Common Questions Asked About Chapter 13 Bankruptcy
What is Chapter 13 and how does it work?
Chapter 13 is that part of the federal bankruptcy law permitting a person to repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court. Under Chapter 13, the person filing the case, who is called the debtor, submits a plan for the repayment of all or a portion of the debts to the court, which must approve the plan for it to become effective.
The court prohibits creditors from attempting to collect claims directly from the debtor; instead, the debtor makes regularly structured payments in the amounts called for in the debtor’s plan to the Chapter 13 trustee for the period of time specified in the plan.
The trustee collects the money paid in by the debtor and disburses it to the creditors as set forth in the debtor’s plan. Upon the completion of the payments called for in the plan, the debtor is discharged from any liability for the remainder of the debts.
How does Chapter 13 differ from Chapter 7?
Under Chapter 7, the debtor loses all or most of his nonexempt property and is released from liability of dischargeable debts. Under Chapter 13, the debtor is usually permitted to keep nonexempt property, is required to pay off as much of the debts as is feasible, and is released from liability for the balance of the dischargeable debts. More types of debts are dischargeable under Chapter 13 than are dischargeable under Chapter 7.
When is Chapter 13 preferable to Chapter 7?
Chapter 13 is usually preferable for the debtor who:
- Wishes to repay all or most of his unsecured debts and has the income with which to do so within a reasonable time;
- Has valuable nonexempt property or exempt property pledged as security for debts, either of which he would lose if he filed under Chapter 7;
- Is not eligible for a discharge under Chapter 7;
- Has one or more substantial debts that are not dischargeable under Chapter 7;
- Has sufficient assets with which to repay his debts, but needs temporary relief from his creditors in order to do so, or;
- Seeks to cure a defaulted secured obligation.
How does Chapter 13 compare with a private debt consolidated service?
Under Chapter 13, the court possesses powers to aid the debtor that private debt consolidation services do not have. For example, the court has the power to prohibit creditors from attaching or foreclosing on the debtor’s property, the power to force unsecured creditors to accept a Chapter 13 plan that does not pay their claims in full, and the power to discharge a debtor from unpaid portions of debts. Private debt consolidation services have none of these powers.
What is a Chapter 13 discharge?
It is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt 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: one that is granted to a debtor who has completed all of the payments called for under the plan, and one that is granted to a debtor who is unable to complete the payments called for in his plan due to circumstances for which he should not justly be held accountable.
The discharge granted upon the completion of a Chapter 13 plan discharges more debts than this other type of discharge which is known as a hardship discharge.
What debts are not released by a Chapter 13 discharge?
The Chapter 13 discharge granted after the completion of all payments under a Chapter 13 plan releases a debtor from all debts except:
- Debts that are repaid outside of the plan;
- Debts for alimony, maintenance, or support;
- Installment debts whose last payment is due after the completion of payments under the plan;
- Debts incurred during the time the plan was in effect that were not paid under the plan;
- Student loans;
- For death or personal injury caused by the debtor’s operation of a motor vehicle if such operation was unlawful because the debtor was intoxicated;
- For restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime.
The Chapter 13 discharge granted when a debtor is unable to complete the payments under a plan due to circumstances for which he should not justly be held accountable (hardship discharge) releases the debtor from all debts except:
- Secured debts;
- Debts that are paid outside the plan;
- Installment debts whose last payment is due after the completion of payments under the plan;
- debts incurred during the time the plan was in effect that were not paid under the plan, and;
- The types of debts not discharged by a Chapter 7 discharge set forth in ‘523(a) of the Bankruptcy Code.
What is a Chapter 13 plan?
It is a written plan presented to the bankruptcy court by a debtor that states:
- Which of the debtor’s debts should be paid;
- How much should be paid on each debt;
- How much of the debtor’s earnings or other property should be paid to the Chapter 13 trustee;
- How long the payments should continue;
- Which debts should be paid outside of the plan and certain other technical matters.
What is a Chapter 13 trustee?
A Chapter 13 trustee is an officer of the court appointed to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor’s Chapter 13 plan and administer the Chapter 13 case until it is closed. The debtor is required to cooperate with the Chapter 13 trustee.
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 alimony, maintenance, or support, may be paid in a reasonable manner under a Chapter 13 plan.
Must all debts be completely paid off under a Chapter 13 plan?
No. Certain debts such as debts for taxes and fully secured debts, must be paid in full under a Chapter 13 plan, but only an amount that the debtor can reasonably afford must be paid on most debts. The unpaid balance of most debts not paid in full under a Chapter 13 plan may be discharged upon the completion of the plan.
Must all unsecured debts be treated alike under a Chapter 13 plan, or can more be paid on some than on others?
If there is a reasonable basis for doing so, unsecured debts may be divided into separate classes and treated differently. It may be possible, therefore, to pay certain unsecured debts in full, while paying very little on others. An unsecured debt is a debt that is not secured by a valid mortgage or lien.
