Adjustment
of Debts Under Chapter 13
Frequently Asked Questions About Chapter 13
1.
What is chapter 13 and how does it work?
Chapter 13 is that part (or chapter) of the Bankruptcy Code under which
a person may repay all or a portion of his or her debts under the supervision
and protection of the bankruptcy court. A person who files under chapter
13 is called a debtor. In a chapter 13 case, the debtor must submit
to the court a plan for the repayment of all or a portion of his or
her debts. The plan must be approved by the court to become effective.
If the court approves the debtor’s plan, most creditors will be
prohibited from collecting their claims from the debtor during the course
of the case. The debtor must make regular payments to a person called
the chapter 13 trustee, who collects the money paid by the debtor and
disburses it to creditors in the manner called for in the plan. Upon
completion of the payments required in the plan, the debtor is released
from liability for the remainder of his or her dischargeable debts.
2.
How does chapter 13 differ from chapter 7 for a debtor?
The basic difference between chapter 7 and chapter 13 is that under
chapter 7 the debtor’s nonexempt property (if any exists) is liquidated
to pay as much as possible of the debtor’s debts, while in most
chapter 13 cases a portion of the debtor’s future income is used
to pay as much of the debtor’s debts as is feasible considering
the debtor’s circumstances. As a practical matter, under chapter
7 the debtor loses all or most of his or her nonexempt property and
receives a chapter 7 discharge, which releases the debtor from liability
for most debts. Under chapter 13, the debtor usually retains his or
her nonexempt property, must pay off as much of his or her debts as
the court deems feasible, and receives a chapter 13 discharge, which
is broader than a chapter 7 discharge and releases the debtor from liability
for several types of debts that are not dischargeable under chapter
7. However, a chapter 13 case normally lasts much longer than a chapter
7 case.
3.
When is chapter 13 preferable to chapter 7 for a debtor?
Chapter 13 is usually preferable for a person who – (1) wishes
to repay all or most of his or her unsecured debts and has the income
with which to do so within a reasonable time, (2) has valuable nonexempt
property or has valuable exempt property securing debts, either of which
would be lost in a chapter 7 case, (3) is not eligible for a discharge
under chapter 7, (4) has one or more substantial debts that are dischargeable
under chapter 13 but not under chapter 7, or (5) has sufficient assets
with which to repay most debts, but needs temporary relief from creditors
in order to do so.
4.
How does chapter 13 differ from a private debt consolidation service?
In a chapter 13 case, the bankruptcy court can provide aid to the debtor
that private debt consolidation services cannot provide. For example,
the court has the authority to prohibit creditors from attaching or
foreclosing on the debtor’s property, to force unsecured creditors
to accept a chapter 13 plan that pays only a portion of their claims,
and to discharge a debtor from unpaid portions of debts. Private debt
consolidation services have none of these powers.
5.
What is a chapter 13 Plan?
It is a written plan presented to the bankruptcy court by a debtor and
his or her attorney. The plan states how much money or other property
the debtor will pay to the chapter 13 trustee, how long the debtor’s
payments to the chapter 13 trustee will continue, how much will be paid
to each of the debtor’s creditors, which creditors will be paid
outside of the plan, and certain other technical matters.
6.
What is a chapter 13 trustee?
A chapter 13 trustee is a person appointed by the United States trustee
to collect payments from the debtor, make payments to creditors in the
manner set forth in the debtor’s plan, and administer the debtor’s
chapter 13 case until it is closed. In some cases the chapter 13 trustee
is required to perform certain other duties, and the debtor is always
required to cooperate with the chapter 13 trustee.
7.
What debts may be paid under a chapter 13 plan?
Any debts whatsoever, whether they are secured or unsecured. Even debts
that are nondischargeable, such as debts for student loans, alimony
or child support, may be paid under a chapter 13 plan.
8.
Must all debts be paid in full under a chapter 13 plan?
