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Chapter 13
Individual Debt Adjustment
The chapter of the Bankruptcy Code providing for adjustment of debts of an individual
with regular income. (Chapter 13 allows a debtor to keep property and pay debts over
time, usually three to five years.)
Background
A chapter 13 bankruptcy is also called a wage earner's plan. It enables individuals with
regular income to develop a plan to repay all or part of their debts. Under this chapter,
debtors propose a repayment plan to make installments to creditors over three to five
years. If the debtor's current monthly income is less than the applicable state median,
the plan will be for three years unless the court approves a longer period "for cause." (1)
If the debtor's current monthly income is greater than the applicable state median, the
plan generally must be for five years. In no case may a plan provide for payments over a
period longer than five years. 11 U.S.C. §1322(d). During this time the law forbids
creditors from starting or continuing collection efforts.
This chapter discusses six aspects of a chapter 13 proceeding: the advantages of
choosing chapter 13, the chapter 13 eligibility requirements, how a chapter 13
proceeding works, what may be included in chapter 13 repayment plan and how it is
confirmed, making the plan work, and the special chapter 13 discharge.
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7.
Perhaps most significantly, chapter 13 offers individuals an opportunity to save their
homes from foreclosure. By filing under this chapter, individuals can stop foreclosure
proceedings and may cure delinquent mortgage payments over time. Nevertheless,
they must still make all mortgage payments that come due during the chapter 13 plan
on time. Another advantage of chapter 13 is that it allows individuals to reschedule
secured debts (other than a mortgage for their primary residence) and extend them over
the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has
a special provision that protects third parties who are liable with the debtor on
"consumer debts." This provision may protect co-signers. Finally, chapter 13 acts like a
consolidation loan under which the individual makes the plan payments to a chapter 13
trustee who then distributes payments to creditors. Individuals will have no direct
contact with creditors while under chapter 13 protection.
Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business, is
eligible for chapter 13 relief as long as the individual's unsecured debts are less than
$307,675 and secured debts are less than $922,975. 11 U.S.C. § 109(e). These
amounts are adjusted periodically to reflect changes in the consumer price index. A
corporation or partnership may not be a chapter 13 debtor. Id.
An individual cannot file under chapter 13 or any other chapter if, during the preceding
180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to
appear before the court or comply with orders of the court or was voluntarily dismissed
after creditors sought relief from the bankruptcy court to recover property upon which
they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a
debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has,
within 180 days before filing, received credit counseling from an approved credit
counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.
There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy
administrator) has determined that there are insufficient approved agencies to provide
the required counseling. If a debt management plan is developed during required credit
counseling, it must be filed with the court.
How Chapter 13 Works
A chapter 13 case begins by filing a petition with the bankruptcy court serving the area
where the debtor has a domicile or residence. Unless the court orders otherwise, the
debtor must also file with the court: (1) schedules of assets and liabilities; (2) a
schedule of current income and expenditures; (3) a schedule of executory contracts and
unexpired leases; and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b). The
debtor must also file a certificate of credit counseling and a copy of any debt repayment
plan developed through credit counseling; evidence of payment from employers, if any,
received 60 days before filing; a statement of monthly net income and any anticipated
increase in income or expenses after filing; and a record of any interest the debtor has
in federal or state qualified education or tuition accounts. 11 U.S.C. § 521. The debtor
must provide the chapter 13 case trustee with a copy of the tax return or transcripts for
the most recent tax year as well as tax returns filed during the case (including tax
returns for prior years that had not been filed when the case began). Id. A husband and
wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a). (The Official
Forms may be purchased at legal stationery stores or downloaded from the Internet at
www.uscourts.gov/bkforms/index.html. They are not available from the court.)
The courts must charge a $235 case filing fee and a $39 miscellaneous administrative
fee. Normally the fees must be paid to the clerk of the court upon filing. With the court's
permission, however, they may be paid in installments. 28 U.S.C. § 1930(a); Fed. R.
Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. The number
of installments is limited to four, and the debtor must make the final installment no later
than 120 days after filing the petition. Fed. R. Bankr. P. 1006(b). For cause shown, the
court may extend the time of any installment, as long as the last installment is paid no
later than 180 days after filing the petition. Id. The debtor may also pay the $39
administrative fee in installments. If a joint petition is filed, only one filing fee and one
administrative fee are charged. Debtors should be aware that failure to pay these fees
may result in dismissal of the case. 11 U.S.C. § 1307(c)(2).
