Chapter 13

Posted by Kevin on September 21, 2009 under Bankruptcy Blog | Be the First to Comment

A Chapter 13 bankruptcy may be filed by individuals with regular income. This includes a sole proprietor who runs a business but does not include a corporation, an LLC or a partnership. In a Chapter 13, the debtor pays all or a part of her debts over a period of 3-5 years under the supervision of the bankruptcy court.

A Chapter 13 bankruptcy is initiated by the filing of a Chapter 13 petition together with a Chapter 13 plan. The plan must provide for a fixed monthly payment to the Chapter 13 trustee. The debtor must begin making payments pursuant to the plan beginning the month after the filing. For example, if the filing is on April 10, then the first payment is due on May 1. Creditors and/or the Chapter 13 trustee may object to the plan. The debtor can either modify the plan to meet the objections or allow the bankruptcy judge to decide if the plan complies with the law and is, therefore, confirmable.

If the plan is confirmed, the Chapter 13 trustee distributes the money she is holding to the creditors in accordance with the terms of the plan, and the debtor continues to make monthly payments. If the plan is not confirmed, the debtor may modify the plan, convert the case to a Chapter 7 or dismiss the case. If all the payments are made under the plan, the debtor receives a Chapter 13 discharge. Under the prior law, the Chapter 13 discharge covered significantly more types of debts than a Chapter 7 discharge. However, under BAPCPA, the Chapter 13 discharge is less broad than under previous law.

As with a Chapter 7 filing, a Chapter 13 debtor must take an approved credit counseling course before filing. In addition, to qualify for Chapter 13, a debtor must have less than $336,900 of non-contingent, liquidated unsecured debt and less than $1,010,650 of secured debt (mortgages, car loans, for example).

Each debtor must complete a means test as part of her filing. If the debtor’s annual income is below the median income for his household size, then the plan must be 3 years and the debtor uses her actual expenses in determining disposable income. If the debtor’s annual income is above the median income, then the plan must be 5 years unless the debtor can pay off all unsecured debt in a shorter period.

In Chapter 13, the debtor may keep all of his or her assets, even non-exempt assets. For that reason, Chapter 13 is especially helpful to debtors who want to retain their residence. Chapter 13 allows the debtor to pay off any mortgage arrearages over the term of the plan (while paying the mortgage going forward). In addition, Chapter 13 allows a debtor to strip off liens on her residence that are totally unsecured and treat them as unsecured creditors. For example, if your house is worth $200,000 and your first mortgage is for $230,000 and your second mortgage is for $110,000 and you file a 10% plan, you can eliminate the second mortgage and turn it into unsecured debt which will be paid off for $.10 on the dollar.

As with any bankruptcy, the debtor gets the benefit of the automatic stay upon filing (most collection efforts must stop). In a Chapter 13, however, the automatic stay applies to other persons who may be liable on the debt. For example, if only a husband files Chapter 13 and the husband and wife are jointly liable for the purchase of an HD television, the automatic stay applies to both the husband and the non-filing wife.

As with a Chapter 7 bankruptcy, a Chapter 13 bankruptcy will stay on the consumer’s credit report for 10 years. The impact on the credit score varies. If the debtor pays all or a substantial amount of her debt in the Chapter 13 plan, then credit scores can rebound in a year or two. If only minimal payments are made, the effect on credit scores for a Chapter 13 will be similar to that of Chapter 7.

For further information, please refer to the following videos:

The different types of bankruptcy

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