No. While priority debts, (such as debts for alimony, child support
and certain taxes) and fully secured debts must be paid in full under
a chapter 13 plan, only an amount that the debtor can reasonably afford
must be paid on most debts. The unpaid balances of most debts that are
not paid in full under a chapter 13 plan are discharged upon completion
of the plan.
9.
Must all unsecured creditors be treated alike under chapter 13 plan?
No. If there is a reasonable basis for doing so, unsecured debts can
be divided into separate classes and treated differently. It may be
possible, therefore, to pay certain unsecured creditors in full, while
paying little or nothing to others.
10.
How much of a debtor’s income must be paid to the chapter 13 trustee
under a chapter 13 plan?
Usually all of the disposable income of the debtor and the debtor’s
spouse for a three year period must be paid to the chapter 13 trustee.
Disposable income is income received by the debtor and his or her spouse
that is not reasonably necessary for the support of the debtor’s
dependents.
11.
When must the debtor begin making payments to the chapter 13 trustee
and how must they be made?
The debtor must begin making payments to the chapter 13 trustee within
30 days after the debtor’s plan is filed with the court, and the
plan must be filed with the court within 15 days after the case is filed.
The payments must be made regularly, usually on a weekly, bi-weekly,
or monthly basis. If the debtor is employed, some courts require the
payments to be made by the debtor’s employer; otherwise, the payments
can be made by either the debtor or the debtor’s employer.
12.
How long does a chapter 13 plan last?
A chapter 13 plan must last for three years, unless all debts can be
paid off in less time. If necessary, a chapter 13 plan can last for
as long as five years.
13.
Is it necessary for all creditors to approve a chapter 13 plan?
No. To become effective, a chapter 13 plan must be approved by the court,
not by the creditors. The court, however, cannot approve a plan unless
secured creditors are dealt with in the manner described in the answer
to Question 14. Also, unsecured creditors are permitted to file objections
to the debtor’s plan, and these objections must be ruled on by
the court before it can approve the debtor’s chapter 13 plan.
14.
How are secured creditors dealt with under chapter 13?
There are four methods of dealing with secured creditors under chapter
13: (1) the creditor may accept the debtor’s proposed plan, (2)
the creditor may retain its lien and be paid the full amount of its
secured claim under the plan, (3) the debtor may surrender the collateral
to the creditor, or (4) the creditor may be paid or dealt with outside
the plan. It is important to understand that a creditor has a secured
claim only to the extent of the value of its security, which cannot
exceed the value of the property securing the claim. Thus, a creditor
with a mortgage on, say, a $1500 automobile cannot have a secured claim
for more than $1500, regardless of how much is owed to the creditor.
If the debtor is in default to a secured creditor, the default must
be cured (made current) within a reasonable time. Also, interest must
be paid on secured claims.
15.
How are cosigned or guaranteed debts handled under chapter 13?
If a cosigned or guaranteed consumer debt is being paid in full under
a chapter 13 plan, the creditor may not collect the debts from the cosigner
or guarantor. However, if a consumer debt is not being paid in full
under the plan, the creditor may collect the unpaid portion of the debt
from the cosigner or guarantor. A consumer debt is a nonbusiness debt.
Creditors may collect business debts from cosigners or guarantors even
if the debts are to be paid in full under the debtor’s plan.
16.
When should a husband and wife file jointly under chapter 13?
If both spouses are liable for any significant debts, they should file
jointly under chapter 13, even if only one of them has income.
17.
May a self-employed person file under chapter 13?
Yes. A self-employed person meeting the eligibility requirements may
file under chapter 13. A debtor engaged in business may continue to
operate the business during the chapter 13 case.
18.
May a chapter 7 case be converted to chapter 13?
A pending chapter 7 case may be converted to chapter 13 at any time
at the request of the debtor, if the case has not been previously converted
to chapter 7 from chapter 13.
19.
Will a person lose any property if he or she files under chapter 13?