In order to complete the Official Bankruptcy Forms that make up the petition, statement
of financial affairs, and schedules, the debtor must compile the following information:
Married individuals must gather this information for their spouse regardless of whether
they are filing a joint petition, separate individual petitions, or even if only one spouse is
filing. In a situation where only one spouse files, the income and expenses of the non-
filing spouse is required so that the court, the trustee and creditors can evaluate the
household's financial position.
When an individual files a chapter 13 petition, an impartial trustee is appointed to
administer the case. 11 U.S.C. § 1302. In some districts, the U.S. trustee or bankruptcy
administrator (2) appoints a standing trustee to serve in all chapter 13 cases. 28 U.S.C.
§ 586(b). The chapter 13 trustee both evaluates the case and serves as a disbursing
agent, collecting payments from the debtor and making distributions to creditors. 11 U.S.
C. § 1302(b).
Filing the petition under chapter 13 "automatically stays" (stops) most collection actions
against the debtor or the debtor's property. 11 U.S.C. § 362. Filing the petition does not,
however, stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may
be effective only for a short time in some situations. The stay arises by operation of law
and requires no judicial action. As long as the stay is in effect, creditors generally may
not initiate or continue lawsuits, wage garnishments, or even make telephone calls
demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all
creditors whose names and addresses are provided by the debtor.
Chapter 13 also contains a special automatic stay provision that protects co-debtors.
Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a
"consumer debt" from any individual who is liable along with the debtor. 11 U.S.C. §
1301(a). Consumer debts are those incurred by an individual primarily for a personal,
family, or household purpose. 11 U.S.C. § 101(8).
Individuals may use a chapter 13 proceeding to save their home from foreclosure. The
automatic stay stops the foreclosure proceeding as soon as the individual files the
chapter 13 petition. The individual may then bring the past-due payments current over a
reasonable period of time. Nevertheless, the debtor may still lose the home if the
mortgage company completes the foreclosure sale under state law before the debtor
files the petition.11 U.S.C. § 1322(c). The debtor may also lose the home if he or she
fails to make the regular mortgage payments that come due after the chapter 13 filing.
Between 20 and 50 days after the debtor files the chapter 13 petition, the chapter 13
trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator
schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy
administrator staffing, the meeting may be held no more than 60 days after the debtor
files. Fed. R. Bankr. P. 2003(a). During this meeting, the trustee places the debtor under
oath, and both the trustee and creditors may ask questions. The debtor must attend the
meeting and answer questions regarding his or her financial affairs and the proposed
terms of the plan.11 U.S.C. § 343. If a husband and wife file a joint petition, they both
must attend the creditors' meeting and answer questions. In order to preserve their
independent judgment, bankruptcy judges are prohibited from attending the creditors'
meeting. 11 U.S.C. § 341(c). The parties typically resolve problems with the plan either
during or shortly after the creditors' meeting. Generally, the debtor can avoid problems
by making sure that the petition and plan are complete and accurate, and by consulting
with the trustee prior to the meeting.
In a chapter 13 case, to participate in distributions from the bankruptcy estate,
unsecured creditors must file their claims with the court within 90 days after the first
date set for the meeting of creditors. Fed. R. Bankr. P. 3002(c). A governmental unit,
however, has 180 days from the date the case is filed file a proof of claim.11 U.S.C. §
502(b)(9).
After the meeting of creditors, the debtor, the chapter 13 trustee, and those creditors
who wish to attend will come to court for a hearing on the debtor's chapter 13 repayment
plan.
The Chapter 13 Plan and Confirmation Hearing
Unless the court grants an extension, the debtor must file a repayment plan with the
petition or within 15 days after the petition is filed. Fed. R. Bankr. P. 3015. A plan must
be submitted for court approval and must provide for payments of fixed amounts to the
trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the
funds to creditors according to the terms of the plan, which may offer creditors less than
full payment on their claims.
There are three types of claims: priority, secured, and unsecured. Priority claims are
those granted special status by the bankruptcy law, such as most taxes and the costs of
bankruptcy proceeding. (3) Secured claims are those for which the creditor has the right
take back certain property (i.e., the collateral) if the debtor does not pay the underlying
debt. In contrast to secured claims, unsecured claims are generally those for which the
creditor has no special rights to collect against particular property owned by the debtor.
The plan must pay priority claims in full unless a particular priority creditor agrees to
different treatment of the claim or, in the case of a domestic support obligation, unless
the debtor contributes all "disposable income" - discussed below - to a five-year plan.11
U.S.C. § 1322(a).
