Chapter 13 Bankruptcy

Can Chapter 13 save my house?

Unlike chapter 7 which is a liquidation process, chapter 13 bankruptcy is a repayment plan for consumers who want to pay off some or all of their debts over a period of time, usually three to five years. This type of bankuptcy also allows you to “cure” your overdue mortgage payments and stop foreclosure.  This type of bankruptcy also appeals to individuals who have non-exempt property that they don’t want to give up, or have debts which are non-dischargeable and must continue to pay and want to create a manageable payment plan, such as back taxes. Only individuals who have regular monthly income and sufficient disposable income are eligible.

Advantages of Chapter 13 over Chapter 7.

Chapter 13 offers a number of advantages over liquidation under chapter 7.

  • Chapter 13 offers an opportunity to save your home from foreclosure.  A Chapter 13 petition will stop foreclosure proceedings and allow you to cure delinquent mortgage payments over time. You must, however, still make all regular monthly mortgage payments that come due on time.
  • Chapter 13 usually allows you to keep all you property, where you might otherwise have to turn it over in a Chapter 7 case.
  • Chapter 13 allows you to pay off debts in the plan which would be non-dischargeable in a Chapter 7 case, like back taxes and child support. In those cases, you would get no benefit from a Chapter 7 case, but you will emerge from Chapter 13 with those debts paid off and discharged.
  • Chapter 13 gives you an enormous Automatic Stay period, freezing interest, penalties and late charges to give you time to make repayment.
  • Chapter 13 can stay collection actions against your co-debtors too.  So your spouse or other non-filing co-debtor can be protected from collection actions while you are in the plan.
  • Chapter 13 can strip liens off your property. If you have a second mortgage that is wholly unsecured, it can be removed by the bankruptcy court.
  • Chapter 13 can permit you to modify loans on investment or rental property (but not your home). You can reduce the principal and monthly payments.

You need not pay 100% of your unsecured debts in full. So long as you devote all of your monthly disposable income to the plan, they will be discharged, even if they only get a small percentage of what they were originally owed.

Automatic Stay. Just as in chapter 7, immediately upon the filing your case, the Bankruptcy Court issues an “Order for Relief” which bars all your creditors from taking or continuing any actions to collect on their debts. All pending or threatened foreclosures, repossessions, attachments, wage garnishments, phone calls, letters, billing notices, and even payment orders from other courts are stayed. Click here to learn more about the automatic stay. In the case of Chapter 13 cases, the automatic stay continues the full three to five years until your case is closed and you receive a discharge, which means that interest, penalties and late charges are suspended the whole time.

Discharge.  If you complete all the payments required by your plan, you receive a discharge of all your listed debt, just as in chapter 7. The discharge is an order releasing you from any further personal obligation to pay discharged debts. As in chapter 7, some kind of debts are not discharged, such as child support, alimony, some kinds of taxes, and student loans. Click here for more information on what kinds of debts are not dischargeable.

Eligibility. To qualify under Chapter 13, you must have regular income, and sufficient funds left over each month after paying your regular expenses to pay toward your creditors. Your unsecured debts must be less that $360,475 and secured debts must be less than $1,081,400 (these amounts are adjusted from time to time based on the consumer price index). Unlike Chapter 7, a corporation or partnership cannot file chapter 13. Despite that restriction, individuals who operate small businesses and have business debts can often still file chapter 13 to discharge their personal liability on the business debts.  If you filed a previous case under the bankruptcy code within the preceding 180 days which was dismissed, or received a discharge in a previous bankruptcy case within the preceding 4 years, there may be restrictions on re-filing, or receiving another discharge.

Also, as in chapter 7 cases, you must have resided in the jurisdiction for the past 180 days (otherwise, you may be required to file in the jurisdiction where you last lived); and you must complete the pre-bankruptcy credit counseling briefing.

The Chapter 13 Plan.

You propose a repayment plan to the bankruptcy court, and thereafter the court and your creditors review it. If the creditors don’t object, or the court approves it over their objections, it is “confirmed” and becomes binding on you and your creditors. In order to be confirmed, your plan must meet various minimum requirements.

Chapter 13 Plan Requirements.

