Chapter 13 Bankruptcy
MortgageForeclosureReport.com’s goal on this webpage was to provide an understanding of what Chapter 13 is according to the Bankruptcy Code of the United States. The other webpages on our website containing information on bankruptcy provide a guide on the history of bankruptcy and other Chapters of bankruptcy (i.e. Chapter 7 and Chapter 11). If a reader has not read our History of Bankruptcy webpage we have provided a link (History of Bankruptcy), however, we want to reiterate a couple of important dates that happened throughout the development of bankruptcy. Prior to discussing the overview we would like to make a note.
If you are reading this page you most likely have fallen into some difficult economic times. While we cannot tell you not to worry because this is a stressful time just remember many people are in your current situation. While you feel may be losing everything sometimes a Chapter 7 or Chapter 13 Bankruptcy may be the best or only option for your current situation. This is why it is so important to get legal counsel. They will be able to help direct you into the right direction of how to handle your unique situation. You may be surprised they may tell you something you did not know. They may also tell you were other avenues of help can be found. We suggest getting a qualified lawyer in your area that understands how to handle a Chapter 13 Bankruptcy. This is an important decision for you and your family. Lawyers have developed a lot of experience with banks and the courts over the past several years and with their help you may be able to be succesfful in your efforts to file a Chapter 13 Bankruptcy if this is the direction you decide to go. Bankrupcty are not easy for the majority of people. However, for lawyers it is much simplier because they are experienced in these filings and proceedings. By filling out a form on our website we can facilitate locating a qualified lawyer in your area. Go to our Contact Us page or press the banner to the right and fill out the form to receive your free no-hassle no-obligation consultation. To us it is a no brainer. If a professional is willing to give you their advice for free then why would you not take them up on that offer. It does it hurt to speak to them. It is free and you will develop a better understanding of your current situation. They may be able to help more than you thought. Now as I noted below is our understanding of a Chapter 13 Bankruptcy.
In 1898 Congress approved the Bankruptcy Act. This act was the most beneficial bankruptcy law that had been passed up until this point in time. It helped to revolutionize the Bankruptcy Code for the United States.
Then in 1934 the Supreme Court heard the case Local Loan v. Hunt. The outcome of the case established the essence of bankruptcy according to our laws enacted by Congress. In a simple summary of the case the Supreme Court established bankruptcy is a chance for individuals or a company to have an opportunity to start “…afresh free from the obligations and responsibilities consequent upon business misfortunes”.
In 1938 the Chandler Act was passed by Congress which established Chapters X and XI.
A major reconstruction of the Bankruptcy Code was passed in 1978 and it was simply called The Bankruptcy Act of 1978. For purposes of this webpage the Act of 1978 strengthened an individual’s right for bankruptcy by giving additional advantages to the laws associated with Chapter 13. It also enacted the automatic stay which is a law that immediately stops all creditors from pursuing payment and harassing the individual who have filed for bankruptcy.
Finally, a major act that affected Chapter 13 was Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA herein). The act was debated in Congress for almost a decade. Essentially, the lenders were becoming upset with how certain debtors were abusing their rights to file bankruptcy. The bill was signed by President George W. Bush on October 17th of 2005. There were several changes to bankruptcy law due to this act and the most notable was the “means test” and the requirement of credit counseling. The purpose of the “means test” is essentially how it sounds. The definition of mean for our purposes is average; therefore, the “means test” is an average test. The goal of the test is to determine if you qualify for either Chapter 7 or Chapter 13 Bankruptcy. Once a debtor files a petition for bankruptcy the courts want to ensure the individual meets the requirements of a person who is in true need for bankruptcy. The means test takes a debtor (aka borrower) average income over the past six months and subjects the income to a complex calculation. The calculation subtracts out various variables from the average monthly income such as living expenses and secured debts. Upon the results of the calculation the court decides if a borrower qualifies for Chapter 7 Liquidation. In order to qualify the borrower’s test must result in little to no disposable income. If the individual does not meet the requirements of Chapter 7 due to the means test, or other bankruptcy law requirements, the borrower may seek relief through Chapter 13. The other major requirement the BAPCPA enacted in order to obtain a discharge of debt from the courts for Chapter 7and Chapter 13 is the debtor must attend a credit counseling course from a recognized credit counseling agency according to your bankruptcy district.