If the debtor wants to keep the collateral securing a particular claim, the plan must
provide that the holder of the secured claim receive at least the value of the collateral. If
the obligation underlying the secured claim was used the buy the collateral (e.g., a car
loan), and the debt was incurred within certain time frames before the bankruptcy filing,
the plan must provide for full payment of the debt, not just the value of the collateral
(which may be less due to depreciation). Payments to certain secured creditors (i.e., the
home mortgage lender), may be made over the original loan repayment schedule
(which may be longer than the plan) so long as any arrearage is made up during the
plan. The debtor should consult an attorney to determine the proper treatment of
secured claims in the plan.
The plan need not pay unsecured claims in full as long it provides that the debtor will
pay all projected "disposable income" over an "applicable commitment period," and as
long as unsecured creditors receive at least as much under the plan as they would
receive if the debtor's assets were liquidated under chapter 7. 11 U.S.C. § 1325. In
chapter 13, "disposable income" is income (other than child support payments received
by the debtor) less amounts reasonably necessary for the maintenance or support of
the debtor or dependents and less charitable contributions up to 15% of the debtor's
gross income. If the debtor operates a business, the definition of disposable income
excludes those amounts which are necessary for ordinary operating expenses. 11 U.S.
C. § 1325(b)(2)(A) and (B). The "applicable commitment period" depends on the
debtor's current monthly income. The applicable commitment period must be three
years if current monthly income is less than the state median for a family of the same
size - and five years if the current monthly income is greater than a family of the same
size. 11 U.S.C. § 1325(d). The plan may be less than the applicable commitment period
(three or five years) only if unsecured debt is paid in full over a shorter period.
Within 30 days after filing the bankruptcy case, even if the plan has not yet been
approved by the court, the debtor must start making plan payments to the trustee. 11 U.
S.C. § 1326(a)(1). If any secured loan payments or lease payments come due before
the debtor's plan is confirmed (typically home and automobile payments), the debtor
must make adequate protection payments directly to the secured lender or lessor -
deducting the amount paid from the amount that would otherwise be paid to the trustee.
Id.
No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a
confirmation hearing and decide whether the plan is feasible and meets the standards
for confirmation set forth in the Bankruptcy Code. 11 U.S.C. §§ 1324, 1325. Creditors
will receive 25 days' notice of the hearing and may object to confirmation. Fed. R. Bankr.
P. 2002(b). While a variety of objections may be made, the most frequent ones are that
payments offered under the plan are less than creditors would receive if the debtor's
assets were liquidated or that the debtor's plan does not commit all of the debtor's
projected disposable income for the three or five year applicable commitment period.
If the court confirms the plan, the chapter 13 trustee will distribute funds received under
the plan "as soon as is practicable." 11 U.S.C. § 1326(a)(2). If the court declines to
confirm the plan, the debtor may file a modified plan. 11 U.S.C. § 1323. The debtor may
also convert the case to a liquidation case under chapter 7. (4) 11 U.S.C. § 1307(a). If
the court declines to confirm the plan or the modified plan and instead dismisses the
case, the court may authorize the trustee to keep some funds for costs, but the trustee
must return all remaining funds to the debtor (other than funds already disbursed or
due to creditors). 11 U.S.C. § 1326(a)(2).
Occasionally, a change in circumstances may compromise the debtor's ability to make
plan payments. For example, a creditor may object or threaten to object to a plan, or the
debtor may inadvertently have failed to list all creditors. In such instances, the plan may
be modified either before or after confirmation. 11 U.S.C. §§ 1323, 1329. Modification
after confirmation is not limited to an initiative by the debtor, but may be at the request of
the trustee or an unsecured creditor. 11 U.S.C. § 1329(a).
Making the Plan Work
The provisions of a confirmed plan bind the debtor and each creditor. 11 U.S.C. § 1327.
Once the court confirms the plan, the debtor must make the plan succeed. The debtor
must make regular payments to the trustee either directly or through payroll deduction,
which will require adjustment to living on a fixed budget for a prolonged period.
Furthermore, while confirmation of the plan entitles the debtor to retain property as long
as payments are made, the debtor may not incur new debt without consulting the
trustee, because additional debt may compromise the debtor's ability to complete the
plan. 11 U.S.C. §§ 1305(c), 1322(a)(1), 1327.
A debtor may make plan payments through payroll deductions. This practice increases
the likelihood that payments will be made on time and that the debtor will complete the
plan. In any event, if the debtor fails to make the payments due under the confirmed
plan, the court may dismiss the case or convert it to a liquidation case under chapter 7
of the Bankruptcy Code. 11 U.S.C. § 1307(c). The court may also dismiss or convert the
debtor's case if the debtor fails to pay any post-filing domestic support obligations (i.e.,
child support, alimony), or fails to make required tax filings during the case. 11 U.S.C.