Usually not. Under chapter 13, creditors are usually paid out of the
debtor’s income and not from the debtor’s property.
20.
How does filing under chapter 13 affect collection proceedings and foreclosures
previously filed against the debtor?
The filing of a chapter 13 case automatically stays (stops) all lawsuits,
attachments, garnishments, foreclosures, and other actions by creditors
against the debtor or the debtor’s property. A few days after the
case is filed, the court will mail a notice to all creditors advising
them of the automatic stay. Certain creditors may be notified sooner,
if necessary. Most creditors are prohibited from proceeding against
the debtor during the entire course of the chapter 13 case. If the debtor
is later granted a chapter 13 discharge, the creditors will then be
prohibited from collecting the discharge debts from the debtor after
the case is closed.
21.
May a person whose debts are being administered by a financial counselor
file under chapter 13?
Yes. A financial counselor has no legal right to prevent a person from
filing any type of bankruptcy case, including a chapter 13 case.
22.
How does filing under chapter 13 affect a person’s credit rating?
It may worsen it, at least temporarily. However, if most of a person’s
debts are ultimately paid off under a chapter 13 plan, that fact may
be taken into account by credit reporting agencies. If very little is
paid on most debts, the credit-rating effect of a chapter 13 case may
be similar to that of a chapter 7 case.
23.
Are the names of persons who file under chapter 13 published?
When a chapter 13 case is filed, it becomes a public record and the
name of the debtor may be published by some credit reporting agencies.
However, newspapers do not usually publish names of persons who file
under chapter 13.
24.
Is a person’s employer notified when he or she files under chapter
13?
In most cases, yes. Many courts require a debtor’s employer to
make payments to the chapter 13 trustee on the debtor’s behalf.
Also, the chapter 13 trustee may contact an employer to verify the debtor’s
income. However, if there are compelling reasons for not informing an
employer in a particular case, it may be possible to make other arrangements
for the required information and payments.
25.
Does a person lose any legal rights by filing under chapter 13?
No. Filing under chapter 13 is a civil proceeding and not a criminal
proceeding. Therefore, a person does not lose any legal or constitutional
rights by filing a chapter 13 case.
26.
May employers or government agencies discriminate against persons who
file under chapter 13?
No. It is illegal for either private or governmental employers to discriminate
against a person as to employment because that person has filed under
chapter 13. It is also illegal for local, state, or federal government
agencies to discriminate against a person as to the granting of licenses,
permits, student loans, and similar grants because that person has filed
under chapter 13.
27.
What is required for court approval of a chapter 13 plan?
The court may confirm a chapter 13 plan if:
-
(1) the plan complies with the legal requirements of chapter 13;
-
(2) all required fees, charges and deposits have been paid;
-
(3) all priority claims will be paid in full under the plan;
-
(4) the plan was proposed in good faith;
-
(5) each unsecured creditor will receive under the plan at least as much as it would have received had the debtor filed under chapter 7;
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(6) it appears that the debtor will be able to make the required payments and comply with the plan; and
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(7) each secured creditor has been with in the manner described in the answer to Question 14 above.
28.
What if the court does not approve a debtor’s chapter 13 plan?
If the court does not approve the plan proposed by a debtor, it will
usually give its reasons for refusing to do so. The debtor may modify
the plan and seek court approval of the modified plan. A debtor who
does not wish to modify a proposed plan may either convert the case
to chapter 7 or dismiss the case.
29.
How are the claims of unsecured creditors handled under chapter 13?
Unsecured creditors must file their claims with the bankruptcy court
within 90 days after the first date set for the meeting of creditors
in order for their claims to be allowed. Unsecured creditors who fail
to file claims within that period are barred from doing so, and upon
completion of the plan their claims will be discharged. The debtor may
file a claim on behalf of a creditor, if desired. After the claims have
been filed, the debtor may file objections to any claims that he or
she disputes. When the claims have been approved by the court, the chapter
13 trustee begins paying unsecured creditors as provided for in the
chapter 13 plan. Payments to secured creditors, priority creditors,
and special classes of unsecured creditors may begin earlier, if desired.