Now that you have a basis of bankruptcy and what a debtor is trying to accomplish by filing let us discuss Chapter 13 Bankruptcy. Chapter 13 is a form of bankruptcy that an individual can file. Corporations, partnerships, or any other type of legal business entities are not allowed to file Chapter 13. Debtors who utilize Chapter 13 are individuals who have a steady stream of income and do not meet the means test (see above) or other requirements to file Chapter 7 Bankruptcy. Chapter 13 is advantageous for a debtor because it allows them keep their house, car, boat, etc. if they meet requirements set forth by the court and the bankruptcy code. Chapter 13 also allows the debtor to discharge as much debt as possible. Finally, the effect on their credit score is perceived to be less devastating than a Chapter 7 Bankruptcy. In Chapter 7 bankruptcy, also called Straight Bankruptcy or Liquidation Bankruptcy, the debtor liquidates all non-exempt assets to pays off their creditors. In Chapter 13 Bankruptcy, aka Wage Earner’s Plan, the debtor develops a repayment plan to pay their creditors over a period of time (three to five years with five years being the maximum time allowed to repay the debt). Note the three and five year plan may have different guidelines per state, but generally if the borrower’s monthly income is less than the state’s average income the courts will approve a plan based on a three year payment plan. On the other hand, if the debtor’s monthly income is greater than the state’s average income per person than the plan may be approved for five years. Either way the debtor obtains the advantage of the automatic stay as it is enacted by the court for the repayment period. Additionally, the plan permits the debtor is permitted to pay for filing fees and court fees in monthly installments instead of a lump sum.
A trustee is assigned in Chapter 13 similar to a Chapter 7 Bankruptcy trustee. His/her job is to ensure the appropriate distribution of the monthly payments to the creditors. The debtor’s lawyer will oversee the process in order to ensure your assets are distributed properly and the debtor is not taking advantage of during the payout period. In addition the court oversees the whole process. Based upon the court’s decision the creditors must accept the repayment plan and if a creditor is uncooperative the courts has the option to penalize the creditor. An example of a situation in which a creditor is being uncooperative is when they charge the debtor interest and penalties on an unpaid balance after the debtor filed Chapter 13 and the court has approved the payment plan. The courts will discharge any charges that were added to the debtor’s balance after the filing period of bankruptcy.
Who qualifies for Chapter 13?
As we noted above, Chapter 13 is for debtors who have a steady stream of income which is able to support their living expenses in addition to the repayment plan approved by the bankruptcy court. Partnerships, corporations, and any legal business entity are unable to file for Chapter 13 Bankruptcy. The debtor’s income will be subjected to a means test. Their income previous six months of income will be averaged to determine if their average monthly income is significant enough to support them while meeting their obligations to the creditors under the proposed repayment plan approved by the court system. Additionally, the bankruptcy code under 11 U.S.C. SS 109 (e) establishes that an individual’s secured debt may not be in excess of $1,010,650 and the unsecured debt may not be greater than $336,900 (these balances are subject to change in accordance to the consumer price index (CPI herein)). Note a secured debt is a debt in which a debtor promises the creditor pieces of property equivalent to the market value of the loan if the debtor does not have the ability to repay the loan. Property in this environment is commonly known as collateral. An unsecured debt is when a debtor obtains a loan and has not guaranteed the creditor any property if they are unable to repay the loan.
Another aspect of the plan is it has to be in “good faith” in addition to being in the best interest of the creditors. This means that a creditor must receive as much collections of the debt as they would in a Chapter 7 bankruptcy test.
