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Chapter 13 FAQ : Background and filing information

1. What is a chapter 13 bankruptcy case and how does it work?

2. How does a chapter 13 case differ from a chapter 7 case?

3. When is a chapter 13 case preferable to a chapter 7 case?

4. How does a chapter 13 case differ from a private debt consolidation service?

5. What is a chapter 13 discharge?

6. What types of debts are not dischargeable in chapter 13 cases?

7. What is a chapter 13 plan?

8. What is a chapter 13 trustee?

9. What debts may be paid under a chapter 13 plan?

10. Must all debts be paid in full under a chapter 13 plan?

11. Must all unsecured debts be treated alike under a chapter 13 plan?

12. Is there a difference between a debt and a claim?

13. How much of a debtor’s income must be paid to the chapter 13 trustee under a chapter 13 plan?

14. When must the debtor begin making payments to the chapter 13 trustee and how are the payments made?

15. How long does a chapter 13 plan last?

16. Is it necessary for all creditors to approve a chapter 13 plan?

17. How are the claims of secured creditors dealt with in chapter 13 cases?

18. How are cosigned or guaranteed debts handled in chapter 13 cases?

19. Who is eligible to file a chapter 13 case?

20. May a husband and a wife file a joint chapter 13 case?

21. When should a husband and wife file a joint chapter 13 case?

22. May a self-employed person file a chapter 13 case?

23. May a chapter 7 case be converted to a chapter 13 case?

24. What fees are charged in a chapter 13 case?

25. Will a person lose any property if he or she files a chapter 13 case?

26. How does the filing of a chapter 13 case affect collection proceedings and foreclosures that are filed against the debtor?

27. May a person whose debts are being administered by a financial counselor file a chapter 13 case?

28. How does filing a chapter 13 case affect a person’s credit rating?

29. Is a person’s employer notified when he or she files a chapter 13 case?

30. Does a person lose any legal rights by filing a chapter 13 case?

31. May employers or government agencies discriminate against persons who file chapter 13 cases?

32. What is required for court approval of a chapter 13 plan?

33. What is a priority claim?

34. When does a debtor have to appear in court in a chapter 13 case?

35. What if the court does not approve a debtor’s chapter 13 plan?

36. What if the debtor is temporarily unable to make chapter 13 payments?

37. What if the debtor incurs new debts or needs credit during a chapter 13 case?

38. What should the debtor do if he or she moves while the case is pending?

39. What if the debtor later decides to discontinue the chapter 13 case?

40.What happens if a debtor is unable to complete the chapter 13 payments?

 

1. What is a chapter 13 bankruptcy case and how does it work? Back to top

A chapter 13 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under chapter 13 of the Bankruptcy Code. Chapter 13 is that part (or chapter) of the Bankruptcy Code which allows a person to repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court. The Bankruptcy code is the set of federal laws that deal with bankruptcy. A person who files a chapter 13 case 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. The debtor must make regular payments to a person called the chapter 13 trustee, completion of the payments called for in the plan, the debtor is released from liability for the remainder of his or her dischargeable debts.

2. How does a chapter 13 case differ from a chapter 7 case? Back to top

The basic difference between a chapter 7 case and a chapter 13 case is that in a chapter 7 case, the debtor’s non-exempt 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 if feasible considering the debtor’s circumstances. As a practical matter, in a chapter 7 case the debtor loses all or most of his or her non-exempt property and receives a chapter 7 discharge, which releases the debtor from liability for most debts. In a chapter 13 case, the debtor usually retains his or her non-exempt 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 a chapter 7. However, a chapter 13 case normally lasts much longer than a chapter 7 case and is usually more expensive for the debtor.

3. When is a chapter 13 case preferable to a chapter 7 case? Back to top

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 non-exempt 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 chapter 7 discharge, (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 a chapter 13 case differ from a private debt consolidation service? Back to top

In a chapter 13 case, the bankruptcy court can provide relief to the debtor that a private debt consolidation service 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 discharge? Back to top

It is a court order releasing a debtor from all of his or her debts and ordering creditors not to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. There are two types of chapter 13 discharges: (1) a full or successful plan discharge, which is granted to a debtor who completes all payments called for in the plan, and (2) a partial or unsuccessful plan discharge, which is granted to a debtor who is unable to complete the payments called for in the plan due to circumstances for which the debtor should not be held accountable. A full chapter 13 discharge is broader and discharges more debts than a chapter 7 discharge, while a partial chapter 13 discharge is similar to a chapter 7 discharge.

6. What types of debts are not dischargeable in chapter 13 cases? Back to top

A full chapter 13 discharge granted upon the completion of all payments required in the plan discharges a debtor from all debts except:

(1) debts that were paid outside of the plan and not covered in the plan,
(2) debts for alimony, maintenance, or support,
(3) debts for death or personal injury caused by the debtors operation of a motor vehicle while unlawfully intoxicated,
(4) debts for restitution or criminal fines included in a criminal sentence imposed on the debtor,
(5) debts for student loans or educational obligations unless a court rules that not discharging the debt would impose an undue hardship on the debtor and or his or her dependents,
(6) installment debts whose last payment is due after the completion of the plan,
(7) debts incurred while the plan was in effect that were not paid under the plan, and
(8) debts owed to creditors who did not receive notice of the chapter 13 case.