§§ 1307(c) and (e), 1308, 521.
The Chapter 13 Discharge
The bankruptcy law regarding the scope of the chapter 13 discharge is complex and
has recently undergone major changes. Therefore, debtors should consult competent
legal counsel prior to filing regarding the scope of the chapter 13 discharge.
A chapter 13 debtor is entitled to a discharge upon completion of all payments under
the chapter 13 plan so long as the debtor: (1) certifies (if applicable) that all domestic
support obligations that came due prior to making such certification have been paid; (2)
has not received a discharge in a prior case filed within a certain time frame (two years
for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases); and (3)
has completed an approved course in financial management (if the U.S. trustee or
bankruptcy administrator for the debtor's district has determined that such courses are
available to the debtor). 11 U.S.C. § 1328. The court will not enter the discharge,
however, until it determines, after notice and a hearing, that there is no reason to
believe there is any pending proceeding that might give rise to a limitation on the
debtor's homestead exemption. 11 U.S.C. § 1328(h).
The discharge releases the debtor from all debts provided for by the plan or disallowed
(under section 502), with limited exceptions. Creditors provided for in full or in part
under the chapter 13 plan may no longer initiate or continue any legal or other action
against the debtor to collect the discharged obligations.
As a general rule, the discharge releases the debtor from all debts provided for by the
plan or disallowed, with the exception of certain debts referenced in 11 U.S.C. § 1328.
Debts not discharged in chapter 13 include certain long term obligations (such as a
home mortgage), debts for alimony or child support, certain taxes, debts for most
government funded or guaranteed educational loans or benefit overpayments, debts
arising from death or personal injury caused by driving while intoxicated or under the
influence of drugs, and debts for restitution or a criminal fine included in a sentence on
the debtor's conviction of a crime. To the extent that they are not fully paid under the
chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy
case has concluded. Debts for money or property obtained by false pretenses, debts for
fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or
damages awarded in a civil case for willful or malicious actions by the debtor that cause
personal injury or death to a person will be discharged unless a creditor timely files and
prevails in an action to have such debts declared nondischargeable. 11 U.S.C. §§ 1328,
523(c); Fed. R. Bankr. P. 4007(c).
The discharge in a chapter 13 case is somewhat broader than in a chapter 7 case.
Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and
malicious injury to property (as opposed to a person), debts incurred to pay
nondischargeable tax obligations, and debts arising from property settlements in
divorce or separation proceedings. 11 U.S.C. § 1328(a).
The Chapter 13 Hardship Discharge
After confirmation of a plan, circumstances may arise that prevent the debtor from
completing the plan. In such situations, the debtor may ask the court to grant a
"hardship discharge." 11 U.S.C. § 1328(b). Generally, such a discharge is available only
if: (1) the debtor's failure to complete plan payments is due to circumstances beyond
the debtor's control and through no fault of the debtor; (2) creditors have received at
least as much as they would have received in a chapter 7 liquidation case; and (3)
modification of the plan is not possible. Injury or illness that precludes employment
sufficient to fund even a modified plan may serve as the basis for a hardship discharge.
The hardship discharge is more limited than the discharge described above and does
not apply to any debts that are nondischargeable in a chapter 7 case. 11 U.S.C. § 523.
________________________________________
NOTES
1. The "current monthly income" received by the debtor is a defined term in the
Bankruptcy Code and means the average monthly income received over the six
calendar months before commencement of the bankruptcy case, including regular
contributions to household expenses from nondebtors and including income from the
debtor's spouse if the petition is a joint petition, but not including social security income
or certain payments made because the debtor is the victim of certain crimes. 11 U.S.C.
§ 101(10A).
2. In North Carolina and Alabama, bankruptcy administrators perform similar functions
that U.S. trustees perform in the remaining forty-eight states. The bankruptcy
administrator program is administered by the Administrative Office of the United States
Courts, while the U.S. trustee program is administered by the Department of Justice.
For purposes of this publication, references to U.S. trustees are also applicable to
bankruptcy administrators.
3. Section 507 sets forth 10 categories of unsecured claims which Congress has, for
public policy reasons, given priority of distribution over other unsecured claims.
4. A fee of $15 is charged for converting a case under chapter 13 to a case under
chapter 7.
The chapter of the Bankruptcy Code providing for adjustment of debts of an individual
with regular income. (Chapter 13 allows a debtor to keep property and pay debts over
time, usually three to five years.)