Finally, the creditor must receive payment in full of “priority claims” and a general rule is the creditor of a secured claim of personal property must receive the value.
A person filing Chapter 13 will be disqualified if one of the following has occurred in the past:
· In the prior six months they filed a bankruptcy petition
· Bankruptcy petition dismissed due to the debtor’s unruly failure to appear before the court
· The debtor failed to comply with court orders in a bankruptcy case
· The voluntarily dismissal after creditors sought relief from the bankruptcy court to recover property from secured or unsecured debt
· Must receive credit counseling from a court approved credit counseling agency six months prior to filing for Chapter 13 Bankruptcy
o There are exceptions to this such as there are no credible counseling agencies within a reasonable radius from your primary residence in emergency situations
o If you develop a repayment plan while attending credit counseling it must be submitted to the Bankruptcy Court.
A huge advantage of Chapter 13 is the ability of how often you are able to file a petition for bankruptcy under the chapter. If you want to file for Chapter 7 you may only file it every eight years. However, Chapter 13 may be filed more frequently if you meet the requirements. The time periods are as followed:
· A debtor may file for Chapter 13 four years after they received a discharge for Chapter 7
· A debtor may file for Chapter 13 two years after filing a previous Chapter 13 bankruptcy petition
After Established Debtor is Eligible:
Once a debtor establishes they are eligible to file Chapter 13 Bankruptcy they must take the appropriate steps to file. First, the debtor must file a petition with the bankruptcy court assigned to their district of their primary residence.
Second, the debtor must prepare the appropriate paperwork so the courts may analyze if Chapter 13 is the correct bankruptcy chapter for the debtor and to determine if they qualify according to Chapter 13 requirements. The paperwork includes the following schedules:
· A debtor’s assets and liabilities
· Financial affairs
· Current income and expenses
· Executory contracts and unexpired leases
The schedule of current income and expenses must have supporting documentation which proves to the court the income the debtor is claiming on their income schedule. Therefore, the debtor must provide proof of payment from employers or proof of income if self-employed. If the debtor received any payments within sixty days prior to filing they must submit an income statement with support which exhibits their income and expenses for those 60 days. They also have to disclose if they are going to incur an increase in income or expenses within the time period of the bankruptcy. Chapter 13 requires a majority of the same paperwork as Chapter 7 when filing a petition. To help support the schedules listed above the debtor must also include the following:
· A list of all creditors and the amounts and nature of their claim
· Proof of the debtors income and how they are going to maintain that level of income for the life of the repayment plan
· The debtor must list all their assets
· To expand upon the current income and expenses noted above a debtor must provide a detail list of what these expense items include (i.e. house, car, school, medications, food, clothes, supplies for house, etc.)
Third, they must provide proof of attendance and completion of credit counseling from a court recognized counseling agency six months prior to the date of filing the petition for bankruptcy. Additionally, they must submit any repayment plans the debtor and the agency developed while they attended the program.
Fourth, interests the debtor holds in state and federal education/tuition programs.
Fifth, the debtor must provide prior year tax returns in addition to any returns that occur during the time of the bankruptcy hearings and case.
Note a married couple may file a joint petition or individual petitions when filing for bankruptcy. If a debtor’s spouse chooses not to file jointly for Chapter 13 the debtor filing must still provide all the required information discussed above for their partner so the appropriate decision can be made on what is the household’s financial position.
To file all the paperwork the court charges a $235 case filing fee and $39 administrative fee for a total of $274. Upon the courts approval these fees may be paid in four installments within 120 days of filing the bankruptcy petition and if the fee is not paid the court may dismiss the case.
