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CHAPTER 13 BANKRUPTCY FAQ

1. What is chapter 13 bankruptcy?

By filing for Chapter 13 bankruptcy, a debtor can seek relief from their outstanding debts. Chapter 13 allows an individual to repay all or some of his or her debts through an alternative payment plan. To get approval for this modified plan, the debtor will submit the plan in writing to the Bankruptcy Courts. If the plan gets approved, the debtor will send his or her payments to an appointed trustee, who will dispense the payments to the proper creditors.

Once the debtor has completed all of the payments stated on the plan, he or she is officially released from all financial obligation to the creditors. Additionally, once an individual has successfully filed for Chapter 13 bankruptcy, creditors will not permitted to solicit or collect funds from the debtor.

2. What is the difference between a chapter 13 and Chapter 7 Bankruptcy CAse?

In a chapter 7 case, the debtor must pay off as much of his or her outstanding debt as possible by having his or her nonexempt property (if any exists) liquidated. In chapter 13 cases, some of the debtor's future income is used toward his or her outstanding debt. As a practical matter, in a chapter 7 case the debtor loses all or most of his or her nonexempt property and receives a chapter 7 discharge, which releases the debtor from liability for most debts. In a chapter 13 case, the debtor usually retains his or her nonexempt property, but must pay off as much of his or her debts as the court deems feasible and receives a chapter 13 discharge, which is slightly broader than a chapter 7 discharge, as it discharges more types of debt than chapter 7 does. However, a chapter 13 case typically lasts longer and is more costly for the debtor.

3. When Should Someone Choose Chapter 13 Bankruptcy Instead of Chapter 7?

Chapter 13 is usually preferable for those who:

  • Want to repay all or most of their debts and has the income to do so within a reasonable timeframe
  • Have valuable property they do not want to lose, which might happen in a chapter 7 case
  • Are not eligible for chapter 7, per results on the means tests
  • Have significant debts that can be discharged under chapter 13, but not under chapter 7.
  • Have assets they are willing to use toward paying off their debts, but simply need temporary relief from creditors in order to do so.

4. Who is eligible to file a chapter 13 case?

Any individual person who meets the following requirements may file for chapter 13 bankruptcy:

  • Lives in, does business in, or owns property in the United States
  • Has regular income (note that self-employed individuals are eligible to file)
  • Has unsecured debts totaling less than $307,675
  • Has secured debts totaling less than $922,975
  • Is not a stockbroker or a commodity broker
  • Has not intentionally dismissed another bankruptcy case within the last 180 days
  • Has received a briefing from an approved credit counseling agency within the last 180 days (unless not required by local bankruptcy court).

A husband and wife may file jointly for chapter 13. Only one spouse is required to have regular income, and their combined debt must meet the minimum described above. Filing jointly for chapter 13 would be advantageous to married couples who both have significant debts.

5. How is a chapter 13 case different from a private debt consolidation service?

Private debt consolidation services cannot provide the same kind of relief that bankruptcy court can. The court can forbid creditors from foreclosing the debtor's property and can discharge some of that individual's debt. Bankruptcy courts can also compel creditors to accept and observe the debtor's new repayment plan.

6. What is a chapter 13 discharge?

A chapter 13 discharge releases a debtor from all of his or her debts that can be discharged, and requires creditors to cease attempts at collecting repayment. Individuals under chapter 13 may either receive a full plan discharge, which simply means that he or she has completed all the payments required in his or her repayment plan, or the debtor may be granted a partial or unsuccessful plan discharge if the debtor failed to complete all the plan's payments due to circumstances that the court will not hold him or her responsible for.

7. What types of debts are not dischargeable in a Chapter 13 case?

According to the U.S. Courts, “Debts not discharged in chapter 13 include certain long term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, 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 included in a sentence on the debtor's conviction of a crime.”

8. Must all debts be paid in full under a chapter 13 plan?

Chapter 13 only requires individuals to pay off debts that they can reasonably afford to fulfill. Therefore, individuals who have filed for chapter 13 often receive full or partial debt discharge. It may be determined that the debtor should pay more toward certain unsecured debts than others.

