To many, the thought of filing for bankruptcy probably conjures up images of losing their homes, cars, assets and personal belongings. While Chapter 7 bankruptcy liquidation does require that a debtor's non-exempt assets and property be liquidated to pay off creditors, Ch 13 bankruptcy is a reorganization rather than a liquidation. Chapter 13 bankruptcy rules on reorganization require the debtor retains his assets and property, but must devote a portion of his future income to paying off all or a portion of his debt.
Who Can File For Chapter 13 Bankruptcy?
Following the enactment of the Bankruptcy Abuse and Consumer Protection Act in 2005, more debtors are filing Chapter 13 bankruptcy than ever before. With the invention of the "means test" for those who wish to file for Chapter 7 bankruptcy, more and more debtors are being forced out of Chapter 7 bankruptcy to Chapter 13 filings. Typically, Chapter 13 bankruptcy is appropriate for a debtor with a steady stream of income, a portion of which can be paid towards his creditors over a set period of time.
What Does a Payment Plan Look Like Under Chapter 13?
Rather than liquidating his assets to repay his creditors, a debtor in a Chapter 13 bankruptcy must submit a proposed payment plan to the Bankruptcy Court. The payment plan must set out the manner in which the debtor will pay off his debts over time. The payment plan must a) represent a satisfaction of all the outstanding debt or b) represent a utilization of all the debtor's disposable income (income left over after the debtor's taxes and living expenses are paid) towards his debts for a three to five year period. Once the time allotted to the payment plan has expired, any remaining debt is usually discharged.
What if You are Unable to Make the Payments?
In some cases, after you file chapter 13 bankruptcy, the debtor will wind up unable to make the mandatory payments, per the payment plan. There are two possible courses of action; Either the plan may be modified by the trustee, or the bankruptcy court can be petitioned to convert the plan into a chapter 7 bankruptcy and discharge the debts.
What Property Can a Debtor Keep Under Chapter 13?
Perhaps a debtor's biggest concern in filing for bankruptcy is whether he will be able to keep his home. In Chapter 13 rules of bankruptcy, a debtor may keep his home as long as there is not substantial non-exempt equity in the home and the debtor complies with his repayment plan. However, what portion of a home's equity is "exempt" varies by state. Vehicles are usually retained by the debtor as long as the payment plan is successfully completed or arrangements are made to pay off the lien on the vehicle. Other exempt property, such as clothing, furniture, household items, and personal property are almost always kept by the debtor.
Which Debt Gets Discharged Under Chapter 13?
What debts are discharged by the Bankruptcy Court is largely dependent on the payment plan agreed upon by the debtor and creditors. Typically, secured debts (those with liens on the debtor's property) are far less likely to be discharged than unsecured debts (such as credit cards). Additionally, there are some debts that cannot be discharged in bankruptcy. These non-dischargeable debts include:
- Back child support and current child support obligations;
- Tax debts;
- Alimony obligations; and
- Student loan debt (unless the debtor can show that the student loan is an "undue burden," an extremely difficult standard to meet).
Paperwork and Process of Chapter 13
Typically, the steps in a Chapter 13 bankruptcy are as follows:
Credit Counseling
Before filing for bankruptcy, the U.S. Bankruptcy Code requires all debtors to undergo credit counseling from an approved agency. These agencies may charge a fee for their services, but are required to provide counseling for free or at a reduced rate if the debtor is unable to pay.
Means Test and Chapter 7
Many debtors who wind up filing for Chapter 13 initially attempted to file for Chapter 7. However, with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA), those debtors who fail the "means test" are forced into Chapter 13 bankruptcy.
Petition to File for Chapter 13 Bankruptcy Protection
Following the completion of credit counseling, the debtor files a petition for bankruptcy under Chapter 13 of the U.S. Bankruptcy Code. Along with the petition, the debtor must also provide detailed information about his assets, income, debts, and monthly living expenses. Many debtors seek legal help to ensure that a properly completed petition and financial affidavit is submitted to the Court. The cost of filling a Chapter 13 bankruptcy petition is approximately $275.
Once a bankruptcy petition is filed with the Court, an automatic stay goes into effect. This means all creditors must cease any efforts to collect debts. This includes phone calls, law suits, letters and any other means of collecting debt. Essentially, creditors can do nothing once the petition has been filed. This is the "protection" part of filing bankruptcy.
A Trustee is Appointed
The Bankruptcy Court will appoint a bankruptcy trustee. The purpose of the trustee is to review the debtor's financial information and help negotiate a reasonable payment plan with the creditors. A bankruptcy trustee may object to claims of exemption or oppose requests for discharge of debt. However, such decisions ultimately rest with the Bankruptcy Court judge.
Meeting with Creditors and Trustee
Within one to two months after the bankruptcy petition is filed, a meeting between the debtor, creditors, and bankruptcy trustee takes place. This is typically a short meeting that gives the creditors the opportunity to learn more about the debtor's financial situation.
Payment Plan is Proposed
Following negotiations with creditors, the debtor presents a proposed payment plan to the Court. If the plan is accepted, the debtor begins making payments to his creditors through the bankruptcy trustee. If the payment plan is not accepted by the Court, the debtor has the right to file a modified plan or to convert his case to a Chapter 7 liquidation.
Repayment Begins Until Discharge
The bankruptcy trustee will continue to disburse payments from the debtor to the creditors for the life of the payment plan. Once the payment plan is completed, the bankruptcy is closed and any remaining debt that existed at the time the bankruptcy petition was filed is discharged. One caveat to the discharge is that the filer must be up to date with any domestic obligations such as child support; otherwise the discharge will not occur.
Chapter 13 and Foreclosure
One of the primary reasons debtors file for Chapter 13 is because it is a great answer to how to stop the foreclosure of their home. In order for Chapter 13 to stop a foreclosure, the petition for bankruptcy must be filed before the sale of the home takes place. Once the bankruptcy petition is filed, an automatic stay goes into place that prevents the mortgage company from taking any action to foreclose on the home. Once the stay is in place, the debtor can propose a payment plan to repay the amount of mortgage payments in arrears, as well as begin paying their regular mortgage. Because the law requires a mortgage company to accept mortgage payments made by the debtor once the repayment had been renegotiated, using Chapter 13 is often highly preferable to other methods of preventing foreclosure, such as short refinancing, short selling, and modifying the original mortgage.
