Chapter 13 Information
WHAT IS A CHAPTER 13 BANKRUPTCY AND HOW DOES IT WORK?
Chapter 13 is one form of bankruptcy in which you obtain relief from your creditors and submit a plan to pay some or all of your debts. The Court prohibits your creditors from trying to collect from you during the time you are paying your creditors according to your plan. You must make regular payments to the Chapter 13 Trustee for a specified period of time ranging from three to five years. The Chapter 13 Trustee collects your money paid according to the plan and disburses it to your creditors in the proportions and manner you determined in your plan.
WHAT ARE THE FEES CHARGED IN A CHAPTER 13?
In most cases a debtor can file a case with no upfront cost. There is a $310 filing fee charged when the case is filed, which will be paid through the plan, and $3000 in attorney’s fees paid through the plan. In this manner, the Trustee will send part of your plan payment each month to your attorney to pay the remainder of the attorney’s fees. In addition, the Chapter 13 Trustee receives a fee of approximately 11 % of any money paid under the plan. Your plan payment goes to the Trustee, she takes her fee off the top and then distributes the remainder of the money pursuant to the terms of the plan.
WHEN WILL I HAVE TO APPEAR IN COURT IN A CHAPTER 13 CASE?
In the United States Bankruptcy Court for the District of Kansas, you have to appear for a hearing at least once for a First Meeting of Creditors hearing. This hearing is conducted by the Chapter 13 Trustee. The Bankruptcy Judge will NOT be present. This will be held about five (5) weeks after your case is filed. Your testimony at such hearing will not be lengthy. Confirmation hearings generally occur later are handled by your attorney and the Chapter 13 Trustee. Your attendance at the confirmation hearing is not required. If your plan runs smoothly, additional court appearances will probably not be necessary.
HOW DOES CHAPTER 13 DIFFER FROM CHAPTER 7?
Chapter 13 is an attractive alternative to a straight bankruptcy, which is also known as Chapter 7. Under Chapter 7, a debtor must turn over all of their non-exempt property to a bankruptcy trustee, who then pays the unsecured creditors out of the proceeds from the property, while the secured creditors are permitted to repossess the property upon which they have valid liens, unless the debtor remains current on payments under the terms of the loan. Under Chapter 13, you are usually permitted to keep all of your property, whether or not it is exempt. The unsecured creditors and some of the secured creditors are paid out of the periodic payments you make the Chapter 13 Trustee, or in some instances, secured creditors are paid directly by you rather than through the Chapter 13 Trustee.
WHEN IS CHAPTER 13 PREFERABLE TO CHAPTER 7?
Chapter 13 may be preferable for the debtor who:
(a) wishes to repay all or some of his unsecured debts and has the income to do so within a reasonable time;
(b) has valuable non-exempt property which he would lose if he filed under Chapter 7;
(c) is NOT eligible for discharge under Chapter 7;
(d) has one or more substantial debts that are NOT dischargeable under Chapter 7;
(e) has sufficient assets with which to repay his debts, but needs temporary relief from his creditors in order to do so;
(f) has personal property pledged as collateral where the debt greatly exceeds the value of the collateral and the debtor desires to retain the property by only paying the value of the collateral plus interest through the plan, (where allowed);
(g) the debtor is behind on house or vehicle payments and desires to use Chapter 13 to bring the loan current over time through the plan;
(h) the debtor desires to protect his co-signer which is possible in certain limited circumstances under Chapter 13.
HOW DOES CHAPTER 13 COMPARE WITH PRIVATE DEBT CONSOLIDATION SERVICES?
Under Chapter 13, the Court possesses powers to aid the debtor that private debt consolidation services do NOT have. For example, the Court has the power to prohibit creditors from attaching or foreclosing on the debtor’s property, the power to force unsecured creditors to accept a Chapter 13 plan that does not pay their claims in full, and the power to discharge a debt from unpaid portions of claims. Private debt consolidation services have none of these powers.
MUST ALL OF MY DEBTS BE COMPLETELY PAID OFF UNDER A CHAPTER 13 PLAN?
No. While secured debts dealt with under the plan must be brought current or paid in full, at least to the extent that they are secured, only the portion of unsecured debts that you can reasonably afford to repay out of all of your disposable income over the period of the plan needs to be paid off. The unpaid balance of most unsecured debts will be discharged upon completion of the plan.