A partial chapter 13 discharge granted when a debtor is unable to complete the payments under a plan due to circumstances for which the debtor should not be held accountable, discharges the debtor from all debts except:

(1) secured debts (i.e., debts secured by mortgages or liens),
(2) debts that were paid outside of the plan and not covered in the plan,
(3) installment debts whose last payment is due after the completion of the plan,
(4) debts incurred while the plan was in effect that were not paid under the plan,
(5) debts owed to creditors who did not receive notice of the chapter 13 case, and
(6) debts that are not dischargeable in a chapter 7 case.

7. What is a chapter 13 plan? Back to top

It is a written plan presented to the bankruptcy court by a debtor that states how much money or other property the debtor will pay 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.

8. What is a chapter 13 trustee? Back to top

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.

9. What debts may be paid under a chapter 13 plan? Back to top

Any debts whatsoever, whether they are secured or unsecured. Even debts that are non-dischargeable, such as debts for student loans, alimony or child support, may be paid under a chapter 13 plan.

10. Must all debts be paid in full under a chapter 13 plan? Back to top

No. While priority debts, such as debts for alimony, maintenance and support and debts for 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.

11. Must all unsecured debts be treated alike under a chapter 13 plan? Back to top

No. If there is a reasonable basis for doing so, unsecured debts (or claims) may be divided into separate classes and treated differently. It may be possible, therefore, to pay certain unsecured debts in full, while paying little or nothing on others.

12. Is there a difference between a debt and a claim? Back to top

No, not in a practical sense. They are different terms for an obligation owed by the debtor to the creditor. For example, if the debtor owes $1,000 to the bank, the $1,000 obligation is viewed as a debt by the debtor and as a claim by the bank.

13. How much of a debtor’s income must be paid to the chapter 13 trustee under a chapter 13 plan? Back to top

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 and the debtor’s dependents.

14. When must the debtor begin making payments to the chapter 13 trustee and how are the payments made? Back to top

The debtor must begin making the payments to the chapter 13 trustee within 30 days of 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 that the payments to be made directly to the chapter 13 trustee by the debtor’s employer.

15. How long does a chapter 13 plan last? Back to top

A chapter 13 plan must last for three years, unless all debts can be paid off in full in less time. However, a chapter 13 plan can last for as long as five years, if necessary.

16. Is it necessary for all creditors to approve a chapter 13 plan? Back to top

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 each secured creditor is dealt with in the manner described in the answer to question 18 below. 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.

17. How are the claims of secured creditors dealt with in chapter 13 cases? Back to top

There are four methods of dealing with secured claims in chapter 13 cases: (1) the creditor may accept the debtor’s 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 most partially-secured creditors have a secured claim only to the extent of the value of their collateral. If the debtor is in default must be cured (made current) within a reasonable time.

18. How are cosigned or guaranteed debts handled in chapter 13 cases? Back to top

A cosigned or guaranteed debt is a debt of the debtor that has been cosigned or guaranteed by another person. If a cosigned or guaranteed consumer debt is being paid in full under a chapter 13 plan, the creditor may not collect the debt 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 the guarantor. A consumer debt is a non-business 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.

19. Who is eligible to file a chapter 13 case? Back to top

Any individual (I.e., natural person) is eligible to file a chapter 13 case if he or she-(1) resides in, does business in, or owns property in the United States, (2) has regular income, (3)has unsecured debts of less than $269,250, (4) has secured debts of less than $807,750, (5) is not a stockbroker or a commodity broker, and (6) has not intentionally dismissed another bankruptcy case within the last 180 days. A person meeting the above requirements may file a chapter 13 case regardless of when he or she last filed a bankruptcy case or received bankruptcy discharge. Corporations, partnerships, limited liability companies, and other business entities are not eligible to file a chapter 13 case.

20. May a husband and a wife file a joint chapter 13 case? Back to top

A husband and wife may file a joint chapter 13 case if each of them meets the requirements listed in question 18 above, except that only one of them need have regular income and their combined debts must meet the debt limitations described in the answer to question 19 above.

21. When should a husband and wife file a joint chapter 13 case? Back to top

If both spouses are liable for any significant debts, they should file a joint chapter 13 case, even if only one of them has income. Also, if both of them have regular income, they should file a joint case.

22. May a self-employed person file a chapter 13 case? Back to top

Yes. A self-employed person meeting the eligibility requirements listed in the answer to question 19 above may file a chapter 13 case. A debtor engaged in business may continue to operate the business during his or her chapter 13 case.

