Adjustment of Debts of an Individual with Regular Income
Chapter 13 of the United States Bankruptcy Code is frequently referred to as the "wage earner" chapter, although its application is actually to individuals with any form of regular income. While the information presented is intended to be accurate as of the date of publication, it should not be cited or relied upon as legal authority. Significant changes were made to the bankruptcy laws with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). It should not be used as a substitute for reference to the United States Bankruptcy Code (Title 11, United States Code) and the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rules"), and any local rules or practices adopted and disseminated by each bankruptcy court.
Chapter 13 is designed for individuals with regular income who desire to pay their debts but are currently unable to do so. Chapter 13 may also be necessary for those debtors that do not qualify for chapter 7 relief under BAPCPA's means test. The purpose of Chapter 13 is to enable financially distressed individual debtors, under court supervision and protection, to propose and carry out a repayment plan under which creditors are paid over an extended period of time. Under this chapter, debtors are permitted to repay creditors, subject to certain mandatory plan terms under BAPCPA, in full or in part, in installments over a three to five year period, during which time creditors are prohibited from starting or continuing collection efforts. A plan providing for payment over more than three years must be for cause and be approved by the court, unless the debtor makes more than the median income for his family size in the state in which he resides. In such case, the plan must be five years in length unless unsecured creditors are paid in full in less time.In no case may a plan provide for payments over a period that is more than five years.
Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as his or her unsecured debts are less than $360,475 and secured debts are less than $1,081.400. These numbers are adjusted annually. A corporation or partnership may not be a Chapter 13 debtor. An individual cannot file under Chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
HOW CHAPTER 13 WORKS
A Chapter 13 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor lives. Unless the court orders otherwise, the debtor shall file with the court the required schedules and statement of financial affairs. A husband and wife may file a joint petition or individual petitions.
In order to complete the petition, statement of financial affairs, and schedules, the debtor will need to compile the following information:
- A list of all creditors and the amount and nature of their claims
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, with supporting documentation, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.;
- Pay stubs for the 6-months prior to the date of the filing of the petition; and
- Tax returns for all periods ending during the 4-year period prior to the date of the filing of the petition.
When a husband and wife file a joint petition or each spouse files an individual petition they should be sure to gather the above detailed data for both spouses. In order to accurately assess financial responsibilities, however, when only one spouse files, the income and expenses of the non-filing spouse should be included.
Upon the filing of the petition an impartial trustee is appointed by the court or the United States trustee to administer the case. A primary role of the Chapter 13 trustee is to serve as a disbursing agent, collecting payments from debtors and making distributions to creditors.
The filing of the petition under Chapter 13 "automatically stays" most actions against the debtor or the debtor's property. Under BAPCPA, the imposition or continuation of the automatic stay is questionable and depends upon whether the debtor filed a previous bankruptcy petition and when said petition was filed.As long as the "stay" is in effect, creditors generally cannot initiate or continue any lawsuits, wage garnishment, or even telephone calls demanding payments. Creditors receive notice of the filing of the petition from the court clerk or debtor's counsel. Further, Chapter 13 contains a special automatic stay provision applicable to co-debtors. Specifically, after the commencement of a Chapter 13 case, unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a "consumer debt" from any individual who is jointly liable with the debtor, known as a co-debtor.
By virtue of the automatic stay, subject to BAPCPA restrictions, an individual debtor faced with a threatened foreclosure of the mortgage on his or her principal residence may prevent an immediate foreclosure by filing a Chapter 13 petition. Chapter 13 then affords the debtor the opportunity to cure defaults on long-term home mortgage debt by bringing the payments current over a reasonable period of time.
The debtor must file a plan of repayment with the petition or within 15 days thereafter, unless extended by the court for cause. The Chapter 13 plan must provide for the full payment of all claims entitled to priority, such as, tax claims or claims for alimony maintenance or child support, unless the holder of a particular claim agrees to different treatment of the claim, if the plan classifies claims, provides the same treatment for each claim within each class; and provides for the submission of such portion of the debtor's future income to the supervision of the trustee as is necessary for the execution of the plan. Other plan provisions are permissive.
Chapter 13 plans, which must be approved by the court, provide for payments of fixed amounts to the trustee on a regular basis, typically monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims, however, post-petition alimony, maintenance and support payments must be current in order to obtain plan confirmation. If the trustee or a creditor with an unsecured claim objects to confirmation of the plan, the debtor is obligated to pay the amount of the claim or commit to the proposed plan all projected "disposable income" during the period in which 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 is defined as excluding those amounts which are necessary for the payment of ordinary operating expenses.
