How does Chapter 13 work?

The Debtors file documents called Petition, Schedules, Statement of Affairs, along with some other documents with the Bankruptcy Court. These documents are reviewed by the Chapter 13 Trustee and other creditors. In addition to the documents the Debtors also file a Plan of Reorganization. This is called debt adjustment. The intention is that over the next 3 to 5 years the Debtors will pay all the disposable income (income minus allowed expenses- see Trustee Guidelines and Census Bureau and IRS Data) to their creditors by way of the Bankruptcy Trustee. At the end of their Plan period their remaining debts will be discharged, unless they are non-dischargeable.

Chapter 13 varies widely from district to district depending on the custom and attitudes of the local trustees and judges about what is "reasonable" and in "good faith". A successful Chapter 13 case always requires an experienced bankruptcy lawyer familiar with the prevailing judicial attitudes in the district and the myriad of unwritten local rules.

Who is eligible for a Chapter 13?

In order to file for a chapter 13 you must:

• Before filing complete the Credit Counseling for Consumers Class.
• Have sufficient regular income to meet monthly living expenses allowed by the chapter 13 Trustee, as allowed by the IRS and make a plan payment.
• Have less than $307,675 of unsecured debt, and less than $922,975 of secured debt.
• Not be a corporation, partnership, stockbroker, or commodity broker.

You may file Chapter 13 and obtain a discharge, so long as you did not receive an earlier discharge in a 7, 11 or 12 in the last 4 years, or another chapter 13 in the last 2 years, but that is an issue to discuss with your attorney.

A liquidated debt is one where the amount the debtor owes is known, or capable of easy calculation. For example, a loan is a liquidated debt and the damages owing in an auto accident are usually unliquidated until judgment is entered.

A strategy frequently used is to file Chapter 7 to discharge those debts that are dischargeable, and file a subsequent Chapter 13 to repay those debts that were not discharged in Chapter 7, or that cold not be dealt with in a chapter 7 (such as paying arrears on houses, etc).

What is the role of an attorney in a chapter 13 bankruptcy case?

The debtor’s attorney will normally do the following things in a chapter 13 consumer case:

• Analyze the amount and character of the debts owed by the debtor to determine whether bankruptcy is the best remedy for the debtor’s financial problems.
• Assist the debtor in preparing his estate for bankruptcy, so that a minimum amount of property will later have to be turned over to the Trustee.
• Review the Debtor's history of payments and transfers to determine possible exposure to Debtor and others.
• Assemble the information and data necessary to prepare the bankruptcy schedules and statements for filing.
• Assist the Client in understanding their duties in a chapter 13.
• Draft the Plan of Reorganization, based on the debtor's situation, the law and the practical solutions available.
• Prepare the proper petitions, schedules, and statements for filing with the bankruptcy court.
• Determine whether the education classes are necessary. If so, file the required certificates with the court.
• File the bankruptcy petitions, schedules, and statements with the court and obtaining the necessary injunctions and restraining orders.
• Address issues related to redemption, surrender or reaffirmation.
• File and notice the Plan of Reorganization.
• Attend the Meeting of Creditors with the debtor.
• Address issues raised by the Bankruptcy Trustee and creditors related to the Plan and other documents filed with the Court.
• Attend Plan Confirmation hearings.
• Address modifications of the Plan, as circumstances change during the life of the Plan.
• Prepare and file amended schedules as required by the Debtor's change of circumstances and/or the court.

What is the Means Test?

The means test is explained in the Chapter 7 FAQ. In a chapter 13 it is complicated because of a change in the definition of "disposable Income". The form used is Official form B22C. The problem is that the disposable income test, under either 7 or 13 median income approach, will not be an accurate measure of future ability to pay in the Plan. The test is a look back, not forward in time. In addition to other deductions, charitable contributions, up to 15% of gross income, is included.

What Classes Must be Taken before and During the Bankruptcy?

