Chapter 13 Bankruptcy (Debt Consolidation)

Ifyou are an individual (not available to partnerships or corporations) facing bankruptcy, you could qualify for one of the following cases: Chapter 7 Bankruptcy filing (straight liquidation) or Chapter 13 Bankruptcy filing (debt consolidation).

What is Chapter 13 Bankruptcy?

Filing a Chapter 13 bankruptcy case focus on individuals with regular income from any source, not just wages. A sole proprietor is also eligible for chapter 13 relief. The objective is for individuals to pay creditors through a payment plan for a minimum of three but no more than five years. For an individual, even if self-employed in an unincorporated business, to qualify for chapter 13 relief, their unsecured debts must be $269,250, or less, and secured debts $807,750, or less.

The Process

The first step in filing for chapter 13 bankruptcy case is to file a petition at the bankruptcy court where the individual has an address or residence. The debtor is required to file schedules of assets and liabilities, including current income and expenses, and a statement of financial dealings. A married couple may file a joint petition and pay one filling fee, or a spouse may choose to file individually. If only one spouse files, the income and expenses of the non-filing spouse must be included in the debtor's schedules.

The filing of the petition under chapter 13 "automatically stays" most actions against the debtor or the debtor's property. As long as the "stay" is in effect, creditors generally cannot initiate or continue any foreclosure, lawsuit, repossession, or wage garnishment. Chapter 13 also provides a "co-debtor" stay which stops a creditor from trying to collect a "consumer debt" from another individual who is liable with the debtor on the debt. A consumer debt is an obligation incurred for consumer, as opposed to business, needs.

A debtor facing foreclosure can stop the foreclosure sale by filing chapter 13 bankruptcy. The chapter 13 plan permits the debtor to cure defaults on mortgage debts by repaying the arrears within a reasonable period of time [usually within 36 months]. If the mortgage becomes all due during the chapter 13, the plan must pay off that entire debt by the due date.

When a case is filed, a chapter 13 trustee is appointed to collect plan payments from debtors and make distributions to creditors according to the debtor's plan. The debtor must file a plan within fifteen days of the petition, unless extended by the court, and the debtor must begin making plan payments to the trustee within 30 days of the petition date. The plan provides for monthly payments of a fixed amount to the trustee and must eventually be confirmed by the court.

A plan can offer unsecured creditors less than full payment of their claims. Automobile loans can be modified so a debtor pays the lender only the value of the car as of the date of the petition. The undersecured portion of the debt is treated like all other unsecured debts in the plan.

In every case a meeting of creditors is held approximately 30 days after a petition is filed, and the debtor is examined under oath. The trustee conducts the meeting and questions the debtor's financial dealings and the proposed terms of the plan. All parties must be present at the meeting with a government issued picture I.D. and your social security card, and if a married couple filed jointly, both must attend with required documentation. Creditors may attend and ask questions. Problems with the plan are typically resolved during or shortly after the creditors' meeting. If there are no plan objections, a confirmation order is submitted at the creditors meeting.

If the trustee or a creditor objects to a plan, a hearing is scheduled before the court. The bankruptcy judge will determine whether the plan is reasonable and meets the legal requirements for confirmation. A number of oppositions may be made, but the most common are: the total plan payments are less than creditors would receive if the debtor's assets were liquidated; or the debtor's plan does not commit all of the debtor's projected net disposable income for the minimum three-year period.

The debtor must commit all projected disposable income, income not reasonable necessary for the maintenance or support of the debtor or dependents, during the time the plan is in effect. If the debtor operates a business, disposable income eliminates those sums needed to pay operating expenses.

If the plan is confirmed by the bankruptcy judge, the chapter 13 trustee begins distributing the funds received in accordance to the plan. If the plan is not confirmed, the debtor may try to amend the plan. The debtor also has a right to convert the case to a chapter 7 at any time.

Making the Plan Work

There will be times where certain circumstances will affect a debtor's ability to make payments, or a debtor may inadvertently omit a creditor. In such instances, the plan may be modified either before or after confirmation. Modifications after a confirmation are not limited to a proposal by the debtor but may also be requested by the trustee or an unsecured creditor.

The requirements of a confirmed plan are obligatory on the debtor and each creditor. Once the court confirms the plan, it is the responsibility of the debtor to make the plan succeed. Chapter 13 is not designed to solve financial problems that occur after the case is filed. The debtor must make regular payments to the trustee, even if it requires living on a fixed budget for a long period. In some cases, the debtor's employer may be required to withhold the amount of the payment from the debtor's paycheck and send it to the chapter 13 trustee. In addition, while confirmation of the plan permits the debtor to retain property, the debtor may not incur any significant new debt without consulting the trustee, if such commitments have an impact upon the execution of the plan. Failure to make plan payments may result in dismissal of the case.

The Chapter 13 Discharge

Once all payments are made to the creditor, the chapter 13 debtor is entitled to a discharge. The discharge releases the debtor from all claims provided for in the plan or disallowed by the court. It is the creditor's duty to file a claim in the case. Those creditors, who were provided for in full or in part under the chapter 13 plan, even if not paid because they failed to file a claim, may not initiate or continue legal action to collect the discharged obligations.

By following the terms of the three to five year repayment plan, the debtor receives a broader discharge under chapter 13 than in a chapter 7 case. The debtor , even though discharged from all debts provided for by the plan, is not exempt from certain long term obligations such as a home mortgage, debts for alimony or child support, debts for most student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine. To the extent that these types of debts are not fully paid pursuant to the chapter 13 plan, the debtor will still be liable for these debts after the chapter 13 case has successfully been fulfilled.