A Chapter 13 bankruptcy is an individual reorganization for people who have enough disposable income to pay both their bills and their debts, and who own property that they want to protect, but who need a break to get back to solvency. It gives these people time to pay their debts while they live their lives uninterrupted by creditors. And it can also give the debtors potential discounts to their debts, while assuring that their creditors receive at least some repayments – generally more than they would receive under a Chapter 7.
Chapter 13 actions are for individuals only, although they can include individual business debts. These bankruptcies are mostly filed by middle income people who want to keep their secured property (like houses and cars), pay off their unsecured debts and keep their credit cards, but who need restructuring of their debts. Chapter 13s are also frequently filed by homeowners looking to stave off mortgage foreclosure and there are specific ways that this Chapter does that, which we will discuss as we go through this module.
A Chapter 13 works much the same way that an individual Chapter 11 works in that there is a plan proposed by the debtor that pays off debts over time. But it is different from Chapters 11 and 7 in several ways.
Chapter 13 has the same rules for the automatic stay that the other chapters have.[1] In addition, Chapter 13 features a special automatic stay provision that protects co-debtors, unlike the standard automatic stay provision under Section 362. Under a Chapter 13 case, “unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a ‘consumer debt’ from any individual who is liable along with the debtor.”[2] This would include co-signers to cars, houses, credit cards, etc.
Chapter 13 also creates classes of creditors like those in Chapter 11. Each member of each class must be treated in the same way as each other member of the class, just like in Chapter 11.
In total, about a third of US bankruptcy filings are for Chapter 13s,[3] but not all of these bankruptcies are successful. A Chapter 13 requires that the debtor have enough financial discipline to follow a multi-year austerity plan to pay off or pay down debt. Not everyone can do this. In fact, statistically, most people fail to do it. For example, the California Central District has only a 55% rate of confirmations for Chapter 13s, and the national average of successful Chapter 13 cases even after confirmation is only about one-third. In addition, Chapter 13’s, while not requiring a lawyer, are very difficult to administer without one. That same California district had a Chapter 13 pro se filing success rate of less than one-half of one percent.[4]
Those statistics may not actually be as daunting as they seem, because not every Chapter 13 is filed to try to reach a discharge. Many are filed to stop or slow down a foreclosure with no realistic intent of the case ending in a successful plan administration and discharge. Also, in a Chapter 13 the debtor can keep property beyond state exemptions. Moreover, many more actions initially brought under Chapter 13 are eventually converted into a Chapter 7.
Filing Under Chapter 13
A Chapter 13 can be filed by any individual (or married couple) if the individual’s unsecured debts are less than $394,725 and secured debts are less than $1,184,200, as of 2018.[5] These amounts are pegged to the Consumer Price Index and, so, change periodically.
An “individual” under this Chapter also refers to a person who is self-employed or who operates an unincorporated business. No incorporated business is eligible to file a Chapter 13.
An individual filing for Chapter 13 must be able to prove to the court that he has a regular income. In most cases, that income consists of wages, but any regular income or liquidation of property can qualify.[6] People who do not qualify under these income and debt restrictions must file either a Chapter 7 or 11.
Like other Chapters in the Bankruptcy Code, a filer must complete credit counseling to file.[7] Also, as in other Chapters, one 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. [8]
Unlike a Chapter 11, which can have competing plans offered by creditors, a Chapter 13 can only be filed by the debtor.
Unlike a Chapter 11, but like a Chapter 7, a trustee is appointed to the case upon the filing of a Chapter 13.[9] But the role of the trustee is far more vital to the success of this Chapter than with any other. The role of a Chapter 13 trustee (or bankruptcy administrator in some states) is unlike that of any other bankruptcy trustee.[10] A Chapter 13 trustee is a “standing trustee” under the code and is an active participant in the case. The trustee is not employed by the government, but, rather, is a contractor who receives a salary based upon a percentage of the funds disbursed to creditors under the Chapter 13 plans in that district.
The Code sets out dozens of specific duties of the trustee,[11] and local courts can add to those duties. In general, the court relies on the Chapter 13 trustee to review, negotiate and run the plan. The trustee receives payments from the debtor, distributes those payments, shows up at hearings, and can both file and deal with objections to the plan.
However, the trustee does not have a role in any businesses of the debtor. In a Chapter 11, the plan administrator will run a business according to the bankruptcy plan. But a Chapter 13 does not cover ongoing businesses. Because Chapter 13 is only for individuals, the trustee will not step in to run any business that the debtors owns or runs. The debtor will continue to run the business.
The Repayment Plan
A repayment plan submitted to the court for approval must be filed with the petition, or within 14 days after filing the petition.[12] The plan must provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. These payments are usually derived from a set income like a salary, but can really come from anywhere, as long as the court is convinced that they will be regular and sustainable. The repayment amounts are taken from “disposable income.”[13] As a practical matter, most debtors have these payments processed as payroll deductions.