WHAT DEBTS ARE DISCHARGEABLE UNDER CHAPTER 13?
There are two (2) types of Chapter 13 discharges. One is given if the approved plan is not successfully completed due to circumstances for which the debtor should not be justly held accountable. This “hardship” discharge does not discharge as many debts as is similar to a Chapter 7 discharge. The other discharge is given upon the debtor’s successful completion of a plan and discharges the debtor from all debts dealt with under the plan except debts for alimony, maintenance, or support, and home mortgages extending longer than the plan.
MUST ALL OF MY CREDITORS APPROVE OF MY CHAPTER 13 PLAN?
No. Only the Court must approve a Chapter 13 plan in order for it to be confirmed (made effective). However, unsecured creditors and the Chapter 13 Trustee may file objections to the confirmation of a Chapter 13 plan. Secured creditors who do not accept the plan may also file objections if they are not being treated in the manner described in the answer to the next question.
HOW MUST SECURED CREDITORS BE TREATED UNDER THE CHAPTER 13 PLAN?
The Court may confirm your plan when you provide in your plan that secured creditors:
(1) have accepted the plan;
(2) are allowed to retain the lien securing their collateral;
(3) receive the full amount of their secured claim under the plan;
(4) are given back their collateral.
It is important to realize that a secured creditor is considered to have a secured claim only to the extent of the value of the security, which cannot exceed the value of the property securing the claim. For example, if a secured creditor has a lien on your car, and if the car is worth $500, then the creditor has a secured claim for only $500 regardless of how much you may owe him.
HOW DO I HANDLE SECURED CREDITORS TO WHOM I AM IN DEFAULT?
Defaults to secured creditors may be cured (brought current) within a reasonable time under your Chapter 13 plan.
HOW ARE DEBTS THAT HAVE BEEN CO-SIGNED OR GUARANTEED BY ANOTHER PERSON HANDLED UNDER CHAPTER 13?
If a consumer debt which has been co-signed or guaranteed by another person is being paid off in full under the Chapter 13 plan, the automatic stay that was entered when the case was filed will prevent the creditor from collecting the debt from the other person. However, the Court will permit the creditor to collect from the other person the portion of the debt that is not being off under the plan.
WHAT IS REQUIRED FOR COURT APPROVAL OF A CHAPTER 13 PLAN?
The Court will confirm a Chapter 13 plan if:
(a) the plan complies with the requirements of Chapter 13 generally;
(b) all required fees, charges, and deposits have been made;
(c) the plan has been proposed in good faith;
(d) each secured creditor has:
(1) accepted the plan;
(2) is given back his collateral;
(3) is allowed to retain his lien on his collateral;
(4) is paid the full amount of the secured claim under the plan;
(e) each unsecured creditor will receive under the plan at least as much as the creditor would have received if you had filed Chapter 7;
(f) it appears that the debtor will be able to make the required payments and comply with the plan.
WHAT IF THE COURT DOES NOT APPROVE MY CHAPTER 13 PLANS?
If the Court will not confirm your Chapter 13 plan that you have proposed, you may either modify the plan and seek Court approval of the modified plan, convert the case to Chapter 7, or dismiss the case. If the Court will not confirm the original plan, it will usually give the reasons for its disapproval so that the plan may be appropriately modified to be acceptable.
WHEN MUST THE CHAPTER 13 PAYMENTS BEGIN AND HOW OFTEN MUST THEY BE MADE?
Most Chapter 13 payments are made through a payroll deduction at your place of employment. Only in unusual circumstances will the Court allow plan payments to be made by you directly to the Trustee instead of by payroll deduction order. If you make a plan payment personally, do so only by money order, postal order, personal check, or cashier’s check. Be sure to include your name, address, and your case number.
A first payment must be made to the Chapter 13 Trustee within thirty (30) days of your filing bankruptcy. Thereafter, payments may be monthly, bi-weekly, weekly, or whatever best fits your financial situation. Do not send your payments to the Clerk of the Bankruptcy Court or to your attorney. This confuses things. If you are paying one of your debts directly, do not send those payments to the Trustee. This also confuses bookkeeping. If secured creditors are being paid through the Trustee’s office, do not send us your payment coupons.
