Chapter 13 Bankruptcy
Background
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. It is used primarily by individuals who are attempting to save their homes from foreclosure and sheriff sale. Under this
chapter, you propose a repayment plan which will pay your creditors some or all of what you owe them over a period of three to five years. In no case may
a plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection
efforts including foreclosures, sheriff sales, repossessions, wage garnishments, bank attachments, and utility shut-offs.
Chapter 13 offers you a number of advantages over chapter 7. Perhaps most significantly, chapter 13 offers you an opportunity to
save your home from foreclosure. By filing under this chapter, you can stop foreclosure proceedings and may cure delinquent mortgage payments over time.
Nevertheless, you 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
you to reschedule secured debts (other than a mortgage for your primary residence NOTE: See Home Loan Modifications regarding proposed new bankruptcy law
which would allow the bankruptcy judge in a chapter 13 bankruptcy to rewrite the mortgage on your 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 you on
"consumer debts."
This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which you make the plan payments to a chapter 13
trustee
who then distributes payments to creditors. You will have no direct contact with creditors while under chapter 13 protection.
Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as your
unsecured debts are less than $336,900 and secured debts are less than $1,010,650. These amounts are adjusted periodically to reflect changes in the
consumer price index. A corporation or partnership may not be a chapter 13 debtor.
A chapter 13 bankruptcy case begins with your attorney filing a petition with the bankruptcy court. In addition to the petition, your attorney will file with the court:
- Schedules of assets and liabilities;
- Schedule of current income and expenditures;
- Schedule of executory contracts and unexpired leases;
- A statement of financial affairs; and
- A chapter 13 plan.
In order for your attorney to complete the Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, you must provide the following information:
- A list of all creditors and the amount and nature of their claims;
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Married individuals must gather this information for their spouse regardless of whether they are filing a
joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where
only one spouse files, the income and expenses of the non-filing
spouse is required so that the court, the trustee and creditors can evaluate the household's financial position. At our first meeting we will provide
you with forms that will assist you in providing the need information and a list of all required documents.
Among the schedules you will file is a schedule of "exempt" property. The Bankruptcy Code
allows you to protect property from the
claims of creditors because it is exempt under Ohio law. Examples of Ohio’s exemptions include the complete
protection of all federal tax refunds to the
extent they represent either earned income credits or child tax credits, up to the maximum exemption of $20,200 in
equity in residential real estate,
$400 in cash or bank deposits, $10,775 in household goods and furnishings, $3,225 in equity in a car; a “wild card” of $1,075 to be used on any
property, and many others, including virtually all pension and retirement plans . The exemptions are double for married debtors. Exemptions are
important because non-exempt property will increase the amount of money which the court requires be paid to unsecured creditors.
As your attorney, we must also provide the chapter 13 trustee with a copy of the tax return or transcripts for the most recent
tax year for which a return was filed, as well as tax returns filed during the case (including tax returns for prior years that had not been
filed when the case began), evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any
anticipated increase in income or expenses after filing.
Filing a petition under chapter 13 "automatically stays" (stops) most collection actions against you or your property. The stay
arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits,
foreclosures, sheriff sales, wage garnishments, bank attachments, automobile repossessions, or even telephone calls demanding payments. The bankruptcy clerk
gives notice of the bankruptcy case to all creditors whose names and addresses are provided by you. Chapter 13 also contains a special
automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor
may not seek to collect a "consumer debt" from any individual who is liable along with you. Consumer debts are those incurred by you primarily for a personal,
family, or household purpose. You may use a chapter 13 proceeding to save your home from foreclosure or your car from repossession. The automatic stay stops
the foreclosure proceeding or attempts to repossess your car, as soon as you file the chapter 13 petition. You may then bring the past-due payments current
over a reasonable period of time usually three to five years. You may also lose your home or car if you fail to make the regular mortgage payments that come
due after the chapter 13 filing or you fail to make your plan payments to the chapter 13 trustee. Also, you may still lose the home if the mortgage company
completes the foreclosure sale under state law before your petition is filed with the bankruptcy court.
Between 20 and 50 days after you file the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors, which is called a 341 meeting. During this meeting, the trustee places you under oath, and both the trustee and creditors may ask questions -- although it is rare for creditors to appear at this meeting. You must attend the meeting and answer questions regarding your financial affairs and the proposed terms of the plan. If a husband and wife file a joint petition, they both must attend the creditors' meeting and answer questions. It is not unusual for the chapter 13 to request modifications to the plan. The modification issues are typically resolved either during or shortly after the creditors' meeting. In a chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors.
After the meeting of creditors, an attorney from our offices, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on your chapter 13 repayment plan. If the court approves your plan your case is confirmed.
In Ohio, the U.S. trustee appoints a standing trustee to serve in all chapter 13 cases. The chapter 13 trustee both evaluates the
case and serves as a disbursing agent, collecting payments from you and making distributions to creditors.
You must file a repayment plan with the petition. A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. Our attorneys will work with you in the preparation of the chapter 13 plan. Once the plan is confirmed the trustee distributes the funds to creditors according to its terms, which may offer creditors less than full payment on their claims -- in appropriate cases the repayment to unsecured creditors can be as little as 1%.