MF Report would like to make a sidenote of some legal costs the debtor will incur through this process. A portion of the attorney’s fees are usually paid prior to the case being filed. The remaining balance will be built into the court approved repayment plan for Chapter 13. The court appointed trustee will distribute payments to the attorneys from payments the debtor makes into the plan. Since bankruptcy attorney fees can be costly this helps alleviate some of the upfront costs normally associated with lawyers. Paying the lawyer over a period of time allows a debtor to obtain better than normal legal representation. However, the course of the repayment period difficulties may arise and unforeseen costs may be incurred from the case causing the lawyer’s fees to exceed the total projected fees. The great part of Chapter 13 Bankruptcy is the court has to review the additional fees and approve whether they are appropriate fees for the lawyer to be charging to the debtor.
After Appropriate Paperwork Filed
When the appropriate file work has been approved and filed with the debtor’s local district court several actions happen simultaneously. First, an automatic stay is immediately authorized for the debtor. As we have already discussed the automatic stay we will place an excerpt from the Chapter 7 Bankruptcy webpage. “Once the petition is filed with the correct officials the Order for Relief (a.k.a. automatic stay, herein) is enacted. An automatic stay is a legal action which helps protect debtors. It immediately halts creditors from trying to collect the money you owe them. Additionally, the creditors and collection agencies are not legally allowed to contact you, remove money from your wages, not allowed to cut-off services to utilities, unable to stop welfare benefits, remove money from your bank account, and are unable to place liens on your car, home, or any other property. Creditors which were listed in your petition are notified by a trustee who has been appointed by the courts. This bankruptcy trustee has been appointed by the courts as an independent party whose purpose is to ensure the borrower’s creditors receive as much money as you can possibly pay them which is justified by the courts.”
A fact that is not commonly known about the automatic stay under Chapter 13 Bankruptcy is a unique provision which protects co-debtors (except if the courts decide differently). The provision halts a creditor from seeking financial restitution from a co-debtor for a consumer debt. According to the bankruptcy code consumer debt is classified as any debt incurred by the debtor for their family, household, or personal reasons.
The trustee is given the autonomy by the US Government to evaluate bankruptcy cases and act as distributing agent. The job of the distributing agent is to collect the monthly payments in accordance with court approved repayment plan and provide distributions in the appropriate order and amount to the creditors. Note a bankruptcy trustee has the ability to invade every aspect of your financial life. For example they will review your financial transactions from past years to see if there are purchases that can be undone to reclaim more money for the debtor’s creditors.
NOTE: It is imperative to file a petition quickly for Chapter 13 Bankruptcy if you are trying save your home from foreclosure. If a bank follows all the correct proceedings and forecloses and sells your home prior to the debtor filing Chapter 13 the courts consider the home foreclosed and property of the lender. However, Chapter 13 and Chapter 7 if you keep up with your monthly mortgage payments and are not delinquent they are not allowed to liquidate your home to pay creditors. However, if you happen to miss payments then the lender has the right to begin the foreclosure process. Therefore, DO NOT MISS YOUR PAYMENTS IF YOU WANT TO KEEP YOUR HOME.
After the paperwork has been properly submitted and filed the next step in the process is a meeting of the creditors which is conducted by the trustee appointed by the courts. The debtor is required to be present at this meeting. The meeting is held approximately three to seven weeks after the debtor files for Chapter 13. If the trustee chooses to have the meeting other than a common meeting place which regularly staffs U.S. trustee and/or bankruptcy administration staff then the meeting may not be held later than two months after the petition was filed.
At the meeting the debtor will sit in front of the trustee, the debtor’s legal representation, and all his/her creditors. The debtor must answer all questions regarding his/her financial dealings over the past couple of years. He/she must answer the questions truthfully as he/she is under oath. The creditors and trustee will ask about the proposed payment plan developed by the debtor to develop a further understanding on how he/she will meet the obligations of payment to the creditors each month. After the question and answer portion of the meeting the creditors will voice their concerns with the plan. It is the job of the trustee to find a common middle ground that is reasonable and acceptable to both parties for the repayment plan.