9. Is there a difference between a debt and a claim?

Both terms refer to the same concept of an outstanding debt, but the term “debt” refers to what the debtor owes a creditor, and the term “claim” refers to the creditor’s right to that money. For example, if Joe owes the bank $1,000, Joe would consider that money a “debt,” and the bank would consider that money a “claim.”

10. How much of a debtor's income must he or she pay the trustee in a chapter 13 plan?

“Disposable income” refers to the amount of income that is not considered necessary for supporting the debtor and his or her dependents. Under chapter 13 bankruptcy, a debtor and his or her spouse must typically pay all of their disposable income for 3-5 years.

11. What is the difference between a secured creditor and an unsecured creditor?

A secured creditor is a creditor whose claim against the debtor is secured by a valid mortgage, lien, or other security interest against property that is owned by the debtor. An unsecured creditor is a creditor whose claim against the debtor is not secured by a valid mortgage, lien or security interest against the debtor's property. In other words, a secured creditor has collateral for its claim and an unsecured creditor does not. The basic difference is that a secured creditor may collect all or a portion of its claim from its collateral, while an unsecured creditor may not.

12. How are the claims of secured creditors dealt with in chapter 13 cases?

  1. The creditor may accept the debtor's plan
  2. The creditor may retain its lien and be paid the full amount of its secured claim in equal monthly payments under the plan
  3. The debtor may surrender the collateral to the creditor
  4. The creditor may be paid or dealt with outside the plan.

13. How are co-signed or guaranteed debts handled in chapter 13 cases?

A cosigned or guaranteed debt is a debt of the debtor that has been co-signed or guaranteed by another person. If a co-signed or guaranteed consumer debt is being paid in full under a chapter 13 plan, the creditor may not collect the debt from the co-signer or guarantor.

However, if a consumer debt is not being paid in full under the plan, the creditor may collect the unpaid portion of the debt from the cosigner or guarantor. A consumer debt is a non-business debt. Creditors may collect business debts from co-signers or guarantors even if the debts are to be paid in full under the debtor's plan.

14. May a chapter 7 case be converted to a chapter 13 case?

Yes. An existing chapter 7 case may be converted to a chapter 13 case at any time at the request of the debtor if the case has not previously been converted from chapter 13 to chapter7.

15. What fees are charged in a chapter 13 case?

There is a $274 filing fee charged when the case is filed, which may be paid in installments if necessary. In addition, the chapter 13 trustee assesses a fee of 10 percent on all payments made by the debtor under the plan. Thus, if a debtor pays a total of $5,000 under a chapter 13 plan, the total amount of fees charged in the case will be $689 (a $500 trustee's fee, plus the $274 filing fee). These fees are in addition to the fee charged by the debtor's attorney.

16. Will a person lose any property if he or she files a chapter 13 case?

Usually not. In a chapter 13 case, creditors are usually paid out of the debtor's income and not from the debtor's property. However, if a debtor has valuable nonexempt property and has insufficient income to pay enough to creditors to satisfy the court, some of the debtor's property may have to be used to pay creditors.

17. How does the filing of a chapter 13 case affect collection proceedings and foreclosures that are filed against the debtor?

The filing of a chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor's property. This stay is called the automatic stay. A few days after the case is filed, the court will mail a notice to all creditors advising them of the automatic stay. Certain creditors maybe notified sooner, if necessary.

Most creditors are prohibited from proceeding against the debtor during the entire course of the chapter 13 case. If the debtor is later granted a chapter13 discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor after the case is closed. If the debtor has had a prior bankruptcy case dismissed within the past year, he or she may be denied the protection of the automatic stay.

18. May a person whose debts are being administered by a financial counselor file a chapter13 case?

Yes. A financial counselor has no legal authority to prevent a person from filing any type of bankruptcy case, including a chapter 13 case.

19. How does filing a chapter 13 case affect a person's credit rating?

It may worsen it, at least temporarily. However, if most of a person's debts are ultimately paid off under a chapter 13 plan, that fact may be taken into account by credit reporting agencies. If very little is paid on most debts, the effect of a chapter 13 case on a person's credit rating may be similar to that of a chapter 7 case.