Every consumer who files Chapter 7 or 13 bankruptcy is required to take a credit counseling "briefing" within 180 days PRIOR to filing their bankruptcy and file a certificate of compliance. There is a provision for emergency situations, but they still must prove that they tried to obtain the class within the last 5 days of filing, but they must take the class and file a certificate of compliance within 30 days after filing their bankruptcy Petition. There is also a budget class that must be taken within 45 days after filing your bankruptcy. Failure to do so will result in additional fees and costs in order to get your discharge in your bankruptcy. There will be fees charged for those classes, unless you cannot afford to pay such fees.

Before filing bankruptcy you must take one class called credit counseling. After filing your bankruptcy you must take a class called Personal Financial Management.

What is the Automatic Stay?

The filing of the petition creates an automatic stay under 11 U.S.C. §362 prohibiting all collection actions. 11 U.S.C. §§ 301, 302, 101(42) - unless the Debtor has filed a prior bankruptcy in the last 12 months. The Stay is good for only 30 days if filed one prior case in last 12 months. §362(c)(3)(A). This is no Stay at all if 2 or more cases in last 12 months. §362(c)(4)(A)(i) A dismissed case is a filed case. There is no excuse for failure to understand the requirements. A motion to extend the Stay must be filed within 30 days.

What are the Debtor's Duties in a Chapter 13?

The Debtor may not submit any documents to the Bankruptcy Court until the Debtor is certain that the information is (1) well grounded in fact; and (2) warranted by existing law or a good faith argument for the modification of the existing law. In other words, someone who is representing himself or herself in a bankruptcy is held to know the bankruptcy and state laws that apply to their situation. Ignorance of the law is no excuse. The Debtor's attorney must make the same avow regarding the information provided by the Debtor. Sanctions can be awarded under §707(b)(4).

All creditors must receive notice of the bankruptcy. This notice requirement includes all addresses on all mail received in the last 90 days prior to filing. Failure to provide notice to the correct address may mean the creditor can continue legal actions outside the bankruptcy court, until they receive notice at the correct address. The requirement is new law and may be open for interpretation for many years.

The Debtor must keep all child support and alimony/maintenance obligations current through the entire Plan, otherwise the Chapter 13 case can be dismissed. Also, the Debtor must file tax returns that are due during the last 4 year before filing the bankruptcy otherwise, the Chapter 13 case can be dismissed. A Plan cannot be confirmed until all tax returns are filed.

The Debtors must file a Plan of Reorganization, mails copies to all creditors and (in some cases) appear at a Plan Confirmation hearing that is usually between 20-45 days after the meeting of creditors. The contents of the Plan are dictated by which requires the Debtor submit all "disposable income" income, minus certain allowed expenses, to the Chapter 13 Trustee for the next 3-5 years. "Disposable Income" is not defined the same here as in a chapter 7.

What happens if I own property that is not Exempt?

If your case involves assets which are not exempt, then you must pay the fair market value of those assets through your Chapter 13 Plan. Your creditors have the right to receive the amount they would have received if you liquidated those assets through a Chapter 7. You are obligated to protect those assets until the Trustee can make arrangements to pick them up. Your creditors will be notified by the Trustee to file a proof of claim. The Debtor, Trustee and other creditors have the right to examine the proof of claims and object. All claims not objected to by the Trustee, you, or another creditor will be approved by the court and the creditors will receive a pro-rata share of whatever the Trustee has distributes, after paying other specified debts (child support, secured debts, etc).

How does filing bankruptcy affect my credit rating?

The filing of a bankruptcy generally means that your credit rating will be poor. A chapter 13 is an open bankruptcy for 3 to 5 years. During the pendency of that bankruptcy your credit score can increase so long you keep your Plan payments and monthly mortgage payments current. It is not unusual that a Debtor obtain a new loan during their chapter 13. Warning - you must obtain court approval for any new loans, sales of assets or purchase or new large-dollar assets. Make certain that the new loan does not cost you more than staying with your current obligation.