- a. Background
b. Advantages of Chapter 13
c. Chapter 13 Eligibility
d. How Chapter 13 Works
e. The Chapter 13 Plan and Confirmation Hearing
f. Making the Plan Work
g. The Chapter 13 Discharge
h. The Chapter 13 Hardship Discharge
Background
A chapter 13 bankruptcy is also called a wage earner's plan. It enables individuals with
regular income to develop a plan to repay all or part of their debts. Under this chapter,
debtors propose a repayment plan to make installments to creditors over three to five
years. If the debtor's current monthly income is less than the applicable state median,
the plan will be for three years unless the court approves a longer period "for cause." (1)
If the debtor's current monthly income is greater than the applicable state median, the
plan generally must be for five years. In no case may a plan provide for payments over a
period longer than five years. 11 U.S.C. §1322(d). During this time the law forbids
creditors from starting or continuing collection efforts.
This chapter discusses six aspects of a chapter 13 proceeding: the advantages of
choosing chapter 13, the chapter 13 eligibility requirements, how a chapter 13
proceeding works, what may be included in chapter 13 repayment plan and how it is
confirmed, making the plan work, and the special chapter 13 discharge.
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7.
Perhaps most significantly, chapter 13 offers individuals an opportunity to save their
homes from foreclosure. By filing under this chapter, individuals can stop foreclosure
proceedings and may cure delinquent mortgage payments over time. Nevertheless,
they must still make all mortgage payments that come due during the chapter 13 plan
on time. Another advantage of chapter 13 is that it allows individuals to reschedule
secured debts (other than a mortgage for their primary residence) and extend them over
the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has
a special provision that protects third parties who are liable with the debtor on
"consumer debts." This provision may protect co-signers. Finally, chapter 13 acts like a
consolidation loan under which the individual makes the plan payments to a chapter 13
trustee who then distributes payments to creditors. Individuals will have no direct
contact with creditors while under chapter 13 protection.
Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business, is
eligible for chapter 13 relief as long as the individual's unsecured debts are less than
$307,675 and secured debts are less than $922,975. 11 U.S.C. § 109(e). These
amounts are adjusted periodically to reflect changes in the consumer price index. A
corporation or partnership may not be a chapter 13 debtor. Id.
An individual cannot file under chapter 13 or any other chapter if, during the preceding
180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to
appear before the court or comply with orders of the court or was voluntarily dismissed
after creditors sought relief from the bankruptcy court to recover property upon which
they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a
debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has,
within 180 days before filing, received credit counseling from an approved credit
counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.
There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy
administrator) has determined that there are insufficient approved agencies to provide
the required counseling. If a debt management plan is developed during required credit
counseling, it must be filed with the court.
How Chapter 13 Works
A chapter 13 case begins by filing a petition with the bankruptcy court serving the area
where the debtor has a domicile or residence. Unless the court orders otherwise, the
debtor must also file with the court: (1) schedules of assets and liabilities; (2) a
schedule of current income and expenditures; (3) a schedule of executory contracts and
unexpired leases; and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b). The
debtor must also file a certificate of credit counseling and a copy of any debt repayment
plan developed through credit counseling; evidence of payment from employers, if any,
received 60 days before filing; a statement of monthly net income and any anticipated
increase in income or expenses after filing; and a record of any interest the debtor has
in federal or state qualified education or tuition accounts. 11 U.S.C. § 521. The debtor
must provide the chapter 13 case trustee with a copy of the tax return or transcripts for
the most recent tax year as well as tax returns filed during the case (including tax
returns for prior years that had not been filed when the case began). Id. A husband and
wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a). (The Official
Forms may be purchased at legal stationery stores or downloaded from the Internet at
www.uscourts.gov/bkforms/index.html. They are not available from the court.)
The courts must charge a $235 case filing fee and a $39 miscellaneous administrative
fee. Normally the fees must be paid to the clerk of the court upon filing. With the court's
permission, however, they may be paid in installments. 28 U.S.C. § 1930(a); Fed. R.
Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. The number
of installments is limited to four, and the debtor must make the final installment no later
than 120 days after filing the petition. Fed. R. Bankr. P. 1006(b). For cause shown, the
court may extend the time of any installment, as long as the last installment is paid no
later than 180 days after filing the petition. Id. The debtor may also pay the $39
administrative fee in installments. If a joint petition is filed, only one filing fee and one
administrative fee are charged. Debtors should be aware that failure to pay these fees
may result in dismissal of the case. 11 U.S.C. § 1307(c)(2).