20. Are the names of persons who file chapter 13 cases published?

When a chapter 13 case is filed, it becomes a public record and the name of the debtor may be published by some credit reporting agencies. However, newspapers do not usually publish the names of persons who file chapter 13 cases.

21. Is a person's employer notified when he or she files a chapter 13 case?

In most cases, no. The court in our District does not require a debtor's employer to make payments to the chapter 13 trustee on the debtor's behalf. Also, the chapter 13 trustee may contact an employer to verify the debtor's income.

22. Does a person lose any legal rights by filing a chapter 13 case?

No. A chapter 13 case is a civil proceeding and not a criminal proceeding. Therefore, a person does not lose any legal or constitutional rights by filing a chapter 13 case.

23. May employers or governmental agencies discriminate against persons who file Chapter 13 cases?

No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed a chapter 13 case. It is also illegal for local, state, or federal governmental agencies to discriminate against a person as to the granting of licenses, permits, student loans, and similar grants because that person has filed a chapter 13 case.

24. What is required for court approval of a chapter 13 plan?

The court will approve and confirm a chapter 13 plan if it finds that:

  • all required fees, charges and deposits have been paid,
  • all priority claims will be paid in full under the plan,
  • if the plan creates different classes of claims, it provides the same treatment for each claim within a particular class,
  • the plan was proposed in good faith,
  • each unsecured creditor will receive under the plan at least as much as it would have received had the debtor filed a chapter 7 case,
  • the debtor will be able to make the required payments and comply with the plan, and
  • each secured creditor is dealt with in one of the four methods described in the answer to Question 12 above. Bacchus Law Group, LLC is dedicated to assuring you that your plan will be approved.

25. What is a priority claim?

A priority claim is an unsecured claim that is given priority of payment under the Bankruptcy Code. It is a claim that must be paid before other unsecured claims are paid. Examples of priority claims are tax claims, wage claims, and claims for alimony, maintenance or support. Claims for administrative fees, such as the chapter 13 trustee's fee, the filing fee, and the fee of the debtor's attorney, are also priority claims in chapter 13 cases.

26. When does the debtor have to appear in court in a chapter 13 case?

Most debtors do not have to appear before the judge. Debtors have to appear at least once for a hearing called the meeting of creditors. Bacchus Law Group, LLC will appear for you at the hearing on the confirmation of the debtor's chapter 13 plan. The meeting of creditors is usually held about a month after the case is filed. The confirmation hearing may be held on the same day as the meeting of creditors or at a later date, depending on the scheduling practices in the local court. If difficulties or unusual circumstances arise during the course of a case, additional court appearances may be necessary. Bacchus Law Group, LLC will appear at all other times in court on your behalf.

27. What if the court does not approve a debtor's chapter 13 plan?

If the court will not approve the plan initially proposed by a debtor, the debtor may modify the plan and seek court approval of the modified plan. If the court does not approve a plan, it will usually give its reasons for refusing to do so, and the plan may then be appropriately modified so as become acceptable to the court. A debtor who does not wish to modify a proposed plan may either convert the case to a chapter 7 case or dismiss the case.

28. How are the claims of unsecured creditors handled in chapter 13 cases?

Unsecured creditors, including those with priority claims, must file their claims with the bankruptcy court within 90 days after the first date set for the meeting of creditors in order for their claims to be allowed. Unsecured creditors who fail to file claims within that period are barred from doing so, and upon completion of the plan their claims will be discharged.

The debtor may file a claim on behalf of a creditor, if desired. After the claims have been filed, the debtor may file objections to any claims that he or she disputes. When the claims have been approved by the court, the chapter 13 trustee begins paying unsecured creditors in the manner and in the amounts provided for in the debtor's chapter 13 plan. Payments to secured creditors, priority creditors, and special classes of unsecured creditors may begin earlier, if desired.