Even through the Court will usually order your employer to deduct plan payments and send them to the Trustee, you must remember that YOU have the obligation to make sure payments are made. If you employer ever fails to make a plan payment deduction, you must tell your lawyer that the deduction was not made AND you must send the needed plan payment to the Trustee by money order, postal order, personal check, or cashier’s check. It is a good idea to keep your pay stubs to demonstrate that the deductions are taking place.
WHAT IF I AM TEMPORARILY UNABLE TO MAKE MY CHAPTER 13 PAYMENTS?
If you are temporarily out of work, injured, or otherwise unable to make the payments required under Chapter 13 plan, the Court will usually suspend the proceeding until you are able to resume the payments. If it appears that your inability to make the required payments will continue for an extended period, you may be permitted to amend your plan, or the case may be dismissed or converted to Chapter 7. It is very important to contact your attorney if you ever expect to miss a payment due to layoff, medical disability, etc.
WHAT IF I LATER DECIDE THAT I NO LONGER WANT TO MAKE PAYMENTS AND TO CONTINUE WITH THE CHAPTER 13 PLAN?
Federal Bankruptcy law allows the debtor to either dismiss a chapter 13 case or possibly convert it to Chapter 7 in most circumstances, regardless of his or her reason for doing so. No one can force you to remain under a Chapter 13 plan if you do not wish to remain. If you desire to stop your case, contact your attorney. Your request for dismissal of your plan must be in WRITING and sent to the Bankruptcy Court.
However, if you simply stop making the Chapter 13 payments, any creditor in your case may ask the Court to dismiss your case. The Trustee WILL ask the Court to dismiss your case if: (1) you fail to make your first payment within thirty (30) days of filing your bankruptcy and/or (2) if you fail to make your required payments regularly during any month of your plan.
You should understand that a DISMISSAL WILL REACTIVATE all unpaid or disputed debts, all interest, finance charges, all late charges not allowed by the Bankruptcy Court, and all debts of creditors who did not file their claims. Consider also that you will be forced to deal with those creditors on their terms, not yours or the Court’s.
HOW ARE THE CLAIMS OF CREDITORS HANDLED UNDER CHAPTER 13?
Creditors must file their claim with the Clerk of the Bankruptcy Court within ninety (90) days after the first date set for the First Meeting of Creditors in order for their claims to be allowed. Unsecured creditors who fail to file claims within this time period will be barred from filing a claim absent specific Court approval. Upon the completion of the plan, their claims will be discharged. The debtor may file a claim on behalf of a creditor if he or she wishes to do so. The Chapter 13 Trustee’s office also regularly contacts secured creditors who have not filed proofs of claim to remind them of the deadline and need to file their proofs of claims. If they do not file a proof of claim within a few days of the deadline, the debtor or the Chapter 13 Trustee will file a proof of claim on behalf of the secured creditor. This practice is followed as a protective measure to ensure effective administration of your plan.
CAN I SELL PROPERTY WHILE I’M IN A CHAPTER 13?
If you want to sell your property, trade in a car, or sell your home, be sure to discuss it with your attorney. Generally, you cannot dispose of any of your property, including real estate, without Court approval. If you dispose of your property without permission, the transaction may be set aside.
WHAT HAPPENS WHEN ALL PAYMENTS HAVE BEEN COMPLETED?
After you have successfully completed your plan – that is, when the Trustee has received enough money from you to pay your creditors what you promised to pay them – you will receive a notice of completion of payments and a notice of your discharge. After you receive the discharge, you will generally not owe any debts, other than alimony, child support, mortgage payments that could not be completed within the time limit of the plan, and taxes. If you are not sure which of your debts will be discharged, you should discuss that with your attorney when you meet with him or her. You may also receive a small refund check which is the amount of your last few payments not needed to pay your creditors.
WILL A CHAPTER 13 BANKRUPTCY AFFECT MY CREDIT RATING?
Your credit rating during and after completion of Chapter 13 will ultimately be based upon the personal opinion of any credit grantor who looks over your credit record. A credit rating is not A, B, or C, or 1, 2, or 3. It is a record of all your past credit performances. This record is made available to a creditor, and he or she makes up his or her own mind, by his or her own standards, as to whether or not he or she wants to grant credit to you. Suits, collections, attachments, straight bankruptcies, and Chapter 13 are indications, in one degree or another, of credit problems, Any credit record that has been blemished by a payment problem must be gradually rebuilt.