QUESTIONS
AND ANSWERS ABOUT CHAPTER 13 BANKRUPTCIES*
1. What
is a chapter 13 bankruptcy case and how does it work?
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 the 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 federal law that deals 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, 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 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?
The
basic difference between a chapter 7 case and a chapter 13 case is
that in a chapter 7 case the debtor's nonexempt property (if any
exists) is liquidated to pay as much as possible of the debtor's
debts, while in 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
under the debtor's circumstances. As a practical matter, in a
chapter 7 case 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. In a chapter 13 case, the
debtor usually retains his or her nonexempt property, but must pay
off as much of his or her debts as the court deems feasible and
receives a chapter 13 discharge, which is slightly broader than a
chapter 7 discharge and releases the debtor from liability for a few
types of debts that are not dischargeable under 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. How
does a chapter 13 case differ from a private debt consolidation
service?
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.
4. What
is a chapter 13 discharge?
It
is a court order releasing a debtor from all of his or her
dischargeable 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 discharges a few more
debts than a chapter 7 discharge, while a partial chapter 13
discharge is similar to a chapter 7 discharge.
5. What
is a chapter 13 plan?
It
is a written plan presented to the bankruptcy court by a debtor that
states how much money or 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, and certain other 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. The
debtor is required to cooperate with the chapter 13 trustee.
7. Must
all debts be paid in full under a chapter 13 plan?
No.
While priority debts, such as debts for domestic support obligations
and 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 the
completion or termination of the plan.
8. 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 3 or 5 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 deemed to be necessary for the support of the
debtor and his or her dependents.
9. When must the
debtor begin making payments to the chapter 13 trustee and how are
the payments made?
The
debtor must begin making payments to the chapter 13 trustee within 30
days after the chapter 13 case is filed with the court. 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.
10. How
long does a chapter 13 plan last?
The
required length of a chapter 13 plan depends on the debtor’s
income. If the debtor’s annual income is less than the median
family income for the debtor’s state and family size, the length of
the plan must be 3 years, unless the debtor can justify a longer
period, which may not exceed 5 years. If the debtor’s annual
income exceeds the median family income, the length of the plan must
be 5 years unless all unsecured claims can be paid off in a shorter
period. The debtor’s annual income is his or her current monthly
income multiplied by 12.
11. How
are cosigned or guaranteed debts handled in chapter 13 cases?
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 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.
12. May
a self-employed person file a chapter 13 case?
Yes. A
debtor engaged in business may continue to operate the business
during his or her chapter 13 case.
13. May
a chapter 7 case be converted to a chapter 13 case?
Yes.
An existing chapter 7 case may be converted to a chapter 13 case at
any time at the request of the debtor if the case has not previously
been converted from chapter 13 to chapter 7.
14. What
fees are charged in a chapter 13 case?
There
is a $274 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 generally about 10 percent on all payments
made by the debtor under the plan. These fees are in addition to the fee charged by the debtor's
attorney.
15. Will
a person lose any property if he or she files a chapter 13 case?
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 nonexempt 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.
16. How does the
filing of a chapter 13 case affect collection proceedings and
foreclosures that are 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. This stay is
called the automatic stay. 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. If the debtor has had a prior
bankruptcy case dismissed within the past year, he or she may be
denied the protection of the automatic stay.
17. How
does filing a chapter 13 case 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 effect of a chapter 13 case on a person’s
credit rating may be similar to that of a chapter 7 case.
18. Are
the names of persons who file chapter 13 cases 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 the names of persons who
file chapter 13 cases.
19. Is
a person's employer notified when he or she files a chapter 13 case?
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.
20. May employers
or government agencies discriminate against persons who file chapter
13 cases?
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 governmental 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.
21. When
does the debtor have to appear in court in a chapter 13 case?
Most
debtors 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 as the meeting of
creditors or at a later date, depending on the scheduling practices
in the local court. If difficulties or unusual circumstances arise
during the course of a case, additional court appearances may be
necessary.