Note: To reduce the problems the creditors have with the plan it is advisable for the debtor seek legal counsel and meet with the trustee prior to the meeting to review the repayment plan. Note if the Chapter 13 Bankruptcy petition was filed jointly by a couple recognized as being married under state laws then both persons must attend the meeting of the creditors.
Once the meeting of creditors is adjourned a court date is set for review and approval of the repayment plan that was set-forth in the meeting of the creditors. The debtor and trustee must attend the court hearing, however, court appearance is optional for the creditors. Simultaneously from when the meeting of the creditors is adjourned unsecured creditors and government parties who have extended loans to the debtor must file their claims with the court within 90 to 180 days, respectively, in order to have a proof of claim and have the ability to partake in the distributions of the bankruptcy estate.
Advantages of Chapter 13
To summarize why a debtor should try and obtain Chapter 13 instead of the other options for eradicating debt we emphasize the following points. Chapter 13 allows for a debtor the opportunity to keep their house, boat, car, etc. It stops all creditors from foreclosing on home if the homeowner has not been delinquent on any payments or has a court approved plan to repay the delinquent payments thus far. In addition the debtor must remain current on future mortgage payments. Chapter 13 protects co-debtors/co-signers from being pursued by a debtor’s creditors for repayment of the debt. Chapter 13 allows debtors to pay all secured debts under modified payment terms in accordance with the repayment plan approved by the court. Chapter 13 disallows creditors from contacting debtors directly by order of the court under the automatic stay stipulation. Chapter 13 acts a consolidated loan without going to a third party creditor to negotiate for a consolidated loan. Chapter 13 may be filed more frequently than any other Bankruptcy Chapter for individuals. Finally, the effect on a debtor’s creditor score is perceived to not be as devastating as other forms of Bankruptcy.
Court approved repayment plan
The core purpose for Chapter 13 Bankruptcy is debt relief with a minimization of repercussions to an individual’s financial stability. The most significant component of Chapter 13 Bankruptcy is the repayment plan. The whole purpose of Chapter 13 is to avoid liquidation of a debtor’s assets and to provide a legal guarantee to the creditors that they will recover a greater portion of their loan from the debtor in comparison to Chapter 7 Bankruptcy. The repayment plan is the means to the end. It is a contract and describes in detail the what, when, who, where, and how the debtor is going to pay the creditor. As this plan plays such an integral role in the Chapter 13 process Congress has specifically laid out a set of guidelines that have to be followed.
Once a debtor has decided Chapter 13 is the best option for their financial situation they must file a petition which must include a repayment plan. If the debtor does not include the repayment on the day of filing the petition they have up to two weeks to submit their tentative repayment plan. They may have the opportunity to submit a repayment plan later than two week deadline if the local district bankruptcy court grants them an extension. The plan which is approved by the courts must include payment to the creditors, through distribution of the court appointed trustee, on weekly, biweekly, or monthly basis in accordance to the plan. If the court has not approved the repayment plan within a month of submitting it to the court the debtor must still make payments to the trustee assigned by the court as if the court had approved the plan. Additionally, if the there are payments such as car and mortgage payments that come due the debtor must pay the lender minus the amount the pay the trustee under the plan for those payments. For example, under the plan the debtor only has to pay $400 a month for their mortgage, but the mortgage is normally $1,000 then the debtor must pay their mortgage lender $600 and the trustee $400.
Note: 45 days after the meeting of the creditors the bankruptcy court will hold a hearing to either approve the plan or deny the plan. The courts must give all creditors a three and a half week notice prior to the meeting to give them proper time to prepare objections to the plan and to assign a representative to appear at the hearing. If the court approves the plan than the trustee will start to distribute the funds in accordance with dates, payment amounts, and order of payments to the creditors as noted in the repayment plan. If the judge denies the plan the debtor will try to modify the plan to obtain approval from the court. If they are unable to still obtain approval then the debtor may attempt to convert the case from a Chapter 13 case to a Chapter 7 Liquidation Bankruptcy case. After the repayment plan has been approved there may need to be modifications such as creditors being inadvertently being left off the petition or the debtor’s financial situation changes in the three to five year repayment period. This may call for fixed payments every payment period or the courts may have to determine if Chapter 13 is still acceptable for this debtor.
