Chapter 13 Bankruptcy

Unlike a Chapter 7 liquidation, Chapter 13 is designed to “adjust” the debts of individuals with “regular income” by implementing a plan to repay all or part of their debts in installments over three to five years. What qualifies as “regular income” is somewhat left up to interpretation by the bankruptcy court, but generally a debtor must have some source of regularly recurring income to qualify to file under Chapter 13.

Chapter 13 acts something like a consolidation loan under which the individual makes payments to a trustee, who distributes the payments among the creditors. Debtors have no direct contact with their creditors while under the protection of a Chapter 13 plan. If the debtor’s current monthly income is less than the state median, the plan (and the payments) will usually last for three years. If the debtor’s current monthly income is greater than the 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. During this time, creditors are forbidden from starting or continuing collection efforts – so long as the debtor continues to make payments under the plan. Businesses are not eligible to file under Chapter 13, they must either liquidate under Chapter 7 or reorganize under Chapter 11.

There are a number of advantages to choosing Chapter 13 over Chapter 7. One of the most important is that Chapter 13 offers individuals who have fallen behind on their house payments an opportunity to save their homes from foreclosure. Filing under Chapter 13 stops foreclosure proceedings and lets debtors cure delinquent mortgage payments over time. They must, however, still make all regular mortgage payments that come due during the Chapter 13 plan. Another advantage of Chapter 13 is that it allows debtors to reschedule their secured debts (other than a mortgage for their primary residence) and extend them over the life of the plan. Doing this may lower the payments and allow debtors to keep property they otherwise would lose. Chapter 13 also has a special provision that protects third parties, such as co-signers, who are liable with the debtor on “consumer debts.” As Salt Lake City bankruptcy attorneys, we help our clients to determine whether Chapter 13 is right for them and, if so, how to best approach it.

Like Chapter 7, a Chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor lives. Unless the court orders otherwise, the debtor must also file: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. The debtor must also file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received during the 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 the debtor has in federal or state qualified education or tuition accounts. The debtor must provide the Chapter 13 case trustee with a copy of their tax returns or tax transcripts for the three most recent tax years, including any tax returns filed during the case. As bankruptcy lawyers in Salt Lake City, Utah, we will make sure that your petition, and all its accompanying forms, statements, schedules and certificates are properly filed, and help you get the other required documents to the Chapter 13 trustee.

Unless the court grants an extension, the debtor must file a proposed Chapter 13 plan either with the petition or within 15 days thereafter. A plan must provide for payments of fixed amounts to the Chapter 13 Trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims. There are three types of creditor claims that must be provided for under the plan: priority, secured, and unsecured. Priority claims are those granted special status by the Bankruptcy Code, such as most taxes and the costs of the bankruptcy proceeding. The plan must pay priority claims in full unless a particular priority creditor agrees to different treatment of the claim or, in the case of a domestic support obligation, unless the debtor contributes all “disposable income” to a five-year plan.

Secured claims are those for which the creditor has the right to foreclose on, or seize and sell, certain property (i.e., the collateral) if the debtor does not pay the underlying debt. If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive at least the value of the collateral. If the obligation underlying the secured claim was used to purchase the collateral (e.g., a car loan), and the debt was incurred within certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the value of the collateral (which may be less due to depreciation). Payments to certain secured creditors (i.e., home mortgage lenders), may be made over the original loan repayment schedule (which may be longer than the plan) so long as any arrearage is made up during the plan.

Unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor. The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected “disposable income” over the “applicable commitment period,” and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under Chapter 7. The “applicable commitment period” must be at least three years if the debtor’s current monthly income is less than the state median income for a family of the same size – and five years if the debtor’s current monthly income is greater than the state median income for a family of the same size. As bankruptcy attorneys in Salt Lake City, Utah, we can help you structure a plan that complies with the Bankruptcy Code while also meeting your objectives.

Just like under Chapter 7, between 20 and 50 days after the debtor files the Chapter 13 petition, the Chapter 13 Trustee will hold a meeting of creditors that the debtor(s) must also attend. Frequently, any problems with the proposed Chapter 13 plan can be worked out at the meeting of creditors. Not later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the proposed Chapter 13 plan is feasible and meets the requirements for confirmation set out in the Bankruptcy Code. Creditors will receive 25 days’ notice of the hearing and may object to confirmation. The most frequent objections are that payments offered under the plan are less than creditors would receive if the debtor’s assets were liquidated, or that the plan does not commit all of the debtor’s disposable income for the three to five year applicable commitment period. If the court declines to confirm the plan, the debtor may file a modified plan or ask to convert the case to a liquidation case under Chapter 7. If the court confirms the plan, the Chapter 13 Trustee begins receiving and distributing payments “as soon as is practicable.” As Salt Lake City bankruptcy lawyers, we will make sure you are fully prepared for, and will be by your side at, the meeting of creditors, and we will appear on your behalf and represent you at the confirmation hearing.

The provisions of a confirmed plan bind the debtor(s) and each creditor. Once the court confirms the plan, the debtor must make the regular payments required under the plan to the trustee, which will require the debtor(s) to live within a fixed budget for a prolonged period. In addition, the debtor(s) may not incur new debt without approval from the trustee because additional debt may compromise the debtor’s ability to complete the plan. If the debtor fails to make the payments due under the confirmed plan, the court may dismiss the case or convert it to a liquidation case under Chapter 7. The court may also dismiss or convert the debtor’s case if the debtor fails to pay any post-filing child support or alimony obligations, or fails to make required tax filings. As Salt Lake City, Utah bankruptcy attorneys, we will remain available to assist you while you are living under your Chapter 13 plan.

Unless the debtor qualifies, and the bankruptcy court grants a debtor’s request, for a “hardship discharge,” a Chapter 13 debtor is entitled to a discharge only upon completion of all payments under the Chapter 13 plan, and only if the debtor: (1) certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid; (2) has not received a discharge in a prior case filed within a certain time frame (two years for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases); and (3) has completed an approved course in financial management. While a Chapter 13 “hardship discharge” will only be the equivalent of a Chapter 7 discharge, a regular Chapter 13 discharge releases the debtor from all debts provided for by, or disallowed under, the plan, with limited exceptions. Debts not discharged in Chapter 13 include certain long term obligations (such as a home mortgage), on-going debts for child support or alimony, most taxes, most student loans, debts arising from death or personal injury caused by the debtor while driving 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. To the extent that these debts are not fully paid under the Chapter 13 plan, the debtor will still be responsible for them after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to another person will also be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable.

The discharge in a Chapter 13 case is somewhat broader than in a Chapter 7 case. Debts dischargeable in a Chapter 13, but not in Chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. As bankruptcy lawyers in Salt Lake City, Utah, we will work hard to make sure that your Chapter 13 discharge is as broad as possible.

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JD Milliner