The bills are stacking up, demanding calls and letters are arriving with increasing frequency and despite the best of efforts, the overdue debts just cannot be paid. In such cases, filing bankruptcy under Chapter 13 of the Bankruptcy Code may provide a solution to what seems like an insurmountable problem. Once considered a last resort, bankruptcy has evolved into an accepted method of resolving serious financial problems. If you are facing serious financial challenges, it is important to seek the counsel of an experienced bankruptcy attorney to determine whether filing under Chapter 13 is right for you.
Bankruptcy law provides two basic forms of relief:
(1) liquidation and
(2) rehabilitation or reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. A reorganization or rehabilitation bankruptcy under Chapter 11 or 13 of the Bankruptcy Code is, however, the option often preferred by the courts. Under Chapters 11 and 13, creditors may be provided with a better opportunity to recoup what they are owed.
When is “Reorganization” or “Rehabilitation” the Right Choice?
Chapter 13 has certain advantages over Chapter 7 in consumer bankruptcies. The biggest advantage for many people is that Chapter 13 allows individuals an opportunity to keep their homes and avoid foreclosure. Chapter 13 also permits individuals to reschedule secured debts and extend them over the life of the plan. In addition, Chapter 13 allows the debtor to discharge more types of debts than Chapter 7 does. Further, under Chapter 7, the court may order that all of the consumer’s assets be sold, whereas under Chapter 13 the debtor may be able to retain more of his or her assets. A consumer’s choice between Chapter 7 and Chapter 13 is not necessarily the last word; once bankruptcy proceedings have begun, a case may be converted to a different chapter. Once converted, however, the case may not be converted back again.
Who is eligible for Chapter 13?
A consumer may choose bankruptcy under Chapter 13 if he or she has a stable income, believes the financial crisis is temporary and wants to repay at least some debt. The debtor must have less than $307,675 in unsecured debt and $922,975 in secured debt, however, in order to be eligible for Chapter 13. 11 U.S.C. §109(e). These amounts are adjusted periodically.
Chapter 13 generally applies to individual consumers with smaller debts. Corporations and partnerships cannot file under Chapter 13, but self-employed individuals and those who own unincorporated businesses are eligible for Chapter 13. If the debtor is an individual with extremely large or complex debts or is a corporation, Chapter 11, which also allows for rehabilitation or reorganization, will generally apply. Farmers can file under Chapter 12, which provides for reorganization and municipalities may file for Chapter 9 reorganization.
How does Chapter 13 Work?
A Chapter 13 proceeding, often called a wage-earner plan, is initiated by filing a petition. As in Chapter 7 cases, the filing of the petition automatically stays (stops) creditors from trying to collect on most of their debts. 11 U.S.C. §362. There is also a special automatic stay provision in Chapter 13 that protects co-debtors. A creditor generally may not seek to collect “consumer debts” from any individual who is liable along with the debtor. 11 U.S.C. §1301(a).
Along with the petition, the debtor must also file a schedule of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases and a statement of financial affairs.
The debtor must also file a certificate of credit counseling; evidence of any payments made by an employer received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest in federal or state qualified education or tuition accounts. 11 U.S.C. §521. After filing the petition, a trustee is appointed to manage the case. 11 U.S.C. §1302. Within 20 to 50 days after the debtor files the petition, the trustee holds a meeting of creditors.
The debtor must attend this meeting and answer questions regarding financial issues and the proposed plan terms. 11 U.S.C. §343. The judge must hold a confirmation hearing within 45 days of the meeting of creditors, at which time he or she will decide whether the plan is feasible and meets the Bankruptcy Code’s standards for confirmation. 11 U.S.C. §1324, 1325. Creditors may ask questions about and object to the plan. If the court approves the plan, however, the creditors can take no action outside the plan’s scope to collect their debts.
Within fifteen days after the debtor’s filing of the petition, the debtor must file a plan that sets forth the details of how he or she intends to pay off creditors in the next three years(or, with the court’s permission, five years). Fed.R.Bankr.P. 3015. The plan must provide for fixed payments to the trustee on a regular basis and it will be submitted to the court for approval. If approved, the trustee will distribute funds to the creditors according to the plan’s terms. Within 30 days of filing, the debtor must start making payments under the plan to the trustee, even if the court has not yet approved the plan. 11 U.S.C. §1326(a)(1).
There are three types of claims: (1) priority claims, which include most taxes and the costs of the bankruptcy proceedings; (2) secured claims, which are those for which the creditor has the right of recovering property (collateral) if the debtor does not pay; and (3) unsecured claims, for which the creditor generally has no special rights to collect against any property the debtor owns.
The plan must pay priority claims in full, unless a priority creditor agrees otherwise. Unsecured claims do not need to be paid in full as long as the plan provides that the debtor will pay all “disposable income” over an “applicable commitment period” and as long as unsecured creditors would receive at least as much under the plan as they would if the debtor’s assets were being liquidated under Chapter 7. 11 U.S.C. §1325.
Once the debtor completes all payments under the plan, the debtor is entitled to a discharge, which releases him or her from all debts provided for or disallowed under the plan.
To obtain the discharge, the debtor must also (1) certify that all domestic support obligations have been satisfied (if applicable); (2) complete an approved financial management course; and (3) have not received a discharge within two years in a prior Chapter 13 case or within four years in a prior case under Chapters 7, 11 or 12. 11 U.S.C. §1328.
Bankruptcy lawyers can help consumers struggling with increasing and inescapable debt find their way to a better financial future. Experienced bankruptcy attorneys have the knowledge and expertise required to help clients get out from under formidable debt and emerge as productive citizens, and can advise them about whether Chapter 13 is the right course of action given their particular circumstances.
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