30.
What if the debtor is temporarily unable to make the chapter 13 payments?
If the debtor is temporarily out of work, injured, or otherwise unable
to make the payments required under a chapter 13 plan, the plan can
usually be modified so as to enable the debtor to resume the payments
when he or she is able to do so. If it appears that the debtor’s
inability to make required payments will continue indefinitely or for
an extended period, the case may be dismissed or converted to chapter
7.
31.
What if the debtor incurs new debts or needs credit during a chapter
13 case?
Only two types of credit obligations or debts incurred after the filing
of the case may be included in a chapter 13 plan. These are: (1) debts
for taxes that become payable while the case is pending, and (2) consumer
debts arising after the filing of the case that are for property or
services necessary for the debtor’s performance under the plan
and that are approved in advance by the chapter 13 trustee. All other
debts or credit obligations incurred after the case is filed must be
paid by the debtor outside the plan. Some courts issue an order prohibiting
the debtor from incurring new debts during the case unless they are
approved in advance by the chapter 13 trustee. Therefore, the approval
of the chapter 13 trustee should be obtained before incurring credit
or new debts after the case has been filed. The incurrence of regular
debts, such as debts for telephone service and utilities, do not require
the trustee’s approval.
32.
What should the debtor do if he or she moves while the case is pending?
The debtor should immediately notify his/her attorney, the bankruptcy
court and the chapter 13 trustee in writing of the new address. Most
communications in a chapter 13 case are by mail, and if the debtor fails
to receive an order of the court or a notice from the chapter 13 trustee
because of an incorrect address, the case may be dismissed.
33.
What if the debtor later decides to discontinue the chapter 13 case?
The debtor has the right to either dismiss a chapter 13 case or convert
it to chapter 7 at any time for any reason. However, if the debtor simply
stops making the required chapter 13 payments, the court may compel
the debtor or the debtor’s employer to make the payments and to
comply with the orders of the court. Therefore, the debtor who wishes
to discontinue a chapter 13 case should do so through his or her attorney.
34.
What is the role of the debtor’s attorney in a chapter 13 case?
The
debtor’s attorney performs the following functions in a typical
chapter 13 case:
- (1) Examining the debtor’s financial situation and determining whether chapter 13 is a feasible alternative for the debtor, and if so, whether a single or a joint case should be filed.
- (2) Assisting the debtor in the preparation of a budget.
- (3) Examining the liens or security interests of secured creditors to determine their validity or avoidability, and taking the legal steps necessary to protect the debtor’s interest in such matters.
- (4) Devising and implementing methods of dealing with secured creditors.
- (5) Assisting the debtor in devising a chapter 13 plan that meets the needs of the debtor and is acceptable to the court.
- (6) Preparing the necessary pleadings and chapter 13 forms.
- (7) Filing the chapter 13 forms and pleadings with the court and paying, or providing for the payment of, the filing fee.
- (8) Attending the meeting of creditors, the confirmation hearing, and any other court hearings required in the case.
- (9) Assisting the debtor in obtaining court approval of a chapter 13 plan.
- (10) Checking the claims filed in the case, filing objections to improper claims, and attending court hearings thereon.
- (11) Assisting the debtor in overcoming any legal obstacles that may arise during the course of the case.
- (12)
Assisting the debtor in obtaining a discharge upon the completion
or termination of the
plan. The fee charged by an attorney for representing a debtor in a chapter 13 case must be reviewed and approved by the bankruptcy court. This is followed whether the fee is paid to the attorney prior to or after the filing of the case, and whether it is paid to the attorney directly by the debtor or by the chapter 13 trustee. The court will approve only a fee that it finds to be reasonable.
