What is Chapter 13?

 Chapter 13 in a Nutshell

The general idea. Chapter 13 is also called a personal reorganization for individual wage earners; it is not available for corporations or other business entities. The basic idea of a chapter 13 is that you have more monthly income than you require for your basic needs. That is, you do have some extra money each month to pay towards your debts, but you are unable to pay creditors as fast as they demand. What you need is a lower total payment and that is what Chapter 13 is designed to do.

Who should consider Chapter 13? People choose to file a repayment plan under Chapter 13 when (a) they owe debts not dischargeable in Chapter 7 (such as recent taxes, child support, fraud judgments), (b) they have liens that are larger than the value of the assets securing the debt, (c) they have years of unfiled taxes, (d) they are behind on their house or car payments, (e) their assets are worth more than the available exemptions, and (f) their income is over the median income and they are not eligible for Chapter 7 relief.

Can you file a Chapter 13? If you are an individual and have (a) unsecured debts not exceeding $336,900 and secured debts not exceeding $1,010,650, (b) a regular income and (c) excess disposable income each month based on a budget that does not include payments on credit cards or installment payments plans to taxing authorities, usually the answer is yes. The Chapter 13 plan does not have to pay debts in full; it can provide for only fractional payments to unsecured creditors. The Bankruptcy Code does require the priority claims be paid in full. The most common priority claims are recent taxes and family support arrearages.

Mortgage Reinstatement. One of the most powerful features of chapter 13 is that it can stop a foreclosure sale and allow you to get caught up on the missing payments (mortgage arrearage) over time. Of course, during the time you are in Chapter 13, you must pay your current monthly mortgage payments, but the pre-petition mortgage arrearage will be paid through the Chapter 13 plan.

Chapter 13 can be filed right up until the public auction at foreclosure takes place and still stop the foreclosure from going through — and save your home. WARNING – Do not wait until the eve of foreclosure to decide to file your Chapter 13 petition! The 2005 bankruptcy reform act makes waiting until the last second a risky decision. New filing requirements, including completion of a pre-filing credit counseling course and increased documentation about your total financial position, make it difficult to prepare your bankruptcy statements and schedules without sufficient time. If you choose to procrastinate, your attorney will not be able to adequately prepare your case. If you have received a notice of default from your mortgage lender, act now, do not delay any longer. Don’t let your emotions or analysis paralysis create an emergency situation that could easily be avoided by advanced preparation.

Stop interest and penalties on priority tax claims. Chapter 13 can also be a powerful tool in dealing with IRS debt. In general, unsecured income taxes that were first due more than three years before the bankruptcy is filed, for which a timely and non-fraudulent return was filed, can be discharge in full in any chapter of bankruptcy. However, in Chapter 13, those recent or non-dischargeable priority taxes can be repaid in full through the plan, but the penalties associated with those taxes can be treated as non-priority claims and paid at a fraction along with other unsecured debt. In Chapter 13, the non-dischargeable taxes do not continue to incur interest during the case; if the plan is completed, no post filing interest is due. Tax liens are an exception: they survive the bankruptcy, regardless of whether a claim is filed, unless paid through the case or avoided as not attaching to value at the commencement of the case.

Chapter 13 Plan. The heart of a Chapter 13 is your plan of reorganization where you promise to pay to the Court-appointed Trustee a certain amount of money each month. In return for this, the Bankruptcy Code requires that all your creditors leave you alone, effectively stopping collections, garnishments and harassing telephone calls. Usually, and in most cases, unless 100% repayment of debt is proposed, Chapter 13 repayment plans must run 36 months, but no longer than 60 months. The Trustee acts like a banker; he divides up your monthly plan payment among your creditors based on priority of payment as defined by the Bankruptcy Code. If you make all your plan payments as agreed, then at the end of the plan the Court will forgive you of the balance of many of the debts that were not paid in full. You would, of course, have to continue making regular monthly mortgage payments on your home. However, if your car is worth less than what you owe, you pay for the value of the car through the Chapter 13 plan, with the loan balance (the amount of your loan that exceeds the value of your car) paid at a lower percentage rate (on average 20 cents on the dollar).

 

The battleground in Chapter 13. The sticking point in Chapter 13 is the struggle over the amount of the monthly payment you must make to the Court under your Chapter 13 Plan. Since you are only allowed to keep each month the portion of your income which is both “necessary” and “reasonable” (in amount), you can see that every dollar you spend of your income is one dollar less that is going to go to the Trustee for repayment of debt. The creditors realize this and their champion, the Chapter 13 Trustee, realizes it too. So the Trustee wants you to spend less on your family and contribute more for debt repayment. However, both of the Chapter 13 Trustees in the District of Utah are fair and predictable and it is easy to anticipate what they would consider to be reasonable expenses

Keep more of your property. One feature of Chapter 13 that many clients find attractive is that they are usually able to keep all their property. Unlike a Chapter 7, where debtors turn over their nonexempt property to the Trustee for distribution to creditors, in a Chapter 13, the debtor turns over to creditors a long series of monthly payments that total up to even more cash than the creditors would have received if the debtor had chosen to file Chapter 7.

Chapter 13 Responsibilities. You have certain responsibilities as a Chapter 13 debtor that you must fulfill or your plan will be dismissed, you will no longer have the protection of the Bankruptcy Court, and you will not receive a discharge (forgiveness) of debt: (1) You must attend the first meeting of creditors. If you fail to attend the scheduled meeting, the case will be dismissed. The first meeting of creditors usually falls one month after your petition date. (2) You must make your monthly plan payments. If you fail to make your monthly Chapter 13 plan payment, your case will be dismissed. (3) You must supply income verification (usually pay stubs), or your case will be dismissed. (4) You must keep making your regular monthly mortgage payments. (5) Finally, if you have not filed past due tax returns, your case will be dismissed unless the tax returns are prepared and filed shortly after the first meeting of creditors.

This is important: This is only meant to give you general information and you should not consider it to be legal advice. You should ask your attorney for answers to your specific issues.