Wednesday, May 23, 2012

Consumer Bankruptcy Part 2: Chapter 13

This is the second part of my three part breakdown of consumer bankruptcy cases.  These pieces are meant as informational tools for consumers who are considering bankruptcy or are looking to find out more information about what bankruptcy is.  I will remind the readers that in order to determine the best options for any given person, it is very important to consult with a local professional bankruptcy attorney.  There is no substitute for learned local counsel.

Chapter 13

The sometimes less popularized version of a consumer bankruptcy is Chapter 13.  As opposed to liquidation (See Chapter 7), a Chapter 13 is a reorganization or repayment plan.  Chapter 13 provides a way that people can keep property and pay back creditors over the course of the plan (over a term of 36-60 months).  This type of bankruptcy is also very helpful to people who experienced a temporary loss of income and who now have regular income and can make regular monthly payments.  Chapter 13 can:

  • Help a homeowner to prevent or stop a mortgage foreclosure
  • Help a driver reinstate their license through repayment on parking tickets
  • Allow a consumer debtor to pay back some of their debts over time
  • Grant a debtor a discharge of debts upon completion of a plan (3-5 years)


The requirements for filing chapter 13 are few.  A person need only have "regular income" and less than $336,900 in unsecured debt.  Unsecured debts are typically things such as credit cards, medical bills and other regular loans and lines of credit that are not backed up with collateral.  There is also a requirement of less than $1,010,650 in total secured debt.  Please note that these debt limits are subject to change on a regular basis as determined by Congress and as permitted by law.  It is important that you consult with a local bankruptcy lawyer before making any determinations.


Filing the chapter 13 case is very similar to a Chapter 7.  A few forms are required to start the case and the debtor must have also completed the required credit counseling course previous to filing the petition.  The main difference in filing a chapter 13 case is with the repayment plan which is proposed by the debtor.


The Chapter 13 Plan is the document which is created by the debtor which is proposed to the court in the Bankruptcy case.  This Plan is the document which set forth the manner in which debts will be repaid over the next 3-5 years.  The Debtor is generally given great leeway in constructing this plan, but there are certain requirements and restrictions, some of which are:
  • All priority claims must be paid in full (i.e. taxes, child support payments, and other special debts)
  • The present value payments must equal at least what the creditors would receive through a chapter 7. This means that you cannot propose to pay less in a chapter 13 than you would in a 7.
  • Secured creditors must accept the plan. (your mortgage company)
    • additionally, you are required to continue to pay your regular payments (i.e. mortgage) as well as make payments on the arrearages.
  • Usually, the debtor must pay ALL of their available disposable income each month toward the plan (through the U.S. Trustee).
These restrictions are sometimes more complicated and there are exceptions to these rules.


Assuming that you have followed all the rules and filed all the proper forms, you will be all set to go in front of a bankruptcy judge for confirmation of your plan.  Hopefully, you or your attorney has done all of the legwork required to create a successful and feasible plan for you.  by this point you should have already made a payment or two to the Trustee based on the proposed plan.  Barring any objections from the creditors or the Trustee, the court should confirm your plan, Congratulations!


3-5 years can be a long time.  Over that period of time, it is common for circumstances to change.  If they do, the debtor may experience a change in income or financial status.  This might mean that the original plan needs to be amended.  Don't worry, this is allowed and common.  It is important that you make sure to keep making payments to the trustee or else your case can be dismissed or converted to a chapter 7.  In order to avoid this, you should consult with your attorney or the trustee's office to make payment arrangements.  If you fail to make timely payments each and every month in the plan, your case will be dismissed and you be back to square one.  DONT MISS YOUR PAYMENTS!!!


Assuming that you made it through 3-5 years of monthly payments, the final step in the case is discharge.  The discharge is the order from the bankruptcy court which releases the debtor from any further obligations under debts which were properly included in the bankruptcy petition and plan.  A Chapter 13 discharge is often broader than a discharge in chapter 7 (some additional types of debts are included) but it is also more difficult to obtain.  Some of these additional types of debts are:
  • debts arising from injury to property
  • marital property settlements
  • certain fines or penalties
There are, of course, exceptions to a discharge in a chapter 13 as there are in a chapter 7.  Please consult with a local bankruptcy attorney to find out if a Chapter 13 is right for you.

For more information about Chapter 7, please see my separate article Here

My next article will discuss how to decide if bankruptcy is right for you and if so, what chapter you should file.