Do I lose any of my rights, such as the right to vote, by filing bankruptcy?

No. Bankruptcy is a civil and not a criminal proceeding. You do not forfeit any of your civil or constitutional rights by filing a bankruptcy. Also, neither a utility, a governmental unit, nor your employer may discriminate against you because you have filed bankruptcy. But, if you discharge a utility bill then you may be required to give a deposit for future service.

Are my out-of-state debts discharged in bankruptcy?

Yes. Bankruptcy is a federal proceeding and the bankruptcy court has the jurisdiction and power to discharge debts contracted anywhere in the Country, whether in or out of your state of residence. Of course, there are certain debts that cannot be discharged in bankruptcy.

How does the Plan of Reorganization work?

The plan must also meet two other tests:

Best Interest of Creditors Test : the plan must give unsecured creditors at least as much on their claim as they would have received if the debtor filed Chapter 7 ; and

Best Efforts Test : all projected disposable income (the amount left after payment of allowed expenses: see Trustee Guidelines and Census Bureau and IRS Data) must be paid into the plan for the "applicable commitment period" which could be 3 to 5 years (or maybe more).

The plan must also provide for payment in full of priority claims and generally provide for payment of the value of secured claims on cars, etc., in full over the life of the plan. The Bankruptcy Reform Act changed the amount necessary to pay on vehicles that were purchased in the 2 1/2 years prior to filing, or other personal property purchased within the year prior to filing. See §1325(a)(10)-hanging paragraph which seems to mean that the full amount of the debt shall be paid for these two new exemptions. Debts such as home mortgages, that exceed the length of the Plan, do no need to be paid in full in the life of the plan, though the plan may cure any defaults on long term debt (arrears). This is why a chapter 13 is used when a trustee' sale is pending against the Debtor's residence or other property.

Payments can be the same over the life of the plan, or they can start low and increase at intervals, or they can vary with the seasons. But see §1325(a)(5)(B)(iii)(I) which requires equal monthly payments equal to the adequate protection required. Plan payments must reflect a change in income. Therefore, if the Debtor receives a raise and does not have any allowed increased in expenses, then the additional monies from the raise must be paid to the Trustee.

Payments through the plan

The debtor must make the first payment on the plan within 30 days of the filing of the plan and each month thereafter. Payments begin before the first meeting of creditors (the §341 meeting) and continue even while objections to confirmation are pending. Payments must be made in certified funds, such as money orders or cashiers checks, or by voluntary wage deduction.

If you stop making plan payments, the Trustee will ask that your case be dismissed.

Can creditors object to the plan?

Yes, but normally Creditors' objections are limited to the value of the secured item or the dollar amount you are scheduled to pay through the plan. They can object only if they contend the plan does not meet the best interests of creditors test and the best efforts test, or if they contend the debtor has not proposed the plan in good faith. The trustee can raise any objection that a creditor could raise. Under the Reform Act of 2005 the creditors may have more grounds for objection (required payments, prior discharges, etc.)

Objections to confirmation are usually resolved by negotiation between the debtor's counsel and the objecting party, usually by some sort of compromise. If the parties can't reach a compromise, the judge will decide the question.

Amending the Plan Before Confirmation:

The plan must meet the tests for plan confirmation. Sometimes, the amount of money to be paid into a plan must be increased, where the claims that are actually filed and allowed are greater than estimated at the beginning of the case.

The confirmed plan:

Once the plan is confirmed, it binds all the parties: the creditors must accept the payments provided; the values given in the plan for the secured portion of claims are fixed; and the debtor's payments over the life of the plan are fixed, unless the debtor's circumstances change and the plan is modified.

What About my tax refund check?

Any right that you had to a tax refund at the time of filing the bankruptcy is an asset of your bankruptcy estate and belongs to your Trustee. At the time that you get your tax refund check, you must turn that check over to the Trustee. Depending on the circumstances you may be required to surrender 2 to 3 years of refunds. Rethink why you are getting a refund check. By overpaying your taxes you are losing the opportunity to use those funds for your own purpose. The best solution is to calculate your wage deductions based on your current situation. Don't use your refund check as a "savings account".

