Chapter 13 is only available to individuals (vs.
partnerships or corporations) with regular income from
any source, not just wages. A sole proprietor can also
file a chapter 13. The goal is to reorganize by paying
creditors through a plan that requires monthly payments
for a minimum of three and no more than five years.
Unsecured debts must be $336,900, or less, and secured
debts $1,010,650, or less, to qualify for chapter 13.
How Chapter 13 Works
A chapter 13 begins with a petition filed at the
bankruptcy court where the debtor has a domicile or
residence. The debtor files schedules of assets and
liabilities, a schedule of current income and
expenditures, and a statement of financial affairs. A
husband and wife can file a joint petition or may file
individually. If only one spouse files, the income and
expenses of the non-filing spouse must be disclosed in
the debtor's schedules.
The filing of the petition under chapter 13
automatically stays most actions against the debtor or
the debtor's property. While the "stay" is in effect,
creditors generally cannot initiate or continue any
foreclosure, lawsuit, repossession, or wage garnishment.
Chapter 13 provides a "co-debtor" stay which stops a
creditor from trying to collect a "consumer debt" from
another individual who is also liable with the debtor on
the debt. A consumer debt is an obligation incurred for
consumer, as opposed to business, purposes.
A debtor facing foreclosure can stop the foreclosure
sale by filing chapter 13. The chapter 13 plan permits
the debtor to cure defaults on real estate debts by
repaying the arrears within a reasonable period of time
[usually within 36 months]. If a trust deed becomes all
due during the chapter 13, the plan can provide for
payment of entire debt.
Upon filing the petition, a trustee is appointed to
administer the case. The chapter 13 trustee's role is to
collect plan payments from debtors and make
distributions to creditors according to the debtor's
plan. The debtor must file a plan with the court and
begin making plan payments to the trustee. The plan
provides for regular monthly payments to the trustee and
must ultimately be confirmed by the court.
Upon confirmation, the trustee begins distributing plan
funds to creditors according to the terms of the plan. A
plan may offer unsecured creditors less than full
payment of their claims. However, the debtor's ability
to modify automobile loans was significantly eroded by
the 2005 amendments to the bankruptcy laws.
A meeting of creditors is held in every case, and the
debtor is examined under oath. The meeting is held about
30 days after the petition is filed. The trustee
conducts the meeting and asks questions about the
debtor's financial affairs and the proposed plan.
Creditors may attend and ask questions. Debtors must
attend, and if a husband and wife filed jointly, both
must be present. Problems with the plan are typically
resolved during or shortly after the creditors' meeting.
If there are no plan objections, a confirmation order is
submitted at the creditors' meeting.
If the trustee or a creditor objects to confirmation of
the plan, a hearing is scheduled before the court. The
bankruptcy judge will determine whether the plan meets
the legal requirements for confirmation. A variety of
objections may be made, but the most frequent objections
are: the total plan payments are less than creditors
would receive if the debtor's assets were liquidated; or
the debtor's plan does not commit all of the debtor's
projected disposable income for the necessary commitment
The debtor must commit all projected "disposable income"
during the time the plan is in effect. Disposable income
is defined as income not reasonably necessary for the
maintenance or support of the debtor or dependents. If
the debtor operates a business, disposable income
excludes those sums necessary to pay ordinary operating
If the plan is confirmed by the bankruptcy judge, the
chapter 13 trustee begins distributing funds to
creditors according to the plan. If the plan is not
confirmed, the debtor may attempt to modify the plan,
convert the case to a chapter 7, or let the case be
dismissed. New limits on multiple filings make it unwise
to allow the case to be dismissed.
Making The Plan Work
On occasion, changed circumstances will affect a
debtor's ability to make plan payments, or a debtor may
have inadvertently omitted a creditor. In such
instances, the plan may be modified either before or
after confirmation. Modification after confirmation is
not limited to a motion by the debtor. The trustee may
also request plan modifications.
The provisions of a confirmed plan are binding on the
creditors. Once the court confirms the plan, it is the
responsibility of the debtor to make certain the plan is
consummated. Chapter 13 is not designed to solve
financial problems that arise after the case is filed.
The debtor must make regular payments to the trustee,
which will require living on a fixed budget for the
length of the case.
The debtor's employer may be required to withhold the
amount of the plan payment from the debtor's paycheck
and send it to the chapter 13 trustee. Furthermore,
while confirmation of the plan entitles the debtor to
retain property, the debtor may not incur any
significant new debt without consulting the trustee, and
a court order may be appropriate. Failure to make plan
payments may result in dismissal of the case.
The Chapter 13 Discharge
The chapter 13 debtor is entitled to a discharge upon
successful completion of all payments. The discharge
releases the debtor from all claims provided for in the
plan or disallowed by the court. It is the creditor's
duty to file a claim in the case. Those creditors who
were provided for in full or in part under the chapter
13 plan, even if not paid because they failed to file a
claim, may not initiate or continue legal action to
collect the discharged obligations.
Pursuant to the 2005 amendments, the scope of the
chapter 13 discharge has been reduced. Debts that are
proven to be the result of fraud or breach of a
fiduciary duty by the debtor may no longer be discharged
in a Chapter 13. As before, the debtor is not discharged
from debts for alimony or child support, student loans,
debts arising from death or personal injury caused by
driving while intoxicated or under the influence of
drugs, and debts for restitution or a Bankruptcy fine. To
the extent that these types of debts are not fully paid
pursuant to the chapter 13 plan, the debtor will still
be responsible for the unpaid balance on these debts
after the chapter 13 case has concluded.