There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding. Secured claims are those for which the creditor has the right take back certain property (i.e., the collateral) if you do not pay the underlying debt. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by you.
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 you contribute all "disposable income" - discussed below - to a five-year plan.
If you want 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 the buy 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., the home mortgage lender), 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.
The plan need not pay unsecured claims in full as long it provides that you will pay all projected "disposable income" over an "applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if your assets were liquidated under chapter 7. In appropriate cases this can be a little as 1% of your unsecured debt. The period over which you are to repay your debts must be three years if current monthly income is less than the state median for a family of the same size - and five years if the current monthly income is greater than a family of the same size. The plan may be less than the three or five year periods only if unsecured debt is paid in full over a shorter period.
Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, you must start making plan payments to the trustee. If any secured loan payments or lease payments come due before you plan is confirmed (typically home and automobile payments), you must make adequate protection payments directly to the secured lender or lessor - deducting the amount paid from the amount that would otherwise be paid to the trustee.
No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. Creditors will receive 25 days' notice of the hearing and may object to confirmation. While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if your assets were liquidated or that your plan does not commit all of your projected disposable income for the three or five year applicable commitment period.
If the court confirms the plan, the chapter 13 trustee will distribute funds received under the plan "as soon as is practicable." If the court declines to confirm the plan, you may file a modified plan. You may also convert the case to a case under chapter 7. If the court declines to confirm the plan or the modified plan and instead dismisses the case, the court may authorize the trustee to keep some funds for costs, but the trustee must return all remaining funds to you (other than funds already disbursed or due to creditors).
Occasionally, a change in circumstances may compromise your ability to make plan payments. For example, a creditor may object or
threaten to object to a plan, or you may inadvertently have failed to list all creditors. In such instances, the plan may be modified either before or after
confirmation. Modification after confirmation is not limited to an initiative by you, but may be at the request of the trustee or an unsecured
creditor.
The provisions of a confirmed plan bind you and each creditor. Once the court confirms the plan, you must make the plan succeed. You must make regular payments to the trustee either directly or through payroll deduction, which will require adjustment to living on a fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles you to retain property as long as payments are made, you may not incur new debt without permission of the court, because additional debt may compromise your ability to complete the plan.
You will be required to make plan payments through payroll deductions, if employed. This practice increases the likelihood that
payments will be made on time and that you will complete the plan. In any event, if you fail to make the payments due under the confirmed plan, the court
may dismiss the case or convert it to a case under chapter 7 of the Bankruptcy Code. The court may also dismiss or convert the case if you fail to pay
any post-filing domestic support obligations (i.e., child support, alimony), or fail to make required tax filings during the case.
The bankruptcy law regarding the scope of the chapter 13 discharge is complex and has recently undergone major changes.
In a chapter 13 you are entitled to a discharge upon completion of all payments under the chapter 13 plan so long as you:
- Certify (if applicable) that all domestic support obligations that came due prior to making such certification have been paid;
- Have 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 case); and
- Have completed an approved course in financial management.
The court will not enter the discharge, however, until it determines, after notice and a hearing, that there is no reason to believe there is any pending proceeding that might give rise to a limitation on your homestead exemption.
The discharge releases you from all debts provided for by the plan or disallowed (under section 502), with limited exceptions. Creditors provided for in full or in part under the chapter 13 plan may no longer initiate or continue any legal or other action against you to collect the discharged obligations.
As a general rule, the discharge releases you from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in 11 U.S.C. § 1328. 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 your conviction of a crime. To the extent that they are not fully paid under the chapter 13 plan, you will still be responsible for these debts 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 you that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable.
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.
After confirmation of a plan, circumstances may arise that prevent you from completing the plan. In such situations, you may ask the court to grant a "hardship discharge." Generally, such a discharge is available only if:
- Your failure to complete plan payments is due to circumstances beyond your control and through no fault of yours;
- Creditors have received at least as much as they would have received in a chapter 7 liquidation case; and
- Modification of the plan is not possible.
Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship
discharge. The hardship discharge is more limited than the discharge described above and does not apply to any debts that are non-dischargeable in a
chapter 7 case.
You cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior
bankruptcy petition was dismissed due to your willful failure to appear before the court or comply with
orders of the court, if the dismissal entry provides for a “1809 day bar”, or was voluntarily dismissed after creditors sought relief from the bankruptcy
court to recover property upon which they hold liens.
Credit Counsel Briefing and Financial Education Course Requirements
You may not file a chapter 13 of the Bankruptcy Code unless you have, within 180 days before filing, received
credit counseling from an approved credit counseling agency. We will assist you in signing up for and
completing this counseling. There is a second Financial Management” course you need to complete after your case is filed, in order to obtain a discharge
of your debts. We will also assist you in signing up for and completing this course. The companies that offer these courses have been approved by the
United States Justice Department. Both can be completed by telephone or over the internet. The Credit Counseling takes ten (10) minutes to one (1). The
Financial Management course takes two (2) hours.