Must my Employer be told I am filing for Bankruptcy?

Perhaps. There are two issues that may involve you employer. First, the bankruptcy Trustee will request that you provide copies of several documents (tax returns, bank statements, etc). One of these items will be copies of some of your pay stubs before filing. If you refuse to provide this information then the Trustee may send a form to your employer seeking information about your wages. Second, the basic foundation of a chapter 13 is the monthly Plan payment made to the Bankruptcy Trustee. In some cases a wage assignment of those Plan payments may be required by the Court, the Trustee or your circumstances. Each situation is unique. The law prohibits your employer using the mere filing of a bankruptcy to deny you employment, unless you work in financially sensitive areas (securities, brokers, etc).

Exemptions in Chapter 13

The bankruptcy code allows each individual who files bankruptcy to keep basic assets deemed necessary for the debtor's "fresh start" after bankruptcy. That property is the debtor's "exempt property".

Debtors often worry that they will lose personal possessions and household goods when they file bankruptcy. Most Chapter 7 cases are no asset cases. That means the debtors give up nothing to the trustee, unless they owe back child support or alimony/maintenance. In that case the Trustee can sell all assts owned by the Debtor, whether or not they are exempt. If the Debtor has assets over the exemption list then a chapter 13 is a good idea, assuming they want to retain those assets. The Debtors must pay through their Plan the resale value of the assets that were not included on the exemption list. Once this is done the Debtors may keep those assets, unless the taxing authorities, or secured creditors have the right to pursue the same assets.

What is the role of the Trustee?

The Trustee acts as the disbursing agent for the payments made into the plan. The Trustee also reviews the plan and challenges those plans that don't, in the Trustee's opinion, meet the tests for confirmable plans set out in the Bankruptcy Code. An experienced bankruptcy attorney will be able to predict most of the Trustee's objections and address them in the Plan, or amended Plan. If the Trustee and the debtor can't agree on the terms of the plan, a judge will decide if the plan can be confirmed.

Once the plan is confirmed, the trustee pays creditors regularly from the payments made by the debtor. The 205 Reform Act permits the Trustee to make adequate protection payments before the Plan is confirmed. These would be payments to the lender on your vehicle, etc.§1326(a)(1)(B)Generally, all debts existing at the beginning of the case must be paid through the trustee; current mortgage payments and some leases are among the exceptions.

What do I file if I am self-employed and in a chapter 13?

Every debtor who is self-employed or operating a business must file a monthly financial report known as a "Business Operating Statement". The term self-employed includes a person who operates a business, whether full or pert time, or with another person. Also, a person who is an independent contractor, subcontractor, works on a contract labor basis, or any other work where taxes are not deducted from the pay received, is deemed self-employed for the purpose of filing the operating statement.

The first Business Operating Statement must be filed for the actual month in which the debtor filed their chapter 13 case. Then, on or before the 15th day of each succeeding month a new Business Operating Statement must be filed. These statements are filed with the Bankruptcy Court, with a copy to your attorney and the Trustee.

The Business Operating Statement is a cash-based report. Do no use an accrual accounting method for this report. Make sure to account for all your expenses and income.

Surviving in Chapter 13:

The restrictions on a debtor in Chapter 13 are:

• Make all plan payments on time.
• Keep your mortgage payments current, and the car - if these are being paid outside of the plan.
• Take the required Personal Financial Management class early in your Plan period.
• If you owe child support or alimony/maintenance you cannot fall behind on any payments. At least by the end of the plan period all such payments must be current. The Debtor must file a certificate that these obligations are current, otherwise the Court will not enter a discharge.
• Do not fall behind on new tax obligations during the plan period.
• Don't incur significant new debt without court approval.
• Keep current insurance on any asset that is collateral for a debt.
• Provide the Trustee with information about change in income.
• Provide the Trustee with copies of annual tax returns.

