Chapter 13 FAQs
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 that 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.
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.
When is a Chapter 13 case preferable to a Chapter 7 case?
Chapter 13 is usually preferable for a person who – (1) wishes to repay all or most of his or her unsecured debts and has the income with which to do so within a reasonable time, (2) has valuable nonexempt property or has valuable exempt property securing debts, either of which would be lost in a Chapter 7 case, (3) is not eligible under means testing to maintain a Chapter 7 case, (4) is not eligible for a Chapter 7 discharge, (5) has one or more substantial debts that are dischargeable under Chapter 13 but not under Chapter 7, or (6) has sufficient assets with which to repay most of his or her debts, but needs temporary relief from creditors in order to do so.
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.
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.
What types of debts are not dischargeable in Chapter 13 cases?
A full Chapter 13 discharge granted upon the completion of all payments required in the plan discharges a debtor from all debts except:
(1) debts that were paid outside of the plan and not covered in the plan,
(2) debts for domestic support obligations, which includes debts for child support and alimony,
(3) debts for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel or aircraft while intoxicated,
(4) most tax debts,
(5) debts for restitution or criminal fines included in a sentence imposed on the debtor for conviction of a crime,
(6) debts for fraud, embezzlement or larceny,
(7) debts for student loans or educational obligations unless a court rules that not discharging the debt would impose an undue hardship on the debtor and his or her dependents,
(8) debts for damages caused by willful or malicious conduct by the debtor,
(9) installment debts whose last payment is due after the completion of the plan,
(10) debts incurred while the plan was in effect that were not paid under the plan,
(11) debts owed to creditors who did not receive notice of the Chapter 13 case, and
(12) long-term debts upon which payments were made under the plan.
A partial Chapter 13 discharge, which is granted when a debtor is unable to complete the payments under a plan due to circumstances for which he or she should not be held accountable, discharges the debtor from all debts except:
(1) secured debts (i.e., debts secured by mortgages or liens),
(2) debts that were paid outside of the plan and not covered in the plan,
(3) installment debts whose last payment is due after the completion of the plan,
(4) debts incurred while the plan was in effect that were not paid under the plan,
(5) debts owed to creditors who did not receive notice of the Chapter 13 case,
(6) debts that are not dischargeable in a Chapter 7 case, and
(7) long-term debts upon which payments were made under the plan.
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.
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.
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 student loans or child support, may be paid under a Chapter 13 plan.
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.
What is the difference between a secured creditor and an unsecured creditor?
A secured creditor is a creditor whose claim against the debtor is secured by a valid mortgage, lien, or other security interest against property that is owned by the debtor. An unsecured creditor is a creditor whose claim against the debtor is not secured by a valid mortgage, lien or security interest against the debtor’s property. In other words, a secured creditor has collateral for its claim and an unsecured creditor does not. The basic difference is that a secured creditor may collect all or a portion of its claim from its collateral, while an unsecured creditor may not. It is common for the amount of a secured creditor’s claim to exceed the value of its collateral. This type of creditor is called a partially-secured (or undersecured) creditor. In Chapter 13 cases the claims of most partially-secured creditors are divided into secured and unsecured portions. For example, a partially-secured creditor with a $2,000 claim against the debtor that is secured by collateral that is worth $1,500 has a $1,500 secured claim and a $500 unsecured claim. The only types of partially-secured creditors whose claim may not be treated in this manner are creditors secured by a mortgage on the debtor’s home and certain creditors who advanced funds for the purchase of automobiles or other personal property of the debtor. It is important to differentiate between secured and unsecured claims because they are treated quite differently in Chapter 13 cases. Secured claims must be paid in full with interest, while only amounts that the debtor can reasonably afford need to be paid to the holders of unsecured claims (except priority claims – see Question 36, infra).
Who is eligible to file a Chapter 13 case?
Any individual (i.e., natural person) is eligible to file a Chapter 13 case if he or she – (1) resides in, does business in, or owns property in the United States, (2) has regular income, (3) has unsecured debts of less than $336,900, (4) has secured debts of less than $1,010,650, (5) is not a stockbroker or a commodity broker, (6) has not intentionally dismissed another bankruptcy case within the last 180 days, and (7) has received a briefing from an approved credit counseling agency within the last 180 days (unless this requirement is not in effect in the local bankruptcy court). Corporations, partnerships, limited liability companies, and other business entities are not eligible to file a Chapter 13 case.
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.
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.
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.
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.
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.