How much of a debtor’s income must be paid to the Chapter 13 trustee under a Chapter 13 plan?
Usually all of a debtor’s disposable income for a three-year period must be applied toward the making of payments under a Chapter 13 plan. Disposable income means income which is received by a debtor that is not reasonably necessary for the maintenance or support of the debtor and his or her dependents.
When must the payments to the Chapter 13 trustee begin, and how often and by whom must they be made?
- The Chapter 13 payments must begin within 30 days after a Chapter 13 plan is filed with the court.
- A Chapter 13 plan must be filed with the court within 15 days after the case is filed.
The payments must be made regularly, but in most cases they can be made weekly, bi-weekly, or monthly, whichever is most convenient for the debtor. If the debtor is employed, some courts require the Chapter 13 payments to be made by the debtor’s employer; otherwise, the payments can be made either directly by the debtor, or by his or her employer.
How long must a Chapter 13 plan last?
A Chapter 13 plan must last for three years, unless all debts can be paid off in full before that time. However, a Chapter 13 plan can last for as long as five years, if the debtor has a valid reason for doing so.
Is it necessary for all creditors to approve a Chapter 13 plan?
No. A Chapter 13 plan must only be approved by the court in order to become effective. The court cannot approve a plan unless secured creditors are dealt with in the manner described above and unsecured creditors are permitted to file objections to the plan.
How may secured creditors be dealt with under Chapter 13?
There are four methods of dealing with a secured creditor under Chapter 13: The creditor…
- May accept the proposed plan;
- May be allowed to retain the lien and be paid the full amount of the secured claim under the plan;
- May have the collateral surrendered to him, or;
- May be dealt with outside the plan.
It is important to realize that a secured creditor is considered to have a secured claim only to the extent of the value of the secured interest, which cannot exceed the value of the property securing the claim.
For example, if a secured creditor has a mortgage on an automobile, and if the automobile is worth $500, then that creditor has a secured claim for only $500, regardless of how much is owed. If the debtor is in default to a secured creditor, the default must be cured within a reasonable time. Also, interest must be paid on secured debts.
How are debts that have been cosigned or guaranteed by someone else handled under Chapter 13?
If a consumer debt that has been cosigned or guaranteed by another person is being paid in full under a Chapter 13 plan, the creditor will be prohibited from collecting the debt from the other person. However, if the debt is not being paid in full under the plan, the creditor will be permitted to collect the unpaid portion of the debt from the other person.
Who is eligible to file under Chapter 13?
Any person may file under Chapter 13 if the person:
- Resides in, does business in, or owns property in the United States;
- Has regular income;
- Has unsecured debts of less than $336,900;
- Has secured debts of less than $1,010,650;
- Is not a stockbroker or commodity broker, and;
- Has not been a debtor in another bankruptcy case that was dismissed within the last 180 days on certain technical grounds.
A person meeting the above requirements may file under Chapter 13 regardless of when he or she last filed or received a discharge under either Chapter 7 or Chapter 13.
May a husband and wife file jointly under Chapter 13?
A husband and wife may file jointly under Chapter 13 if each of them meets the requirements listed in the answer to the criteria above, except that only one of them needs to have regular income and their combined debts must meet the debt requirements listed above.
When should a husband and wife file jointly under Chapter 13?
If both spouses are liable for any substantial debts, they should file jointly under Chapter 13, even if only one of them has income. Also, if both of them have regular income, they should usually file jointly.
May a self-employed person filed under Chapter 13?
A person meeting the eligibility requirements in the eligibility guidelines stated above may file under Chapter 13 if his business is not incorporated. A debtor who owns his or her own business is normally permitted to continue to operate the business during the Chapter 13 case.
May a chapter 7 case that is still open be converted to Chapter 13?
A pending Chapter 7 case may be converted to Chapter 13 at any time, if the case has not been previously converted to Chapter 7 from Chapter 13.
Where is a Chapter 13 case filed?
A Chapter 13 case is filed in the bankruptcy court in a district where the debtor has lived, and his or her principal place of business located, or had his or her principal assets located, for the greatest portion of the last 180 days.
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 assesses a fee not greater than 10 percent on all payments made under the plan. These fees are in addition to the fee charged by the debtor’s attorney.
Does a debtor lose any property in a Chapter 13 case?
Usually not. Under Chapter 13, debts are normally repaid out of the payments made to the Chapter 13 trustee and not out of the debtor’s property. However, if the debtor has considerable nonexempt property and cannot make sufficient payments to pay enough of his debts to satisfy the court, some of his property may have to be used to pay creditors. Also, if a secured creditor is not being paid under the plan, it may be permitted to repossess the property securing the claim if the debt owed is not paid.
How does filing under Chapter 13 affect lawsuits and attachments against the debtor?
The filing of a Chapter 13 case automatically stays all lawsuits, attachments, garnishments, and other actions by creditors against the debtor and the debtor’s property for as long as the Chapter 13 case lasts.