There are essentially four “tests” for determining how much you have to pay each month in your chapter 13 plan:

  • Means Test. You must complete a form which considers your actual income and deducts standardized, average expenses as determined by the I.R.S. for your area, and calculates your disposable income.  If the result is a positive number, that amount becomes your plan payment.
  • Disposable Income Test. If the IRS standardized, average expenses do not yield a positive number, your plan payment will be determined by the “Disposable Income Test.” This test is derived from two forms (schedules I and J) which list your actual monthly income and expenses and determine if you have any funds left over to pay your creditors.
  • Required Payments Test. Regardless of how the above tests determine your presumptive monthly plan payment, there are times when you may have to pay more in order to propose a confirmable plan. The bankruptcy code requires that all “priority debts” must be paid in full in the plan. So, if you have mortgage arrears, back taxes or overdue child support or alimony, those amounts must be paid in full over the term of the plan. Sometimes that requires extending the plan to 60 months where otherwise a 36 month plan might have sufficed; or finding an additional source of money to fund the plan, such as the sale of an asset.
  • Liquidation Analysis Test. Regardless of how your plan is calculated under the above tests, your plan must still provide to creditors at least as much as they would have received in a Chapter 7 case where your property is liquidated. This is not usually a problem since much of your property would be exempt from liquidation in a Chapter 7 case, it would not be available to creditors in any event. However, in unusual cases, you may have to find additional sources to fund your plan (i.e., selling an asset) in order to provide the creditors the same as they would receive in a Chapter 7 case.

How a Routine Chapter 13 Case Proceeds.

Before filing, you must complete a pre-bankruptcy briefing course from an approved provider. These courses can be completed in person, over the phone or online. Most people take the online course which takes about an hour and a half and costs about $35

The chapter 13 case then formally begins with the filing of a petition with the bankruptcy court in your area. In addition to the petition, you must also file: (1) schedules of assets and liabilities; (2) schedules of income and expenses; (3) a statement of financial affairs; (4) your proposed Chapter 13 plan; and (5) several other forms.

The bankruptcy court appoints an officer who will serve as your chapter 13 trustee; and then notifies all your creditors who are then bound by the automatic stay to stop collection activities. There is one “standing” trustee who handles all the Chapter 13 cases for each court in Massachusetts (i.e., Boston, Worcester).

Immediately upon filing, your property becomes part of what is called the “bankruptcy estate.” Essentially, you are no longer the sole owner of your property, and the bankruptcy court has an interest in it until your case is closed. As a result, you must keep your autos and real estate properly insured and provide the court with proof of insurance within a week after filing.

You must begin making your Chapter 13 plan payments within 30 days of filing.

The court next schedules a meeting of your creditors which takes place about 4-6 weeks after filing, called the “section 341 meeting” and which you must attend.

About two weeks before the 341 meeting, you must deliver a copy of your last tax return and 60 days of pay stubs to the chapter 7 trustee. You must also cooperate if the U.S. Trustee or the chapter 13 trustee requests additional information.

The 341 meeting takes place in a large conference room, not a courtroom. The chapter 13 trustee presides and will place you under oath and ask you questions about your petition. All of your creditors are notified of the meeting and invited to attend, but in practice few if any actually show up.

After the 341 meeting, there are several important deadlines which you will want to take careful note of.

First, within 30 days after the 341 meeting of your creditors, creditors or the trustee may object to your plan. If this happens, usually the plan can be amended to circumvent the objection and the case can proceed.

Second, within 30 days after the 341 meeting, creditors who object to your claim of an exemption must file their objections.

Third, within 45 days after the 341 meeting, you must complete a second credit counseling course, called the “Financial Management Course,” and file the certificate with the court.

Fourth, most creditors have 90 days after the 341 meeting to file proofs of claims. If a creditor does not file a proof of claim, they are not entitled to share in the distribution from the trustee. Taxing authorities and governmental agencies have 180 days to file their proofs of claims.

Fifth, creditors also have 90 days after the 341 meeting to object to the dischargeability of certain debts.

After all the proofs of claim have been filed, you and your attorney will scrutinize the claims to make sure they are valid, and you can object to any that are improper or incorrect. Your attorney may recommend filing an amended plan at that time to adjust the payment to account for all the properly allowed claims.

Assuming all objections have been favorably dealt with, the court will “confirm” your plan. At that point it becomes legally binding on you and your creditors.

After confirmation, the Chapter 13 Trustee begins making regular monthly payments to your creditors.

From that point on, you make your monthly plan payments until completion, i.e., three to five years. During this time, the Chapter 13 trustee may require certain things of you, such as sending a copy of your tax returns, notifying her of changes of employment, renewals of insurance, etc. She will also require approval to do certain things, like selling a significant asset, borrowing for a car loan, or refinancing your home mortgage.

During the repayment phase of your plan, you must continue to make all support payments you owe; and you must file and pay all taxes on time.

Finally, after you have made your last plan payment, the Chapter 13 trustee will notify the court and the court will issue a discharge and order closing the case.

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