23. May a chapter 7 case be converted to a chapter 13 case? Back to top

Yes. An existing chapter 7 case may be converted to a chapter13 case at any time at the request of the debtor if the case has not previously been converted from chapter 13 to chapter 7.

24. What fees are charged in a chapter 13 case? Back to top

There is a $194 filing fee charged when the case is filed, which may be paid in installments if necessary. In addition, the chapter 13 trustee assesses a fee of 10 percent on all payments made by the debtor under the plan. Thus, if a debtor pays a total of $5,000 under a chapter 13 plan, the total amount of fees charged in the case will be $694 (a $500 trustee’s fee, plus the $194 filing fee). These fees are in addition to the fee charged by the debtor’s attorney.

25. Will a person lose any property if he or she files a chapter 13 case? Back to top

Usually not. In a chapter 13 case, creditors are usually paid out of the debtor’s income and not from the debtor’s property. However, if a debtor has valuable non-exempt property and has insufficient income to pay enough to creditors to satisfy the court, some of the debtor’s property may have to be used to pay creditors.

26. How does the filing of a chapter 13 case affect collection proceedings and foreclosures that are filed against the debtor? Back to top

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 discharged debts from the debtor after the case is closed.

27. May a person whose debts are being administered by a financial counselor file a chapter 13 case? Back to top

Yes. A financial counselor has no legal authority to prevent a person from filing any type of bankruptcy case, including a chapter 13 case.

28. How does filing a chapter 13 case affect a person’s credit rating? Back to top

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 report agencies. If very little is paid on most debts, the effect of a chapter 13 case on a person’s credit rating may be similar to that of a chapter 7 case.

29. Is a person’s employer notified when he or she files a chapter 13 case? Back to top

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.

30. Does a person lose any legal rights by filing a chapter 13 case? Back to top

No. A chapter 13 case 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.

31. May employers or government agencies discriminate against persons who file chapter 13 cases? Back to top

No, It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed a chapter 13 case. 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 a chapter 13 case.

32. What is required for court approval of a chapter 13 plan? Back to top

The court will approve and confirm a chapter 13 plan if it finds that: (1) all required fees, charges and deposits have been paid, (2) all priority claims under the plan will be paid in full under the plan, (3) if the plan creates different classes of claims, it provides the same treatment for each claim within a particular class, (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 if the debtor filed a chapter 7 case, (6) the debtor will be able to make the required payments and comply with the plan, and (7) each secured creditor is dealt with in one of the four methods described above.

33. What is a priority claim? Back to top

A priority claim is an unsecured claim that is given priority of payment under the Bankruptcy Code. It is a claim that must be paid before other unsecured claims are paid. Examples of priority claims are tax claims, wage claims, and claims for alimony, maintenance or support. Claims for administrative fees, such as the chapter 13 trustee’s fee, the filing fee, and the fee of the debtor’s attorney, are also priority claims in chapter 13 cases.

34. When does a debtor have to appear in court in a chapter 13 case? Back to top

Most debtor’s have to appear in court at least twice: once for a hearing called the meeting of creditors, and once for a hearing on the confirmation of the debtor’s chapter 13 plan. The meeting of creditors is usually held about a month after the case is filed. The confirmation hearing may be held on the same day of the meeting of creditors or at a later date, depending on the scheduling process in the local court. If difficulties or unusual circumstances arise during the course of a case, additional court appearances may be necessary.

35. What if the court does not approve a debtor’s chapter 13 plan? Back to top

If the court will not approve the plan initially proposed by a debtor, the debtor may modify the plan and seek court approval of the modified plan. If the court does not approve a plan, it will usually give its reasons for refusing to do so, and the plan may then be appropriately modified to become acceptable to the court. A debtor who does not wish to modify a proposed plan may either convert the case to a chapter 7 case or dismiss the case.

36. What if the debtor is temporarily unable to make chapter 13 payments? Back to top

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 the required payments will continue indefinitely or for an extended period, the case may be dismissed or converted to a chapter 7 case.

37. What if the debtor incurs new debts or needs credit during a chapter 13 case? Back to top

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 of 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.

38. What should the debtor do if he or she moves while the case is pending? Back to top

The debtor should immediately notify the bankruptcy court and the chapter 13 trustee in writing of the new address. Most communications in a chapter 13 case is 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 maybe dismissed. Many courts have change-of-address forms that may be used if the debtor moves.

39. What if the debtor later decides to discontinue the chapter 13 case? Back to top

The debtor has the right to either dismiss a chapter 13 case or convert it to a chapter 7 case 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.

40.What happens if a debtor is unable to complete the chapter 13 payments? Back to top

A debtor who is unable to complete the chapter 13 payments has three options: (1) dismiss the chapter 13 case, (2) convert the chapter 13 case into a chapter 7 case, or (3) if the debtor is unable to complete the payments due to circumstances for which he or she should not be accountable , close the case and obtain a partial chapter 13 discharge.


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