A few days after the case is filed, a notice is mailed by the court to all creditors advising them of the automatic stay. The creditors may be notified sooner by either the debtor or the attorney, if necessary.
Creditors are not permitted to file lawsuits or attachments against the debtor during the pendency of the Chapter 13 case, and, if the debtor is granted a Chapter 13 discharge, they will be prohibited from attempting to collect any discharged debt from the debtor after the case is closed.
What is required for confirmation of a Chapter 13 plan?
The court will confirm a Chapter 13 plan if:
- The plan complies with the legal requirements of Chapter 13;
- All required fees, charges and deposits have been paid;
- The plan has been proposed in good faith and not by any means forbidden by law;
- Each unsecured creditor will receive under the plan at least as much as would have received had the debtor filed under Chapter 7;
- It appears that the debtor will be able to make the required payments and comply with the plan, and;
- Each secured creditor has been dealt with in the manner described in the answer to the eligibility question above.
When does a 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 is generally held within 75 days thereafter.
The debtor’s testimony is not lengthy at either hearing, however. If difficulties or unusual events arise during the course of a case, additional court appearances may be necessary.
What if the court does not approve a debtor’s Chapter 13 Plan?
If the court does not approve a Chapter 13 plan proposed by a debtor, the debtor is permitted to modify the plan and seek court approval of the modified plan. If the debtor does not wish to change his proposed plan, he may either convert the case to a Chapter 7 case or dismiss the case. If the Court does not approve a plan, it will usually set forth the reasons so that the plan may be appropriately modified.
How are the claims of creditors handled under Chapter 13?
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 will be barred from filing a claim, and after the completion of the plan their claims will be discharged. A debtor may file a claim on behalf of a creditor if desired. When the claims have been filed, the debtor is notified and given an opportunity to file objections to any claims that are disputed.
When the objections have been ruled on, and the claims approved by the court, the Chapter 13 trustee will begin making payments to unsecured creditors as called for in the Chapter 13 plan. Payments to secured creditors and to special classes of unsecured creditors may begin earlier if desired.
What if the debtor is temporarily unable to make his Chapter 13 payments?
If the debtor is temporarily out of work, injured, or otherwise unable to make the payments required under his Chapter 13 plan, the court may suspend the case until he is able to resume the payments. If it appears that the inability to make the required payments will continue for an extended period, the debtor may be permitted to modify the plan, or the case may be dismissed or converted to Chapter 7.
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:
- Debts for taxes that become payable while the case is pending, and;
- 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.
Any 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 precluding the debtor from incurring any new debts during the case unless they are approved in advance by the Chapter 13 trustee. Therefore, if a debtor needs credit or wishes to incur a debt after the case has been filed, he or she should obtain the prior approval of the Chapter 13 trustee.
What if the debtor later decides to discontinue the Chapter 13 case?
A debtor has the right to either dismiss a Chapter 13 case or convert it to a Chapter 7 case at any time, regardless of his reason for doing so. However, if a debtor simply stops making the required Chapter 13 payments, the court has the power to compel the debtor, or his employer, to make the payments and to comply with the orders of the court.
What happens if a debtor is unable to complete his Chapter 13 payments?
A debtor who is unable to complete his Chapter 13 payments has three options:
- He may dismiss the Chapter 13 case;
- He may convert the Chapter 13 case to a Chapter 7 case;
- If he is unable to complete the payments due to circumstances for which he should not justly be held accountable, he may seek to close the case and obtain the second type of a discharge described above.
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:
- 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.
- Assisting the debtor in the preparation of a budget.
- Examining the liens or security interest of secured creditors to ascertain their validity or avoidability, and taking the legal steps necessary to protect the debtor’s interest on such matters.
- Devising and implementing methods of dealing with secured creditors.
- Assisting the debtor in devising a Chapter 13 plan that meets the needs of the debtor and that is acceptable to the court.
- Preparing the necessary pleadings and Chapter 13 forms.
- Filing the Chapter 13 forms and pleadings with the court and paying, or providing for the payment of, the filing fee.
- Attending the meeting of creditors, the confirmation hearing, and any other court hearings required or called in the case.
- Assisting the debtor in obtaining court approval of his Chapter 13 plan.
- Inspecting the claims filed in the case, filing objections to improper claims, and attending court hearings thereon.
- Assisting the debtor in overcoming any legal obstacles that may arise during the courses of the Chapter 13 case.
- Assisting the debtor in obtaining the discharge of as many debts as possible 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 approved by the bankruptcy court. The fee must be reviewed and approved by the court whether it is paid prior to or after the filing of the case, and whether it is paid directly to the attorney by the debtor or by the trustee out of the debtor’s Chapter 13 payments. The court will approve only a fee that it deems to be reasonable.
Where is the Chapter 13 Trustee for the Eastern District of Michigan located?
David Wm. Ruskin
1100 Travelers Tower
Southfield, Michigan 48075
Tammy L. Terry
Detroit, Michigan 48226
Krispen S. Carroll
1100 Dime Bldg.
Detroit, Michigan 48226