Within 30 days after the filing of the plan, even if the plan has not yet been approved by the court, the debtor must start making payments to the trustee. A meeting of creditors is usually held 20 to 40 days after the petition is filed. Within one week of the creditor's meeting, the debtor must have provided to the trustee his last four year's tax returns. The debtor must attend this meeting at which creditors are permitted to appear and ask questions regarding the debtor's financial affairs and the proposed terms of the plan.If a husband and wife have filed one joint petition, they both must attend the creditors' meeting. The trustee also will attend this meeting and question the debtor on the same matters. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending. If there are problems with the plan, they are typically resolved during or shortly after the creditors' meeting. Generally, problems may be avoided if the petition and plan are complete and accurate and the trustee has been consulted prior to the meeting. In a Chapter 13 case, unsecured creditors who have claims against the debtor must file their claims with the clerk's office within 90 days after the first date set for the meeting of creditors.
After the meeting of creditors is concluded, the bankruptcy judge must determine at a confirmation hearing held between 20 and 45 days following the meeting of creditors whether the plan as proposed is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. Creditors may appear and object to confirmation. While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if the debtor's assets were liquidated, or that the debtor's plan does not commit all disposable income for the period of the plan. Usually objections can be negotiated and resolved amicably. Under BAPCPA, "good faith" has been added as a confirmation requirement calling into question the debtor's pre- and post-petition conduct.
If the plan is confirmed by the bankruptcy judge, the Chapter 13 trustee commences distribution of the funds received. If the plan is not confirmed, the debtor has a right to file a modified plan. The debtor also has a right to convert the case to Chapter 7, subject to new BAPCPA limitations. If the plan or modified plan is not confirmed and the case is dismissed, the court may authorize the trustee to retain a specified amount for costs, but all other funds paid to the trustee are returned to the debtor.
On occasion, changed circumstances will affect a debtor's ability to make plan payments, a creditor may object or threaten to object to a plan, or a debtor may inadvertently have failed to list all creditors. In such instances, the plan may be modified either before or after confirmation.
MAKING THE PLAN WORK
The provisions of a confirmed plan are binding on the debtor and each creditor. Once the court confirms the plan, it is the responsibility of the debtor to make the plan succeed. The debtor must make regular payments to the trustee, which will require adjustment to living on a fixed budget for a prolonged period.
Alternatively, the debtor's employer can automatically withhold the amount of the payment from the debtor's paycheck and transmit it to the Chapter 13 trustee. Furthermore, while confirmation of the plan entitles the debtor to retain property as long as payments are made, the debtor should not incur any significant new credit obligations without consulting the trustee, as such credit obligations may have an impact upon the execution of the plan.
A debtor may consent to the deduction of the plan payments from the debtor's paycheck. Experience has shown that this practice increases the likelihood that payments will be made on time and that the plan will be completed. In any event, failure to make the payments may result in dismissal of the case or its conversion to a liquidation case under Chapter 7 of the Bankruptcy Code.
THE CHAPTER 13 DISCHARGE
The bankruptcy law regarding the scope of the Chapter 13 discharge is complex and has recently undergone major changes under BAPCPA. The Chapter 13 debtor is entitled to a discharge upon successful completion of all payments under the Chapter 13 plan and proof that debtor attended a personal financial management course. Proof of completion of such a course must be filed within 45 days of the first date for the creditor's meeting and before the last payment by the debtor in chapter 13. The discharge has the effect of releasing the debtor from all debts provided for by the plan or disallowed, with limited exceptions. Those creditors who were provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
In return for the willingness of the Chapter 13 debtor to undergo the discipline of a repayment plan for three to five years, a broader discharge is available under Chapter 13 than in a Chapter 7 case.
As a general rule, the debtor is discharged from all debts provided for by the plan or disallowed except certain long term obligations (such as a home mortgage), debts for alimony or child support, debts for most government-funded or guaranteed educational loans or benefit over-payments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution included in a sentence on the debtor's conviction of a crime. To the extent that these types of special debts are not fully paid pursuant to the Chapter 13 plan, the debtor will still be responsible for payment of any balance after the bankruptcy case has concluded.
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