In order to complete the Official Bankruptcy Forms that make up the petition, statement
of financial affairs, and schedules, the debtor must compile the following information:
- 1. A list of all creditors and the amounts and nature of their claims;
- The source, amount, and frequency of the debtor's income
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter,
utilities, taxes, transportation, medicine, etc.
Married individuals must gather this information for their spouse regardless of whether
they are filing a joint petition, separate individual petitions, or even if only one spouse is
filing. In a situation where only one spouse files, the income and expenses of the non-
filing spouse is required so that the court, the trustee and creditors can evaluate the
household's financial position.
When an individual files a chapter 13 petition, an impartial trustee is appointed to
administer the case. 11 U.S.C. § 1302. In some districts, the U.S. trustee or bankruptcy
administrator (2) appoints a standing trustee to serve in all chapter 13 cases. 28 U.S.C.
§ 586(b). The chapter 13 trustee both evaluates the case and serves as a disbursing
agent, collecting payments from the debtor and making distributions to creditors. 11 U.S.
C. § 1302(b).
Filing the petition under chapter 13 "automatically stays" (stops) most collection actions
against the debtor or the debtor's property. 11 U.S.C. § 362. Filing the petition does not,
however, stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may
be effective only for a short time in some situations. The stay arises by operation of law
and requires no judicial action. As long as the stay is in effect, creditors generally may
not initiate or continue lawsuits, wage garnishments, or even make telephone calls
demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all
creditors whose names and addresses are provided by the debtor.
Chapter 13 also contains a special automatic stay provision that protects co-debtors.
Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a
"consumer debt" from any individual who is liable along with the debtor. 11 U.S.C. §
1301(a). Consumer debts are those incurred by an individual primarily for a personal,
family, or household purpose. 11 U.S.C. § 101(8).
Individuals may use a chapter 13 proceeding to save their home from foreclosure. The
automatic stay stops the foreclosure proceeding as soon as the individual files the
chapter 13 petition. The individual may then bring the past-due payments current over a
reasonable period of time. Nevertheless, the debtor may still lose the home if the
mortgage company completes the foreclosure sale under state law before the debtor
files the petition.11 U.S.C. § 1322(c). The debtor may also lose the home if he or she
fails to make the regular mortgage payments that come due after the chapter 13 filing.
Between 20 and 50 days after the debtor files the chapter 13 petition, the chapter 13
trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator
schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy
administrator staffing, the meeting may be held no more than 60 days after the debtor
files. Fed. R. Bankr. P. 2003(a). During this meeting, the trustee places the debtor under
oath, and both the trustee and creditors may ask questions. The debtor must attend the
meeting and answer questions regarding his or her financial affairs and the proposed
terms of the plan.11 U.S.C. § 343. If a husband and wife file a joint petition, they both
must attend the creditors' meeting and answer questions. In order to preserve their
independent judgment, bankruptcy judges are prohibited from attending the creditors'
meeting. 11 U.S.C. § 341(c). The parties typically resolve problems with the plan either
during or shortly after the creditors' meeting. Generally, the debtor can avoid problems
by making sure that the petition and plan are complete and accurate, and by consulting
with the trustee prior to the meeting.
In a chapter 13 case, to participate in distributions from the bankruptcy estate,
unsecured creditors must file their claims with the court within 90 days after the first
date set for the meeting of creditors. Fed. R. Bankr. P. 3002(c). A governmental unit,
however, has 180 days from the date the case is filed file a proof of claim.11 U.S.C. §
502(b)(9).
After the meeting of creditors, the debtor, the chapter 13 trustee, and those creditors
who wish to attend will come to court for a hearing on the debtor's chapter 13 repayment
plan.
The Chapter 13 Plan and Confirmation Hearing
Unless the court grants an extension, the debtor must file a repayment plan with the
petition or within 15 days after the petition is filed. Fed. R. Bankr. P. 3015. A plan must
be submitted for court approval and must provide for payments of fixed amounts to the
trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the
funds to creditors according to the terms of the plan, which may offer creditors less than
full payment on their claims.
There are three types of claims: priority, secured, and unsecured. Priority claims are
those granted special status by the bankruptcy law, such as most taxes and the costs of
bankruptcy proceeding. (3) Secured claims are those for which the creditor has the right
take back certain property (i.e., the collateral) if the debtor does not pay the underlying
debt. In contrast to secured claims, unsecured claims are generally those for which the
creditor has no special rights to collect against particular property owned by the debtor.
The plan must pay priority claims in full unless a particular priority creditor agrees to
different treatment of the claim or, in the case of a domestic support obligation, unless
the debtor contributes all "disposable income" - discussed below - to a five-year plan.11
U.S.C. § 1322(a).
