General

Chapter 13 is designed for individuals who have a regular income and who currently cannot make payments on all of their monthly debts. The purpose of Chapter 13 is to allow financially distressed debtors, under court supervision and protection, to set up and carry out a reorganized repayment Plan under which creditors are paid over an extended period of time. Under this Chapter, petitioners are permitted to repay creditors, in full or in part, in installments over a three to five year period. During the period of the Plan creditors are prohibited from either beginning or continuing any collection efforts. Any individual or family, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 protection. There are, however, statutory limits on the amount of allowed debt. 11 U.S.C. ©109(e). A corporation or partnership cannot file a Chapter 13, but must file a Chapter 11 petition.

How Chapter 13 Works

A Chapter 13 case begins with the Applicant filing a petition and a number of required schedules with the bankruptcy court. These schedules include: assets and liabilities; statement of financial affairs; value of personal property; schedule of executory contracts and unexpired leases; environmental data; schedule of exempt assets; creditor matrix; list of all creditors and the amount and nature of debts; source, amount, and frequency of the Applicant's income; list of all of the Applicant's property; detailed list of the Applicant's monthly living expenses; and a Plan of repayment.

The petition is filed with the Bankruptcy Clerk. The filing of a petition automatically "stays" or stops collection activities, telephone harassment and other aggressive creditor conduct against the Applicant. 11 U.S.C. ©362. This stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors cannot begin, or continue, any lawsuits or collection activities. Upon the filing of the petition, an impartial Trustee is appointed to administer the case. 11 U.S.C. ©1302. A primary role of the Trustee is to serve as a disbursing agent, collecting payments from the Applicant and making distributions to creditors. 11 U.S.C. ©1302. As a fee, the Trustee is paid 10% of all amounts the Applicant is required to pay under the repayment Plan.

By virtue of the automatic stay, an individual Applicant who is faced with a threatened foreclosure of his home or other real estate or the repossession of a vehicle can prevent an immediate foreclosure or seizure. Chapter 13 then affords the Applicant a right to cure the defaults on the debts by bringing the arrearage payments current over a reasonable period of time.

The Applicant must file a Plan of repayment. Usually this is filed with the petition. The Chapter 13 Plan must: provide for the full payment of all claims entitled to priority under 11 U.S.C. ©507; provide the same treatment for each claim within a class of claims; and provide for the payment of such portion of the Applicant's future income to the supervision of the Trustee as is necessary for the execution of the Plan. 11 U.S.C. ©1322. The Plan, which must be approved by the U.S. Bankruptcy Judge, provides for payments of fixed amounts to the Trustee on a regular monthly basis. The Trustee then distributes the funds to the creditors, according to the terms of the Plan, which may offer creditors less than full payment on their claims. If the Trustee or a creditor with an unsecured claim objects to confirmation of the Plan, the Applicant 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. 11 U.S.C. ©1325(b). Disposable income is defined as income not reasonably necessary for the maintenance or support of the Applicant and dependents. If the Applicant operates a business, disposable income is defined as excluding those amounts which are necessary for the payment of ordinary operating expenses. 11 U.S.C. ©©1325(b)(2)(A) and (B).

A meeting of creditors is held in every case, during which the Trustee examines the Applicant, under oath. It is usually held 30 to 60 days after the petition is filed. The Applicant must attend the meeting, at which creditors may appear and ask questions regarding the Applicant's financial affairs and the proposed terms of the Plan. 11 U.S.C. ©343. If there are problems with the Plan, they are typically resolved shortly after the creditors' meeting. In a Chapter 13 case, unsecured creditors who have claims against the Applicant must file their claims with the Clerk within 90 days after the first date set for the meeting of creditors. Bankruptcy Rule 3002(c). The Applicant is also required to attend a half-day financial seminar hosted by the Trustee. All tax returns must be made current.

After the meeting of creditors is concluded, the judge determines at a hearing on Confirmation whether the Plan is feasible and meets all standards for confirmation set forth in the Bankruptcy Code. 11 U.S.C. ©1324 & 1325. Creditors may attend and object to confirmation of the Plan. While a variety of objections may be made, the most frequent ones are that the payments offered under the Plan are less than creditors would receive if the Applicant's assets were liquidated or that the Applicant's Plan does not commit all of the Applicant's projected disposable income for the entire period of the Plan.

Within thirty days after the date of filing of the Plan, even if the judge has not yet approved the Plan, the Applicant must start making monthly payments to the Trustee. 11 U.S.C. © 1326(a)(1). If the judge confirms the Plan, the Trustee commences distribution of the funds received in accordance with the Plan. 11 U.S.C. ©1326(a)(2). If the Plan is not confirmed, the Applicant has a right to file a modified Plan. (11 U.S.C. ©1323) or convert the case to a liquidation case under Chapter 7 (11 U.S.C. ©1307). If the Plan is not confirmed and the case is dismissed, the court may authorize the Trustee to retain a specified amount for costs, but return any excess amount to the Applicant. 11 U.S.C. ©1326(a)(2).

On occasion, changed circumstances will affect a Applicant's ability to make Plan payments, a creditor may object or threaten to object to a Plan, or an Applicant may inadvertently have failed to list all creditors. In such instances, the Plan may be modified either before or after confirmation. 11 U.S.C ©1323 & 1329. Modification after confirmation is not limited to an initiative by the Applicant, but may be at the request of the Trustee or an unsecured creditor. 11 U.S.C. ©1329(a).

The provisions of a confirmed Plan are binding on the Applicant and each creditor. 11 U.S.C. ©1327. Once the judge confirms the Plan, it is the responsibility of the Applicant to make the Plan succeed. The Applicant must make regular payments to the Trustee, which will require adjustment to living on a fixed budget for a long period. Furthermore, while confirmation of the Plan entitles the Applicant to retain property as long as payments are made, the Applicant may not incur any significant new credit obligations without first consulting the Trustee. This is because such credit obligations may have an impact upon the fulfillment of the Plan. 11 U.S.C. ©© 1305(c), 1322(a)(1) & 1327.

The Chapter 13 Discharge

The Chapter 13 Applicant is entitled to a discharge upon successfully completing of all payments under the Plan. 11 U.S.C. ©1328(a). The discharge has the effect of releasing the Applicant from all debts provided for by the Plan or disallowed (under section 502), 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 Applicant to collect the discharged obligations.

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