Chapter 13 Bankruptcy (wage earner plan)- Individual Debt Adjustment



Overview

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. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period "for cause." (1) If the debtor's current monthly income is greater than the applicable 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 the law forbids creditors from starting or continuing collection efforts as long as the debtor enjoys a protection provided by the plan.

Advantages of Chapter 13 Bankruptcy

Chapter 13 bankruptcy (wage earner bankruptcy)offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 bankruptcy offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 bankruptcy is that it allows individuals to reschedule secured debts (other than a mortgage for their primary 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 co-signors (parties who are liable with the debtor. Finally, chapter 13 acts like a consolidation loan under which the individual makes reduced payments to the plan to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.

Chapter bankruptcy 13 Eligibility

Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 bankruptcy relief as long as the individual's unsecured debts are less than $307,675 and secured debts are less than $922,975. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. In addition, Debtors under chapter 13 and all other forms of bankruptcy must receive credit counseling from an approved credit counseling agency within 180 days of filing for relief.

How Chapter 13 Bankruptcy Works

A chapter 13 case begins when a bankruptcy attorney files a petition on behalf of a debtor, with the bankruptcy court serving the area where the debtor lives or has his principal business.. the following list andc schedules will also have to be filed: (1) list of assets and liabilities; (2) list of income and expenditures; (3) a list contracts and unexpired leases; and (4) a statement of financial affairs. (5). The debtor must also file a certificate of credit counseling (6) 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; 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 the tax return or transcripts for the most recent tax year as well as tax returns filed during the case

In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must compile the following information:1. A list of all creditors and the amounts and nature of their claims; 2. The source, amount, and frequency of the debtor's income; 3. A list of all of the debtor's property; and 4. A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. and serves as a disbursing agent, collecting payments and making distributions to creditors.

Filing the petition under chapter 13 "automatically stays" (stops) most collection actions against the debtor or the debtor's 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, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor. Chapter 13 also contains a special automatic stay provision that protects co-debtors.

Individuals may use a chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition, even at the eleventh hour.. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition.. The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the chapter 13 filing.

After the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors (341 Hearing) . During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs . Generally, problems can be avoided by insuring that the petition and plan are complete and accurate, and consulting with the trustee prior to the meeting. In a chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court

The Chapter 13 Plan and Confirmation Hearing

The debtor's attorney must file a repayment plan for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the plan, which may pay creditors less than full payment.

There are three types of claims: (1) priority, (2)secured, and (3) unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding. (3) Secured claims are those for which the creditor has the right take back certain property . and finally, unsecured claims are generally those for which the creditor has no collateral.

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,

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. 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 debtor should consult an attorney to determine the proper treatment of secured claims in the plan.

The plan need not pay unsecured claims in full as long it provides that the creditors will recieve all "disposable income" over an "the plan period," and receive at least as much as they would have under chapter 7 bankruptcy. In chapter 13 bankruptcy, "disposable income" is income (other than child support payments received by the debtor) less monies needed for support of the debtor or dependents and less charitable contributions up to 15% of the debtor's gross income. If the debtor operates a business, the definition of disposable income excludes those amounts which are necessary for ordinary operating expenses. The "applicable commitment period" depends on the debtor's current monthly income. The applicable commitment period 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 applicable commitment period (three or five years) if unsecured debt is paid in full over a shorter period.

Within 30 days after filing the bankruptcy case, the debtor must start making plan payments to the trustee. No later than 45 days after the 341 hearing, the bankruptcy judge must hold a confirmation hearing and decide whether the plan meets the standards for confirmation set forth in the Bankruptcy Code. Creditors may object to confirmation. While a variety of objections may be made, the most common are that plan payments are less than they would receive if the assets were liquidated or that the debtor's plan does not commit all of the debtor's projected disposable income to the plan.

If the court confirms the plan, the chapter 13 trustee will distribute funds received . If the plan isn't confirmed, the debtor may file a modified plan. The debtor may also convert the case to a chapter 7 bankruptcy. 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 the debtor (other than funds already disbursed or due to creditors).

Making The Plan Work

The provisions of a confirmed plan bind the debtor and each creditor. Once the court confirms the plan, the debtor must make the plan succeed. The debtor 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 the debtor to retain property as long as payments are made, the debtor may not incur new debt without consulting the trustee, because additional debt may compromise the debtor's ability to complete the plan.

A debtor may make plan payments through payroll deductions. This practice increases the likelihood that payments will be made on time and that the debtor will complete the plan. In any event, 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 of the Bankruptcy Code.

The Chapter 13 Discharge

The bankruptcy law regarding the scope of the chapter 13 discharge is complex and has recently undergone major changes. Therefore, debtors should consult a bankruptcy attorney familiar with bankruptcy code and admitted before the bankruptcy court prior to filing A chapter 13 Bankruptcy The debtor will be entitled to a discharge upon completion of the chapter 13 plan if he: (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 bankruptcy filed within (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

The discharge releases the debtor 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 the debtor to collect the discharged obligations.

As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of 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 over-payments, 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. The debtor will still be responsible for these debts after the bankruptcy discharge. 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 a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable.

The Chapter 13 Hardship Discharge

After a plan is confirmed, if the debtor is unable to complete the plan, the debtor may ask the court to grant a "hardship discharge." Generally, a hardship discharge is available only if: (1) the debtor's failure to complete plan payments is due to circumstances beyond the debtor's control and through no fault of the debtor; (2) creditors have received as much as they would have received in a chapter 7 liquidation case; and (3) 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 normal chapter 13 discharge and does not apply to any debts that are not dischargeable in a chapter 7 bankruptcy.