29. What if the debtor is temporarily unable to make the chapter 13 payments?

If the debtor is temporarily out of work, injured, or otherwise unable to make the payments required under a chapter 13 plan, the plan can usually be modified so as to enable the debtor to resume the payments when he or she is able to do so. If it appears that the debtor's inability to make the required payments will continue indefinitely or for an extended period, the case may be dismissed or converted to a chapter 7 case. If hired, this service is provided by our firm on behalf of the client

30. What if the debtor incurs new debts or needs credit during a chapter 13 case?

Only two types of credit obligations or debts incurred after the filing of the case may be included in a chapter 13 plan. These are: (1) debts for taxes that become payable while the case is pending, and (2) consumer debts arising after the filing of the case that are for property or services necessary for the debtor's performance under the plan and that are approved in advance by the chapter 13 trustee.

All other debts or credit obligations incurred after the case is filed must be paid by the debtor outside the plan. Some courts issue an order prohibiting the debtor from incurring new debts during the case unless they are approved in advance by the chapter 13 trustee.

Therefore, the approval of the chapter 13 trustee should be obtained before incurring credit or new debts after the case has been filed. The incurrence of regular debts, such as debts for telephone service or utilities, do not require the trustee's approval.

Bacchus Law Group, LLC can obtain the trustee's approval for you.

31. What should the debtor do if he or she moves while the case is pending?

The debtor should immediately notify the bankruptcy court and the chapter 13 trustee in writing of the new address. Most communications in a chapter 13 case are by mail, and if the debtor fails to receive an order of the court or a notice from the chapter 13 trustee because of an incorrect address, the case may be dismissed. Many courts have change-of-address forms that may be used if the debtor moves. If hired, this service is provided by Bacchus Law Group, LLC.

32. What if the debtor later decides to discontinue the chapter 13 case?

The debtor has the right to either dismiss a chapter 13 case or convert it to a chapter 7 case at any time for any reason. However, if the debtor simply stops making the required chapter 13 payments, the court may compel the debtor or the debtor's employer to make the payments and to comply with the orders of the court. Therefore, a debtor who wishes to discontinue a chapter 13 case should do so through his or her attorney.

33. What happens if a debtor is unable to complete the chapter 13 payments?

A debtor who is unable to complete the chapter 13 payments has three options:

  • (1) dismiss the chapter 13 case,
  • (2) convert the chapter 13 case to a chapter 7 case, or
  • (3) if the debtor is unable to complete the payments due to circumstances for which he or she should not be held accountable, close the case and obtain a partial chapter 13 discharge

34. What is the role of the debtor's attorney in a chapter 13 case?

The debtor's attorney performs the following functions in a typical chapter 13 case:

  1. Examining the debtor's financial situation and determining whether a chapter 13 case is a feasible alternative for the debtor, and if so, whether a single or a joint case should be filed.
  2. Assist the debtor in obtaining the required pre-bankruptcy briefing on budget and credit counseling.
  3. Assisting the debtor in the preparation of a budget.
  4. Examining the liens or security interests of secured creditors to ascertain their validity or avoidability, and taking the legal steps necessary to protect the debtor's interest in such matters.
  5. Devising and implementing methods of dealing with secured creditors.
  6. Assisting the debtor in devising a chapter 13 plan that meets the needs of the debtor and is acceptable to the court.
  7. Preparing the necessary pleadings and chapter 13 forms.
  8. Filing the chapter 13 forms and pleadings with the court.
  9. Attending the meeting of creditors, the confirmation hearing, and any other court hearings required in the case.
  10. Assisting the debtor in obtaining court approval of a chapter 13 plan.
  11. Checking the claims filed in the case, filing objections to improper claims, and attending court hearings thereon.
  12. Assisting the debtor in overcoming any legal obstacles that may arise during the course of the case.
  13. Assisting the debtor in attending and completing the required instructional course on personal financial management.
  14. Assisting the debtor in obtaining a discharge upon the completion or termination of the plan.

The fee charged by an attorney for representing a debtor in a chapter 13 case must be reviewed and approved by the bankruptcy court. This rule is followed whether the fee is paid to the attorney prior to or after the filing of the case, and whether it is paid to the attorney directly by the debtor or by the chapter 13 trustee. The court will not approve a fee unless it finds the fee to be reasonable.