As in a Chapter 11, there are three general classes of claims: priority, secured and unsecured, and these classes are generally treated the same way as in Chapter 11. Depending on the nature of an individual secured debt, the plan must provide for the repayment of either the total amount of the debt or the value of the collateral. For instance, a car worth $10,000 with a $7000 lien on it must provide for payment of at least $7000.
In many cases, a secured debt like a mortgage is paid at the same time as the original mortgage (such as the 30th of each month) along with an extra amount to make up for any arrearages. Unsecured creditors have few rights, but the plan must treat them at least as well as they would be treated in a Chapter 7.[14] They go through the same proof of claim process as in a Chapter 11.
The debtor must begin making payments under the plan within 30 days of filing the petition, even if the plan has not been approved by the court. [15] Any payments due within those 30 days must be paid directly to the creditor.
Meeting of Creditors
Sometime between 21 and 60 days after filing the petition, the trustee will hold a meeting of the creditors with the debtor (and the debtor’s attorney) to discuss the plan. Attendance of the debtor is mandatory.[16]
To make sure that the plan is in order, the debtor, with his attorney, usually consults with the trustee before this meeting. Most of the time, any issues with the plan are resolved before, during or shortly after this meeting, and the plan can go forward from there.
During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions of the debtor about the debtor’s finances 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. Bankruptcy judges are not permitted to attend this meeting.[17]
Unsecured creditors must file their proofs of claims with the court within 70 days after the first date set for the meeting of creditors.[18]
Time Frames
While the time frames of Chapter 7’s and 11’s are indefinite, all Chapter 13’s have a specific time limit. The Chapter 13 plan is locked into a definitive time frame of either three or five years in almost all cases. The specific time is determined by where the debtor’s income falls on the scale of income for the state in which the bankruptcy is filed.
If the debtor’s income is less than fifty percent of the state median income, it will generally be a three-year plan, unless the court approves a longer period. This option, for the most part, is available to people who qualify for Chapter 7, but choose to file a Chapter 13 so that they can keep their house or cars.
If the income is greater than the state median, it will be a five-year plan. In no case will a Chapter 13 go beyond five years.[19] Most Chapter 13’s are five-year plans. One exception that can shorten the duration of a Chapter 13 is if all unsecured debts are paid in full. In that case, the bankruptcy case can be ended after those debts are paid.[20]
Confirmation and Discharge
No later than 45 days after the meeting of the creditors, the court will hold a confirmation hearing for the debtor, trustee and any creditors who want to attend.[21] Creditors receive 28 days’ notice of the hearing and may object to the confirmation.[22] The court can do any of the following: confirm the plan; reject the plan and ask for a modified plan[23] or dismiss the case. Additionally, the debtor can convert it into a Chapter 7.[24] If the case is rejected and the trustee holds any of the debtors’ funds, they must be returned to the debtor.
As soon as the case is confirmed, the payments need to start “as soon as practicable.”
The plan goes forward after confirmation, as the Bankruptcy Code binds both creditor and debtor together.[25] There is, though, some built-in flexibility as the case moves forward. The plan may be modified after confirmation, if necessary, under the impetus of the debtor, the trustee, or an unsecured creditor.[26] However, the debtor cannot create new debt without consulting the trustee.[27]
If the debtor fails to make the requisite payments under the plan, the case gets thrown back to the court, which then decides how to proceed. At that point, the bankruptcy judge can either dismiss the case or convert it into a Chapter 7 liquidation.[28] The case can also be dismissed if the debtor fails to file income taxes or fails to pay any post-filing domestic support obligations[29].
Unlike in a Chapter 7 or 11 proceeding, in a Chapter 13, the debts are not discharged until after the plan is satisfied — generally three or five years after confirmation. At that point, any remaining debts are discharged.
However, as in the case of chapter 7, many debts are not dischargeable. The list of debts under Chapter 13 that are not dischargeable is lengthy and complex.[30] Any non-dischargeable debt left over after the plan has run its course will have to be paid. For example, if there is a child support arrearage or a mortgage payment that is not fully paid off during the course of the case, the balance of that obligation can still be subject to collection proceedings. Some other particular debts are dischargeable but are still subject to objection by the creditor. These include debts obtained by fraud or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person.[31]
And on the other hand, there are several debts that are not dischargeable in a Chapter 7 that are dischargeable in a Chapter 13. These 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.[32]
Hardship Discharge
After the confirmation of the plan, and before discharge, circumstances may arise that prevent the plan from being administered or modified. Examples include health failure, injury, loss of a job and other catastrophic events beyond the control of the debtor These may make repayments under the plan impossible or impractical. In these cases, Chapter 13 allows for a “hardship discharge.”[33] Hardship discharges are limited, though when granted, they function like discharges under Chapter 7.[34]
Foreclosure
Chapter 13’s primary use is often to forestall a foreclosure of a mortgage on the debtor’s primary residence. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. Later, the debtor can bring the past-due payments current by adding extra amounts to the mortgage’s monthly payments over the time of the bankruptcy.
However, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition.[35] This will occasionally create a “race to the courthouse” to file the Chapter 13 before the foreclosure is completed. If the debtor fails to make the mortgage payments under the plan, of course, the stay can be lifted, and the house can be lost.
In our last module, we’ll look at the bankruptcy process, such as the relevant forms, where to file, etc. We’ll also look at the effects of bankruptcy on the filer’s credit, job security and other considerations. We’ll also look at bankruptcy fraud and some other bankruptcy proceeding concerns.
[1] 11 U.S.C. § 362.
[2] See “Chapter 13 – Bankruptcy Basics,” U.S. Courts, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics (“Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose”) (citing 11 U.S.C. § 101(8); see also 11 U.S.C. § 1301(a).
[3] “Bankruptcy Filings Fall 5.9%, Reach Lowest Level Since 2006,” U.S. Courts, (Jan. 25, 2017) http://www.uscourts.gov/news/2017/01/25/bankruptcy-filings-fall-59-reach-lowest-level-2006 (In 2016, of 794,960 total bankruptcy filings, 296,655 were Chapter 13).
[4] John O’Connor, “How Much Does it Cost to File Bankruptcy?” National Bankruptcy Forum, (Dec. 15, 2017), http://www.natlbankruptcy.com/how-much-does-it-cost-to-file-bankruptcy-2/; “What is Success in Chapter 13 Why Should We Care,” American Bankruptcy Institute, (Sep. 2004), https://www.abi.org/abi-journal/what-is-success-in-chapter-13-why-should-we-care.
[5] 11 U.S.C. § 109(e).
[6] Income under the Code includes the debtor’s “regular monthly income” and regular contributions to household expenses from non-debtors, as well as income from the debtor’s spouse if the petition is a joint petition. It does not include social security income or certain other payments. 11 U.S.C. § 101(10A)(A)-(B).
[7] 11 U.S.C. §§ 109(h), 111.
[8] 11 U.S.C. §§ 109(g).
[9] 11 U.S.C. § 1302.
[10] The functions of the trustee and the administrator are essentially the same, so any discussion of the trustee is also a discussion of the administrator in those jurisdictions. The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the U.S. trustee program is administered by the Department of Justice.
[11] 11 U.S.C. § 704 provides highly detailed standing trustee duties. They are too complex to go into here.
[12] Fed. R. Bankr. P. 3015.
[13] 11 U.S.C. § § 1322(a)(1), 1325(b)(2). In a Chapter 13, “disposable income” is income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents. If the debtor operates a business, the definition of disposable income excludes those amounts which are necessary for ordinary operating expenses.
[14] See “Chapter 13 – Bankruptcy Basics,” U.S. Courts, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics (last visited Sept. 21, 2018) (citing 11 U.S.C. § 1325).
[15] 11 U.S.C. § 1326(a)(1).
[16] 11 U.S.C. § 343.
[17] 11 U.S.C. § 341(c).
[18] Fed. R. Bankr. P. 3002(c).
[19] 11 U.S.C. § 1322(d).
[20] See “Chapter 13 – Bankruptcy Basics,” U.S. Courts, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics (last visited Sept. 21, 2018).
[21] 11 U.S.C. § 1324(a)-(b).
[22] Fed. R. Bankr. P. 2002(b).
[23] See “Chapter 13 – Bankruptcy Basics,” U.S. Courts, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics (last visited Sept. 21, 2018).
[24] 11 U.S.C. § 1307(a).
[25] 11 U.S.C. § 1327.
[26] 11 U.S.C. §§ 1323, 1329.
[27] 11 U.S.C. §§ 1305(c), 1322(a)(1), 1327.
[28] 11 U.S.C. § 1307.
[29] 11 U.S.C. §§ 1307(c) and (e), 1308, 521.
[30] 11 U.S.C. § 1328. These 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 the debtor’s conviction of a crime.
[31] 11 U.S.C. §§ 1328, 523(c); Fed.R. Bankr. P. 4007(c).
[32] 11 U.S.C. § 1328(a); 11 U.S.C. § 523.
[33] 11 U.S.C. § 1328(b).
[34] 11 U.S.C. § 523.
[35] 11 U.S.C. § 1322(c); see also “Chapter 13 – Bankruptcy Basics,” U.S. Courts, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics (last visited Sept. 21, 2018).