The debtor can move or change jobs, but must make sure to report any income changes to their attorney and the Trustee. Court approval is necessary before obtaining a new car loan; incorporating a business that is an asset of the estate; or refinancing, selling or purchasing a home. Getting that approval can take 30-45 days.

Requesting a Moratorium on Plan payments

There are times that the Debtor may be unable to pay the monthly Plan payments. This failure must be as a result of serious, short term changes in the Debtor's income or some unusual, but necessary, expense. A moratorium can be filed with the Court and served on all the creditors. There may be hearing, the Trustee will need to approve the moratorium. Again, the entire length of the Plan cannot exceed 60 months, including any moratoriums.

Modifying the Confirmed Plan:

Plans can be changed if there is an interruption of income, through job loss or ill health. Plan payments can be lowered or the percentage paid to creditors changed if the debtor's income or expenses in the future won't fund the plan as originally confirmed.

The cost of Chapter 13:

Attorneys fees in Chapter 13 are usually paid in part before the case is filed, with the unpaid balance, if any, paid by the Trustee from the payments the debtor makes into the plan.

The court must consider requests for additional attorney fees, and if the request is approved, the additional fees will be added to the debts paid through the plan.

Can I buy a house while in a Chapter 13 bankruptcy?

First, you must obtain advice from your attorney, permission from the Trust and the Court before embarking on this adventure. Some predatory lenders will be happy to charge you very high interest rates to buy a house. The longer you wait in your chapter 13, the better interest rate you can get. After 18 months of perfect payments to your Chapter 13 Trustee and to your mortgage lender, then most good lenders will extend a new loan. HUD underwriting rules state that the person in Chapter 13 bankruptcy can purchase a home and have FHA insurance. Requirements are that the applicant must have completed one year of payments as required while under Chapter 13. The applicant must then obtain a letter from the Trustee of the court, stating the dollar amount the applicant can borrow.

What is a Discharge in Bankruptcy?

A discharge is the court's order stating that you do not have to pay your debts to the creditors that were listed in your bankruptcy documents, so long as the court did not entered a non-dischargeability order. Other debts that are not discharged under the current laws include student loans, child support, alimony/maintenance, government fines or penalties, most taxes and a few others.

If a debtor is required to pay child support or alimony/maintenance, then, after all Plan payments are completed, they must file a certification with the Court that all payments are current, otherwise they will not receive a discharge.

The effect of a discharge is that debtors are released from personal liability for all dischargeable debts, and all creditors, whose debts are discharged, are prohibited from performing any act to collect such debts from the debtors. This is known as a permanent, federal injunction. In a chapter 13 the discharge is not entered until all your plan payments are made and the terms of the Plan completed in full. If the debtor commits fraud, or fails to perform as required by law, the discharge can be revoked.

Even after a discharge, generally a creditor that has a valid lien on property belonging to a debtor (such as: house, car, furniture, jewelry) may recover the property or its value. However, if the debtor possesses certain property that is encumbered by a judicial lien or a non-purchase—money security interest, the Debtor will have to bring this issue to the Court for an order which will remove the effect of the lien. This action is called a Motion to Avoid a Lien.

If the debtor wants to keep assets that have secured liens (such as a house or car) the debtor can either continue making the same payments as before the bankruptcy, or pay the lender one lump-sum payment equal to the fair market value of the item (redemption).

While the discharge stays on your credit record for 10 years from the discharge, it becomes less and less significant in a creditor's decision to grant new credit with every year that passes.

How often can I file a chapter 13?

Only individuals, who have complied with the Bankruptcy laws and completed their chapter 13 Plan, can receive a chapter 13 discharge. An individual cannot receive a discharge in the 13 if they received a discharge in 7, 11 or 12 in the past 4 years before filing the current case, or in a chapter 13 in the last 2 years before filing the current case.