The debtor will have to address how they intend to repay their creditors. In this situation the debtor must understand what types of debts they have outstanding. The debtor must understand the types of claims because the courts and law recognize specific creditor having priority of another creditor based upon their claim status. There are three categories of claims a debtor may have obtained when obtaining their loans. The order of importance and type of claim are as followed:
- Priority claim – These claims are given priority of payment and are classified with a special status under the bankruptcy laws. These claims revolve around most taxes and any costs associated with the courts during the bankruptcy process. These claims must be paid in full unless the courts allow otherwise or in the case of domestic support the debtor must contribute all their disposable income to the their prior partner over the life of the repayment period.
- Secure claim – After a priority claims are paid secured claims are paid next. As described above these claims are creditors who loaned money to individual on the contingency that if they are not repaid their money they may obtain property which is equivalent to the market value of the loan
- Note: Debtors may choose to allow a creditor to maintain a piece of property as collateral. If the debtor chooses this option the debtor has to guarantee the piece of property being used as collateral has the equivalent market value as the balance of the loan. However, the reader should understand the government knows individuals look for loop holes to beat the system as there is one hear they closed and we will demonstrate this through an example below.Example: Johnny files Chapter 13 Bankruptcy and is developing a repayment plan. Six weeks before filing bankruptcy Johnny purchased a new car for $50,000. He put $5,000 down and pays 5% interest a year and $500.00 a month. The car company loaned him the money to purchase the car, however, they held the car as collateral if Johnny was unable to pay the debt they would repossess the car.
In this example the car company is a secured lender and has the ability to repossess the car. However, Johnny thinking he is smarter than the system purchased the car knowing he was going to file bankruptcy and thought he would be either to return the car, discharge the debt, or reduce his payments on the car. This puts the car company in a very bad position because as soon as Johnny drove the car off the lot it depreciated 25%. However, the system tried to protect lenders from people like Johnny by placing rules in place to counteract Johnny’s intentions.
Johnny’s balance on the car was $45,000 ($50,000 – $5,000). He owes interest of $2,250 per year and only paid the car company one month worth of payments of $500.00. The remaining principal one the loan was $44,687.50 (45,000 – 312.50). The $312.50 is a portion of the $500.00 monthly payment which is applied to the principal balance of $45,000. The other portion of the monthly balance is $187.50 which is applied toward the annual 5% interest rate ($2,250) on the loan.
In conclusion when Johnny drove the car off the lot the market value of the car was 37,500 and his outstanding remaining debt on the principal of the loan was 44,687.50. His principal balance was greater than the collateral which means he will somehow have to make up the difference of the $7,187.50 to the car company.
- Note two of secured claims is debtors may pay their mortgage over the life of the repayment and plan and thereafter as long as they pay the delinquent balances prior to the filing of bankruptcy during the repayment period.
- Unsecured claim – After a debtor has paid their priority and secured claims then they continue to pay the unsecured claim. An unsecured claim is the opposite of a secured claim. It is when a creditor makes a loan to the debtor in which they do not obtain guarantee of property equivalent to the market value of the loan if the debtor is unable to repay the loan.
Again an advantage of Chapter 13 over Chapter 7 is the ability to keep your house, boat, car, etc. or at least as much assets as possible. Additionally, it does not have as devastating effect on your credit.
