A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. § 1322(d). During this time the law forbids creditors from starting or continuing collection efforts. This chapter discusses six aspects of a chapter 13 proceeding: the advantages of choosing chapter 13, the chapter 13 eligibility requirements, how a chapter 13 proceeding works, making the plan work, and the special chapter 13 discharge.
Managing Partner Richard Jacoby gives a brief overview of Chapter 7 Bankruptcy and the importance of hiring a dedicated Long Island bankruptcy lawyer to assist with your case.
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Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.
To begin a Chapter 13 bankruptcy, you’ll fill out a packet of forms—mostly the same forms as you would use in a Chapter 7 bankruptcy—listing your income, property, expenses, and debts. You will file these forms and paperwork and a workable payment plan proposing how you plan to handle your debts over the payment plan period with the local bankruptcy court.
You must also file:
- your tax return for the previous year;
- proof that you’ve filed your tax returns for the last four years; and
- a certificate showing that you’ve completed credit counseling with an agency approved by the United States Trustee.
Under a Chapter 13 plan, you make payments, usually monthly, to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee, in turn, pays your creditors and collects a commission based on the amounts paid out under your plan. You must make all of your payments to complete your plan and get a discharge of any remaining balance on qualified debts.
How Much You Will Have to Pay
Some creditors are entitled to receive 100% of what you owe them, while others will receive a much smaller percentage (or nothing at all). Typically, Chapter 13 bankruptcy plans must provide that:
Administrative claims will be paid 100%. These include:
- your filing fee;
- the trustee’s commission (3% to 10% of each monthly payment); and
- attorney’s fees, if you hire an attorney for help with your Chapter 13 bankruptcy (which is advised).
Priority debts will be paid 100%. These include:
- back alimony and child support;
- most tax debts (including state and federal income taxes);
- wages, salaries, or commissions you owe to employees; and
- contributions you owe to an employee benefit fund.
Mortgage defaults will be paid 100% if you want to keep your house.
Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments fall into this category.
Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on.
- the total value of your nonexempt property;
- the amount of disposable income you have each month to put toward your debts; and
- how long your plan lasts.
In your payment plan, you must commit to paying any leftover disposable income (the amount of your income that remains after subtracting certain allowed monthly expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts, medical bills, and student loans.
Length of Payment Plan
The length of your payment plan depends on your income level. If your current monthly income (your average income o\/er the six months before filing) exceeds the median monthly income for a household of your size in your state, your plan must last five years. If your income is less than the median, you can propose a three-year plan.
No Surrender of Property
Everyone who files for bankruptcy can protect the same amount of property using bankruptcy exemptions. Even so, if you file for Chapter 13 bankruptcy, you don’t have to hand over any assets. But that doesn’t mean that you get to keep more property than someone who files for Chapter 7 bankruptcy. You still have to pay for it.
Here’s how your property gets treated in both Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 bankruptcy. In this chapter, you must surrender your nonexempt property to the trustee. The trustee will sell it and distribute the proceeds to your unsecured creditors (see below). You get to keep property that is exempt.
Chapter 13 bankruptcy. The trustee doesn’t sell property in a Chapter 13 case. Instead, in exchange for getting to keep your property, you’ll pay your unsecured creditors (more below) at least the value of your nonexempt property through your repayment plan.
What Is an Unsecured Creditor?
An unsecured creditor is the owner of an unsecured debt. Unlike a secured debt, an unsecured debt isn’t guaranteed by collateral that a creditor can take if you fail to pay your bill.
Examples of common types of unsecured debt include the following:
- major credit card and department store balances;
- medical bills;
- personal loans, such as payday loans;
- utility bills; and
- club memberships.
If you don’t pay one of these debts, the unsecured creditor cannot force you to give up property—at least not without doing more. Most unsecured creditors must first file a lawsuit and win a judgment in court before taking adverse collection steps against you, such as garnishing your wages (taking money out of your paycheck each month) or executing a bank levy (forcing the bank to withdraw funds from your account). (The IRS and your student loan lender don’t need to get a judgment first—see priority unsecured creditors.) So, until you’re served with a lawsuit, you won’t need to worry about collection tactics other than harassing calls and letters—and filing for bankruptcy will wipe out most of these types of debts.
Priority unsecured creditors can use additional collection techniques.
Past due income taxes (unless they’re old) and government-backed student loan obligations are unsecured debts, too, but special rules apply that allow these creditors to take steps against you without going to court. Child and spousal support obligations fall into this category, as well (creditors can use collection techniques allowed by the family court system). These types of unsecured creditors have “priority” claims that won’t go away in bankruptcy. In fact, you’ll need to pay off the entire balance of these debts in your Chapter 13 payment plan.
Be conscious of secured credit cards.
Not all credit card accounts are unsecured. You’ll want to read your contract (or the back of the receipt) when purchasing jewelry, electronics, appliances, and furnishings on credit. By signing the credit contract, you’ll likely agree to give the creditor a security interest in the purchased property (purchase money loan). The creditor will be able to take back the property—such as your ring, computer, or even a mattress—if you’re delinquent on your payments. Even if you file for bankruptcy. Or, you can repay the debt in your Chapter 13 repayment plan and keep the item. You might even be able to pay less if you can cramdown the balance owed.
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