If the debtor wants to keep the collateral securing a particular claim, the plan must
provide that the holder of the secured claim receive at least the value of the collateral. If
the obligation underlying the secured claim was used the buy the collateral (e.g., a car
loan), and the debt was incurred within certain time frames before the bankruptcy filing,
the plan must provide for full payment of the debt, not just the value of the collateral
(which may be less due to depreciation). Payments to certain secured creditors (i.e., the
home mortgage lender), may be made over the original loan repayment schedule
(which may be longer than the plan) so long as any arrearage is made up during the
plan. The debtor should consult an attorney to determine the proper treatment of
secured claims in the plan.
The plan need not pay unsecured claims in full as long it provides that the debtor will
pay all projected "disposable income" over an "applicable commitment period," and as
long as unsecured creditors receive at least as much under the plan as they would
receive if the debtor's assets were liquidated under chapter 7. 11 U.S.C. § 1325. In
chapter 13, "disposable income" is income (other than child support payments received
by the debtor) less amounts reasonably necessary for the maintenance or support of
the debtor or dependents and less charitable contributions up to 15% of the debtor's
gross income. If the debtor operates a business, the definition of disposable income
excludes those amounts which are necessary for ordinary operating expenses. 11 U.S.
C. § 1325(b)(2)(A) and (B). The "applicable commitment period" depends on the
debtor's current monthly income. The applicable commitment period must be three
years if current monthly income is less than the state median for a family of the same
size - and five years if the current monthly income is greater than a family of the same
size. 11 U.S.C. § 1325(d). The plan may be less than the applicable commitment period
(three or five years) only if unsecured debt is paid in full over a shorter period.
Within 30 days after filing the bankruptcy case, even if the plan has not yet been
approved by the court, the debtor must start making plan payments to the trustee. 11 U.
S.C. § 1326(a)(1). If any secured loan payments or lease payments come due before
the debtor's plan is confirmed (typically home and automobile payments), the debtor
must make adequate protection payments directly to the secured lender or lessor -
deducting the amount paid from the amount that would otherwise be paid to the trustee.
Id.
No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a
confirmation hearing and decide whether the plan is feasible and meets the standards
for confirmation set forth in the Bankruptcy Code. 11 U.S.C. §§ 1324, 1325. Creditors
will receive 25 days' notice of the hearing and may object to confirmation. Fed. R. Bankr.
P. 2002(b). While a variety of objections may be made, the most frequent ones are that
payments offered under the plan are less than creditors would receive if the debtor's
assets were liquidated or that the debtor's plan does not commit all of the debtor's
projected disposable income for the three or five year applicable commitment period.
If the court confirms the plan, the chapter 13 trustee will distribute funds received under
the plan "as soon as is practicable." 11 U.S.C. § 1326(a)(2). If the court declines to
confirm the plan, the debtor may file a modified plan. 11 U.S.C. § 1323. The debtor may
also convert the case to a liquidation case under chapter 7. (4) 11 U.S.C. § 1307(a). If
the court declines to confirm the plan or the modified plan and instead dismisses the
case, the court may authorize the trustee to keep some funds for costs, but the trustee
must return all remaining funds to the debtor (other than funds already disbursed or
due to creditors). 11 U.S.C. § 1326(a)(2).
Occasionally, a change in circumstances may compromise the debtor's ability to make
plan payments. For example, a creditor may object or threaten to object to a plan, or the
debtor may inadvertently have failed to list all creditors. In such instances, the plan may
be modified either before or after confirmation. 11 U.S.C. §§ 1323, 1329. Modification
after confirmation is not limited to an initiative by the debtor, but may be at the request of
the trustee or an unsecured creditor. 11 U.S.C. § 1329(a).
Making the Plan Work
The provisions of a confirmed plan bind the debtor and each creditor. 11 U.S.C. § 1327.
Once the court confirms the plan, the debtor must make the plan succeed. The debtor
must make regular payments to the trustee either directly or through payroll deduction,
which will require adjustment to living on a fixed budget for a prolonged period.
Furthermore, while confirmation of the plan entitles the debtor to retain property as long
as payments are made, the debtor may not incur new debt without consulting the
trustee, because additional debt may compromise the debtor's ability to complete the
plan. 11 U.S.C. §§ 1305(c), 1322(a)(1), 1327.