So a question the reader may ask is if I have a repayment plan than do I dismiss any of my debt? The answer is yes you will dismiss debt. If a debtor passes the means test and qualifies for Chapter 13 over Chapter 7 they develop a repayment plan which is court approved. The means test as noted above qualifies that the debtor has enough disposable income to satisfy debts to their creditors with a greater outcome if the debtor filed Chapter 7. As long as the debtor is using all their disposable income over the course of the repayment period and unsecured creditors are receiving the equivalent or greater than to the amount they would receive under Chapter 7 then the debtor is noted as meeting their Bankruptcy obligations, dismissing certain portions of their debt, and repaying creditors more money than they would receive from a Straight Bankruptcy.
The repayment plan is critically dependent upon the debtor paying the monthly payments on time. The debtor can either pay submit the payment themselves through payment to the trustee or they can have it payroll deducted. The plan if can be formed to work in favor of the debtor. As mentioned above priority payments have to be paid in full and unsecured claims have the potential to be paid fractionally.
Therefore, the debtor can calculate what the total amount of money they will have to pay in total at the end of the plan and develop a payment plan around the total funds due to creditors. Chapter 13 repayment plans allow debtors to start with making low payments and can increase every month over the course of the three to five years. Additionally, the payments can vary by seasons. Therefore, since no interest is being charged and you a person in a tuff situation can make small payments a debtor can obtain a financial specialist who can help develop a budget to make paying the creditors’ every month as painless as possible. If done right a person can really benefit from this strategy.
Making the Plan Work
Upon being approved by the courts the debtor now becomes bound to the creditor to meet the stipulations in the plan. Therefore, the debtor must make their repayment plan, which was court approved, successful. At this point in the process the debtor should ask for more help from a debt specialist to develop a budget or utilize their training from debt counseling. They have to devise a plan and budget which should have already been predetermined prior to being approved by the courts. However, if the debtor has not created a plan they need to sit down either by themselves (or if they have a significant other we suggest including them in the process) and determine what are their true living costs and what is essential to live their lives. They must determine where they can cut costs (i.e. cancel a couple of the following: cable, gym membership, obtain a less expensive car, place children in public school a couple of years, golf membership, etc.). Many things we as Americans have become accustomed to in our life we view as essential and if we analyzed our true essentials in life we could cut many frivolous expenses. Whether or not you have a plan that fits your lifestyle the plan you presented to the court in addition to passing the tests required to be approved for chapter 13, as noted above, was approved and you must make regular monthly payments in accordance to the plan. Therefore, be very prepared to meet your obligations.
Payments can be collected in various ways. The trustee, discussed above, can facilitate the payments between the debtor and the creditors or the debtor can arrange to have the payments deducted from their payroll. An additional note about payments and debt is the debtor is not able to obtain new debt without consultation and approval from the trustee. This is the tradeoff between maintain ownership of your property, not incurring interest on any current debt, and paying your debt off at a reduced rate. A debtor should not increase new debt because it may compromise their ability to pay off their current debt.
Each person is different on how they spend their money. This is why we believe the best way to pay off your debt when in a Chapter 13 situation is to do it by payroll reduction. It forces you to live within your means, stay on target with the goals developed in your debt reduction plan, and it assures your creditors will be paid in a timely manner. In addition, the debtor should maintain insurance on any high dollar value items that are held as collateral for your debt. If a debtor misses a payment during the court confirmed plan; than the courts have the ability to dismiss the case or transfer the debtor’s case into a straight liquidation case (Chapter 7). Additionally, a case may dismissed if a debtor does not meet their obligations of payment for child support, alimony, etc. and/or does not file taxes during the bankruptcy process. Finally, if the debtor wants to sell their home, obtain a car loan, set-up a new business, etc. then they may have to obtain court approval which could take a month to a month and a half.
If the debtor at any point in time during the Chapter 13 process then the trustee will try to modify the plan and obtain approval from the court that approved the original repayment plan. Another option may be the courts may review the debtor’s situation and declare that it was an extenuating circumstance and release the debtor of all debt due to hardship (illness, death, injury, loss of job, etc). If the debtor is unable to modify the plan obtain a court ruling to dismiss the debt due to hardship then you may be able to convert the case to a Chapter 7 case as noted above.
