Chapter 13

Chapter 13 – Adjustment of Debts

Chapter 13 bankruptcy allows qualified individuals or small proprietary business owners (NOT corporations, LLCs or partnerships) to consolidate debt while making convenient monthly payments to a trustee. A payment plan is proposed which repays the debts over a three to five year period. The amount of the monthly payment and the length of the repayment plan are based upon several factors including:

  • Monthly income of the Debtor
  • Monthly expenses of the Debtor
  • Amount and nature of the debt

The most common uses of Chapter 13 involve:

  • Repayment of mortgage or vehicle rrears (back amounts owed)
  • Elimination of second or third mortgage liens
  • Restructuring of auto loans to save a vehicle from repossession

Secured debts are sometimes paid 100% (although interest is often reduced), while unsecured debts may be paid less than 100%. A person receives a Discharge under Chapter 13 once the 3-5 year payment plan is completed.

One purpose of a Chapter 13, as opposed to a Chapter 7, is to enable a debtor to retain certain assets (for example, your home) that might otherwise be liquidated by a Chapter 7 Trustee. It also provides an alternative to Chapter 7 when you have too much “disposable income” (your net monthly income exceeds your net monthly expenses by too much.) Chapter 13 usually yields much lower monthly payments than you were previously paying and (here’s the real benefit), after 36 to 60 months, you are done! Almost all of your debts are gone.

The goal of personal bankruptcy is to discharge your existing debts by repaying all or a portion of your debts in a controlled and orderly manner, and allow you a “fresh start” on your finances. In other words, once your discharge is granted, you no longer need to repay most of the debts that were incurred before you filed your bankruptcy.

Chapter 13 Timetable

The following time table shows important dates through the early portion of your Chapter 13 case.  Some of these dates are very important dates and cannot be missed.  They are marked with an asterisk (*).  Failure to comply with these deadlines can result in dismissal of your Bankruptcy case.  Other deadlines are somewhat flexible but it is important to strive to meet each and every deadline.

Deadline Action Required
14 days after filing Petition or Converting to a Chapter 13 Case Deadline for filing the Plan of Repayment
30 days after filing Petition Deadline to make first Plan payment
One (1) days before § 341 Meeting of Creditors All due, but unfiled, tax returns must be filed
4-6 weeks after filing Petition Meeting of Creditors takes place at the United States Bankruptcy Court
30 days after Meeting of Creditors concludes Deadline for objections to claims of exemption
60 days after Meeting of Creditors Deadline for Creditors to object to Plan of Repayment
30 days after deadline for Creditors to object to Plan of Repayment Deadline for Trustee’s objections or Recommendations (this is a soft deadline)
30 days after Trustee’s objections or recommendations Deadline for Debtor to comply with Trustee’s recommendations
90 days after the Meeting of Creditors Deadline for creditors to file claims
180 days after the Meeting of Creditors Deadline for governmental creditors to
file claims

*Important Deadline to Note: Any property that you receive, or acquire a right to receive after the date of filing bankruptcy, by bequest, devise, or inheritance; or from a property settlement or court order in a divorce or separation; or as beneficiary of a life insurance policy or death benefit plan, is property of the Estate. You are required by law to report this information, either to the Trustee, or to your attorney.

The Pros and Cons of Chapter 13 Bankruptcy

PROS

  • The “automatic stay” of bankruptcy stops most creditors’ collection actions, including demands, lawsuits, repossessions, sales, or lease terminations.
  • Only the Debtor can propose the Chapter 13 Plan.  It is effective when confirmed by the Court.
  • Upon completion of the Plan, the Debtor is discharged from most types of debt.
  • Except as requested by the Debtor, most debts are paid only from the Debtor’s income, not from the sale of any assets.
  • The Debtor can hold on to real property subject to a long term note and deed of trust if the Plan is complied with and it provides all necessary stipulations.
  • The Debtor can retain a lease of real or personal property if the Plan is complied with and provides for the lease to be ‘assumed’ and for “catch-up” payment, within a few months of any default. Payment of current rental payments would resume.
  • The Debtor can keep most personal property that secures a loan, or most real property subject to a note and deed of trust (mortgage), irrespective of a default, or any real property subject to an involuntary lien (e.g. an income tax or judicial lien), if the Plan is complied with and provides for payment of the entire balance of such obligation or of the value of the property securing the debt, whichever is less, by way of monthly payments during the Plan period, with interest at a rate that is often less than the contract rate.
  • The Debtor can also hold on to real property, that is not the Debtor’s residence and that is subject to a long term note and deed of trust, under some circumstances.
  • A Chapter 13 can be dismissed or converted to a Chapter 7 by the Debtor at any time, unless it can be shown that the Debtor has acted in bad faith.

CONS

  • Only an individual can file (i.e. not a corporation, LLC, or partnership).
  • The Debtor has to pay unsecured claims to the extent he or she has sufficient income to do so for at least a three year period.
  • Recent unpaid income tax must be paid in full under the Plan but usually without interest.
  • The Repayment Plan period cannot extend beyond five years.
  • There are debt limits imposed upon the Debtor.
  • There is a rather short timetable given to file a Plan.
  • May delay credit repair by the plan payment period.

NOTE: This is a general listing of benefits. Not all benefits will be available to all Debtors. We would be pleased to consult with you about your specific circumstances – contact our office today!