A debtor may make plan payments through payroll deductions. This practice increases
the likelihood that payments will be made on time and that the debtor will complete the
plan. In any event, if the debtor fails to make the payments due under the confirmed
plan, the court may dismiss the case or convert it to a liquidation case under chapter 7
of the Bankruptcy Code. 11 U.S.C. § 1307(c). The court may also dismiss or convert the
debtor's case if the debtor fails to pay any post-filing domestic support obligations (i.e.,
child support, alimony), or fails to make required tax filings during the case. 11 U.S.C.
§§ 1307(c) and (e), 1308, 521.
The Chapter 13 Discharge
The bankruptcy law regarding the scope of the chapter 13 discharge is complex and
has recently undergone major changes. Therefore, debtors should consult competent
legal counsel prior to filing regarding the scope of the chapter 13 discharge.
A chapter 13 debtor is entitled to a discharge upon completion of all payments under
the chapter 13 plan so long as the debtor: (1) certifies (if applicable) that all domestic
support obligations that came due prior to making such certification have been paid; (2)
has not received a discharge in a prior case filed within a certain time frame (two years
for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases); and (3)
has completed an approved course in financial management (if the U.S. trustee or
bankruptcy administrator for the debtor's district has determined that such courses are
available to the debtor). 11 U.S.C. § 1328. The court will not enter the discharge,
however, until it determines, after notice and a hearing, that there is no reason to
believe there is any pending proceeding that might give rise to a limitation on the
debtor's homestead exemption. 11 U.S.C. § 1328(h).
The discharge releases the debtor from all debts provided for by the plan or disallowed
(under section 502), with limited exceptions. Creditors provided for in full or in part
under the chapter 13 plan may no longer initiate or continue any legal or other action
against the debtor to collect the discharged obligations.
As a general rule, the discharge releases the debtor from all debts provided for by the
plan or disallowed, with the exception of certain debts referenced in 11 U.S.C. § 1328.
Debts not discharged in chapter 13 include certain long term obligations (such as a
home mortgage), debts for alimony or child support, certain taxes, debts for most
government funded or guaranteed educational loans or benefit overpayments, debts
arising from death or personal injury caused by driving while intoxicated or under the
influence of drugs, and debts for restitution or a criminal fine included in a sentence on
the debtor's conviction of a crime. To the extent that they are not fully paid under the
chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy
case has concluded. Debts for money or property obtained by false pretenses, debts for
fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or
damages awarded in a civil case for willful or malicious actions by the debtor that cause
personal injury or death to a person will be discharged unless a creditor timely files and
prevails in an action to have such debts declared nondischargeable. 11 U.S.C. §§ 1328,
523(c); Fed. R. Bankr. P. 4007(c).
The discharge in a chapter 13 case is somewhat broader than in a chapter 7 case.
Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and
malicious injury to property (as opposed to a person), debts incurred to pay
nondischargeable tax obligations, and debts arising from property settlements in
divorce or separation proceedings. 11 U.S.C. § 1328(a).
The Chapter 13 Hardship Discharge
After confirmation of a plan, circumstances may arise that prevent the debtor from
completing the plan. In such situations, the debtor may ask the court to grant a
"hardship discharge." 11 U.S.C. § 1328(b). Generally, such a discharge is available only
if: (1) the debtor's failure to complete plan payments is due to circumstances beyond
the debtor's control and through no fault of the debtor; (2) creditors have received at
least as much as they would have received in a chapter 7 liquidation case; and (3)
modification of the plan is not possible. Injury or illness that precludes employment
sufficient to fund even a modified plan may serve as the basis for a hardship discharge.
The hardship discharge is more limited than the discharge described above and does
not apply to any debts that are nondischargeable in a chapter 7 case. 11 U.S.C. § 523.
________________________________________
NOTES
1. The "current monthly income" received by the debtor is a defined term in the
Bankruptcy Code and means the average monthly income received over the six
calendar months before commencement of the bankruptcy case, including regular
contributions to household expenses from nondebtors and including income from the
debtor's spouse if the petition is a joint petition, but not including social security income
or certain payments made because the debtor is the victim of certain crimes. 11 U.S.C.
§ 101(10A).
2. In North Carolina and Alabama, bankruptcy administrators perform similar functions
that U.S. trustees perform in the remaining forty-eight states. The bankruptcy
administrator program is administered by the Administrative Office of the United States
Courts, while the U.S. trustee program is administered by the Department of Justice.
For purposes of this publication, references to U.S. trustees are also applicable to
bankruptcy administrators.
3. Section 507 sets forth 10 categories of unsecured claims which Congress has, for
public policy reasons, given priority of distribution over other unsecured claims.
4. A fee of $15 is charged for converting a case under chapter 13 to a case under
chapter 7.
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