Upon Completion of the Repayment Plan
Once a debtor meets their obligations of the repayment plan they become eligible for discharge. Upon review and being approved for discharge the debtor will be released from all debt obligations that were noted in the Chapter 13 case. Additionally, all taxes have to be filed, all debtor child support/alimony have to be current, and you must have completed the budget counseling process from an agency approved by the US Treasury. However, that is general background of what happens to debtor upon completion of the repayment plan. The actual discharge process is more complex and a debtor should obtain legal counsel from a lawyer who licensed and understands the laws in the debtors jurisdiction.
That being said MF Report is going to provide some guidance per our understanding of the process that happens after your debt is repaid. Remember we are not lawyers and you should obtain a competent licensed lawyer in your jurisdiction for accurate legal advice pertaining to your Chapter 13 situation.
As noted above after your debt is repaid the court and trustee will review your repayment plan and obligations. They will make sure all your child support and alimony obligations that were due before making such certification have been paid in full. The debtor did not receive a discharge for Chapter 13 within the prior two years. The debtor must have completed budget counseling process from a US Trustee or other court approved licensed teacher. Upon the completion the debt courts will be ready to discharge all debts as long as there is no reasonable chance the judgment will give a way to limit the debtor’s homestead exemption. Note there are some exceptions for debt that may not be released upon completion of the repayment plan. However, no creditor noted in the court approved repayment plan, with the exception of the exceptions, may pursue any further legal action against the debtor to recoup any outstanding debt. The debtor’s debt is legally considered satisfied and they no longer have any outstanding obligation.
Please note some of the debts that are not discharged upon completion of the Chapter 13 repayment program. There are certain types of debts which unless covered by the Chapter 13 repayment plan may not be discharged or discharged in full and the debtor will be responsible for repaying. Some examples include the following: specific long-term debt obligations, child support/alimony, certain types of taxes, guaranteed student loans, government loans, debts from a legal case which result4ed in the debtor paying penalties (i.e.personal injury or death from DUI) or other legal situations in which the debtor was found guilty, and if a debtor committed some sort of fraud which involved lending or owing a creditor money than they are still fully responsible for repaying those debts.
The debts discharged in a Chapter 13 have advantages over Chapter 7. The following debts are an allowable discharge in a debtor who files Chapter 13 and not Chapter 7:
- Debts for willful and malicious injury to property
- Debts arising from property settlements in divorce or separation proceedings.
- Debts incurred to pay non-dischargeable tax obligations
- A repayment plan may be approved as long as the judge feels it is fair. He/she can overule a creditors who objects the repayment plan
- Finally all debts have the option to be fully discharged which is not an option in Chapter 7 Bankruptcy
A discharge of debt for Chapter 13 will remain on your credit record for 10 years approximately from the day of filing your case; however, many agencies seem to remove it after 7 years. However, it still appears better on your credit then never repaying your debts. We suggest consulting a liscensed financial advisor on your best payment strategy.
Discharge in the Case of Hardship
Above we discussed that a court has the right to discharge a debtor’s debt prior to completion of the court approved repayment plan. This could happen in the case that the debtor suffers an extenuating circumstance and has fallen into hardship. The general rules for a debtor to have their debt discharged in the case of hardship are as followed but are not limited to:
- Are unable to pay the remainder of their debt per the repayment plan or a revised repayment plan due to no fault of their own and extenuating circumstances (see paragraphs above)
- The creditor received the same amount of money they would have received in a Straight Liquidation case (Chapter 7)
Readers please remember some individuals may plead their case to the courts and have their case converted to a Chapter 7 Bankruptcy.
Good luck to all and do not forget we are not lawyers and you should obtain legal counsel prior to moving forward with any legal actions. MF Report has lawyers we can suggest in your areas that will provide you with a free consultation.