What is Chapter 13 Bankruptcy?

Many people believe that filing for bankruptcy is the last and only option when facing insurmountable debts. Chapter 13 of the U.S. Bankruptcy Code is one of several ways that a debtor can file for bankruptcy, depending on their circumstances.

Whether they use Chapter 13 over other types of bankruptcy will depend on their income and ability to repay their creditors.

Chapter 13 bankruptcy, also known as “wage earner’s" bankruptcy, is a popular option for those who earn money, but who have fallen behind with payments to their creditors. Through this type of bankruptcy, an individual sets up a program to pay down their debts after they’ve been reorganized.

An individual filing under this type of bankruptcy protection has from three to five years in which to resolve their debts by applying their disposable income to debt reduction. While eliminating unsecured debt such as credit card debt, they can catch up on other debts, like mortgage payments. A court-ordered trustee collects monthly payments from the debtor and distributes them to their creditors.

If the debtor's income is less than their state median income, the monthly payment plan will last for three years. However, the court may approve a longer payment plan – up to five years – for cause. If their current monthly income is more than the state median, the plan will typically be five years. At no time will a repayment plan be more than five years.

While an individual is making payments to creditors under a Chapter 13 repayment plan, creditors cannot start or continue collection efforts against the debtor.

There are a handful of differences between Chapter 13 and Chapter 7 bankruptcy, related to eligibility, debt type, exemptions and length.

Chapter 13 allows debtors an advantage that Chapter 7 bankruptcy does not – they have the opportunity to save their home from foreclosure.

Through a Chapter 13 bankruptcy filing, they can avoid foreclosure proceedings by making delinquent mortgage payments over time. Nevertheless, while they are going through bankruptcy, they must still make all current mortgage payments when due.

Chapter 13 allows debtors to reschedule secured debts, extending them over the duration of the plan. It may also help them to obtain lower home mortgage payments. Additionally, this type of bankruptcy has a special provision protecting third parties, such as cosigners, who share liability with the debtor on consumer debts.

Chapter 13 bankruptcies act like consolidation loans in that they allow individuals to make plan payments to a trustee who will, in turn, distribute payments to creditors. Individuals under a Chapter 13 bankruptcy plan have no direct contact with creditors while making payments.

Self-employed individuals or those who operate unincorporated businesses meet the eligibility requirements for a Chapter 13 plan if their combined total of secured debts and unsecured debts is less than $2,750,000, with no unsecured debt more than $419,275, and no secured debt of more than $1,257,850, as of the date of the bankruptcy filing.

An individual cannot file for a Chapter 13 plan, or that of any other bankruptcy, in the 180 days prior to filing a bankruptcy petition that was dismissed because the debtor willfully failed to appear before the bankruptcy court; failed to comply with its orders; or was dismissed voluntarily after lien holder creditors sought relief to recover property.

Additionally, a debtor under a Chapter 13 bankruptcy plan, or under any bankruptcy code chapter, must, within 180 days before a bankruptcy filing, get credit counseling from an approved credit counseling agency.

Bankruptcy law allows exemptions in situations where a bankruptcy trustee has determined that there aren’t enough approved agencies in the debtor's area to provide them with counseling prior to the bankruptcy filing. If the individual develops a debt management plan during the required credit counseling, it must be filed with the bankruptcy court.

Filers in a Chapter 13 case must file a petition with the federal bankruptcy court that serves the location where the debtor resides or has a domicile.

Unless the court states otherwise, the debtor must file these documents:

• Schedule of assets and liabilities.
• List of current income and expenditures.
• List of unexpired leases and executory contracts.
• Statement of their financial affairs under federal rule (Fed. R. Bankr. P. 1007(b)).

The filer must also include:

• Credit counseling certificate.
• Copy of debt repayment plan created through credit counseling.
• Evidence of wages received at least 60 days prior to the bankruptcy filing.
• Statement showing monthly net income and probable increases in expenses or income after filing.
• Debtor’s record of interest regarding state or federal qualified tuition or education accounts.

The filer must also provide the bankruptcy trustee with a copy of their tax returns or transcripts for the most recent tax year and those filed during the case, including returns for years that taxes had not been filed prior to the bankruptcy case. Spouses may file joint or individual petitions.

These forms may be downloaded from the U.S. Courts website; bankruptcy courts do not have them.

When filing a bankruptcy petition, the filer must compile:

1. List of creditors, claim amounts and reasons for claims.
2. Information about debtor’s income, including source of wages, amounts they are paid, and payment frequency.
3. List of filer’s property.
   
4. Detailed list of monthly living expenses, including clothing, food, shelter, medical bills, taxes, transportation and utilities.

Filers must gather this information with their spouse, whether they file tax returns individually or jointly. If just one spouse files a return, the non-filing spouse’s income and expenses are still required so that the bankruptcy court, trustee and creditors can evaluate the overall financial position of the household.

Chapter 13 bankruptcy courts charge a case filing fee of $235, plus $75 in miscellaneous administrative fees paid to the clerk of the court when filing. The court may allow payments to be made in up to four installments. The filer must make the last payment no more than 120 after filing the petition.

But, if the filer can show cause, the court may extend the last payment installment to no later than 180 days after the petition’s filing. The petitioner may also pay the administrative fees in installments. If there is a joint petition, only one filing fee and one administrative fee is required. Failure to pay the petition and administrative fees can result in dismissal of a case.

After the appointment of the Chapter 13 trustee, there will be a meeting of creditors with the debtor. There is no judge in this hearing. Creditors can come themselves or send representatives to gather information if, for example, they suspect bankruptcy fraud. The public is also welcome to observe the hearing.

The debtor is placed under oath and asked questions by the trustee and the creditors in attendance. The Chapter 13 trustee verifies the information in the debtor’s petition and ensures that the debtor's disposable income goes to the unsecured creditors.

If the trustee is satisfied with the debtor’s documents and repayment plan, the meeting of creditors concludes, and the debtor does not need to show up for another meeting.

The trustee and creditors have to up to seven days after the meeting of creditors to object to the debtor's repayment plan, unless there is an extension. For example, the trustee may believe that the debtor should pay more to unsecured creditors and objects to the confirmation of the repayment plan by filing a motion to dismiss.

In this instance, the debtor will receive the motion to dismiss, telling them either to correct the issue to the trustee's satisfaction or show the bankruptcy court why approval of the payment plan is necessary. The debtor will then argue their case at the conformation hearing.

At a Chapter 13 confirmation hearing, the bankruptcy judge reviews the filer’s payment plan and decides whether they have sufficient income to pay their creditors under the plan. If there is no objection, confirmation typically takes place within 30 days, and the debtor can begin making payments to creditors.

However, if the trustee or a creditor does not agree with the plan, the bankruptcy judge can give the debtor time to fix the problem by amending the current plan or by creating a new one.

At that point, the judge will set a date for a new confirmation hearing. The debtor may propose more than one plan to address objections before a judge confirms the final plan. If it becomes clear that the debtor cannot fix the issues or they fail to do so after trying several attempts, the judge can dismiss the case.

The time for confirmation hearings varies greatly when there are objections. Cases can take several months or more than a year to resolve if there are complex factual and legal issues, and if there are numerous plan proposals.