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Chapter 13 Bankruptcy

Filing Chapter 13 Bankruptcy

Save Your Home From Foreclosure

Americans typically file chapter 13 bankruptcy as a tool to stop mortgage foreclosure, stop sheriff sale, stop car repossession, stop garnishment, and stop lawsuits. If you file, you could save your home from foreclosure or save your car from repossession.

Generally, people who file chapter 13 bankruptcy are permitted to keep their property by repaying creditors out of their future income. Bankruptcy filers draft repayment plans which must be approved by the bankruptcy court at a court hearing. People who file chapter 13 bankruptcy must pay the chapter 13 trustee the amounts set forth in their plan. Bankruptcy filers receive a bankruptcy discharge after they complete their chapter 13 repayment plans.

But, chapter 13 is only available to individuals with regular income whose debts do not exceed a debt limit established by Congress--- currently $1,010,650 for secured debts and $336,900 for unsecured debts.


Chapter 13 Bankruptcy Basics

Chapter 13 bankruptcy is designed for individuals with regular income who would like to pay all or part of their debts in installments over a period of time. Individuals are willing to repay certain debts to stop foreclosure, stop repossession, stop wage garnishments, and stop sheriff sales.

The person filing chapter 13 bankruptcy to save the home is only eligible for chapter 13 if that person's debts do not exceed certain dollar amounts set forth in the bankruptcy laws. Under chapter 13 bankruptcy, the debtor must file with the court a plan to repay creditors all or part of the money that is owed them, using future earnings. The period allowed by the court to repay the debt may be three years, but no more than five years, dependinng upon income and other factors.

The bankruptcy court must approve the repayment plan before it can take effect. After completing the payments pursuant to the plan, the debts of the person filing chapter 13 bankruptcy are generally discharged except for domestic support obligations; most student loans; certain taxes; most criminal fines and restitution obligatons; certain debts which are not properly listed in the bankruptcy papers; certain debts for acts that caused death or personal injury; and certain long term secured obligations.

A chapter 13 bankruptcy case is the most common of the repayment plan cases. It enables individuals with regular income to develop a repayment plan to pay all or part of their debts. Under this chapter, the person filing chapter 13 proposes a repayment plan to make installments to creditors during a three to five year period. If current monthly income is less than the applicable median amount, the plan will be for three years unless the court approves a longer period for cause. If the bankruptcy filer's current monthly income is greater than the applicable median amount, the plan must be for five years. In no case may a plan provide for payments longer than five years. During the case, the bankruptcy law forbids creditors from starting or continuing collection efforts.

A person who knowingly and fraudulently conceals assets or makes a false oath or statement under penalty of perjury, either orally or in writing, in connection with a bankruptcy case is subject to a fine, imprisonment, or both. All information supplied by a person filing bankruptcy in connection with a bankruptcy case is subject to examination by the Attorney General acting through the Office of the United States Trustee, the Office of the United States Attorney, and other components and employees of the Department of Justice.

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Advantages of Filing Chapter 13 Bankruptcy

A person filing Chapter 13 bankruptcy enjoys a number of advantages that are not enjoyed by a person filing chapter 7 bankruptcy. Most importantly, you could save your home from foreclosure by filing chapter 13 bankruptcy. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still timely make all mortgage payments that come due during the chapter 13 plan. Another advantage of chapter 13 is that it allows individuals to modify the terms of the contracts with secured creditors (other than a mortgage for the primary residence) and extend the repayment terms over the life of the chapter 13 plan. Doing this may lower the monthly payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on consumer debts. This provision may protect spouses who co-sign on secured debt obligations. Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.

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Chapter 13 Eligibility

Both self-employed and traditionally employed people are eligible to file chapter 13 bankruptcy. But there are restrictions. The unsecured debts of the person filing chapter 13 must be less than $336,900 and secured debts must be less than $1,010,650. 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 willful failure of the person filing chapter 13 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, no individual may file a chapter 13 case that person has received credit counseling from an approved credit counseling agency within 180 days before filing. There are exceptions in emergency situations.

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How Chapter 13 Bankruptcy Works

There is much work to be done prior to filing a chapter 13 bankruptcy case. A comprehensive strategy should be employed to gather and review necessary financial documentation, digest the bankruptcy laws and procedure, and execute the bankruptcy petition, schedules, statements, and plan. An experienced bankruptcy attorney would be helpful to guide you through this process.

A chapter 13 bankruptcy case begins with the filing of a petition with the bankruptcy court in your district. In addition to filing the bankruptcy case, the person filing chapter 13 bankruptcy must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; (4) a schedule of executory contracts and unexpired leases; (5) a creditors matrix; (6) a repayment plan; and (7) a statement of monthly income/ means test . The person filing chapter 13 bankruptcy must file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling. Next, the person filing chapter 13 bankruptcy must also provide the assigned case trustee with copies of pay stubs/pay advices for the 60-day period prior to the date the case was filed. Plus, the person filing chapter 13 bankruptcy must provide the case trustee a copy of tax returns or IRS tax transcripts for the past four tax years as well as any tax returns filed during the case. A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors. Official bankruptcy forms are required and highly structured. These forms can be obtained from your bankruptcy attorney.

Filing bankruptcy is not free. The Clerk of the US Bankruptcy Court will charge the person filing chapter 13 bankruptcy $274 to file the bankruptcy case. The person filing chapter 13 bankruptcy must also pay for the pre-filing bankruptcy credit counseling course (approximately $25 to $50) and the bankruptcy filer must pay for the post-filing bankruptcy debtor education course (approximately $17 to $50).

In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, schedules, and plan, 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.

Married couples filing bankruptcy must gather the same information for both spouses regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing a bankruptcy case. In a situation where only one spouse is prepared to file a bankruptcy case, 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.

Filing a chapter 13 bankruptcy case automatically stays (stops) most collection actions against the person filing chapter 13 bankruptcy or their property. For example, file a chapter 13 bankruptcy case to stop foreclosure, stop sheriff sale, stop repossession, stop garnishment, and stop lawsuit. But there are exceptions. The filing of the bankruptcy case does not stop certain types of actions listed under 11 U.S.C. § 362(b), like police actions. The automatic stay would not be in effect at all if the person filing chapter 13 bankruptcy had two prior bankruptcy cases pending during the 12 month period prior to filing a new bankruptcy case; however, the bankruptcy court could impose the automatic stay on creditors after a motion and hearing. In other cases, the stay may be effective only for a short time; for example, the automatic stay would be in force for only 30 days (unless extended upon motion and a court hearing) if the person filing chapter 13 bankruptcy had one prior case pending during the 12 month period prior to filing a new bankruptcy case. The automatic stay arises automatically by operation of law and does not require any court hearing or judicial action. As long as the stay is in effect, creditors generally may not initiate and must stop foreclosure, stop sheriff sale, stop lawsuit, stop wage garnishment, demand letter, or even telephone calls demanding payments. The bankruptcy attorney could provide written notice to the creditors if a critical action is pending on the day the bankrutpcy case was filed. Either way, the bankruptcy clerk gives notice of the bankruptcy case filing to all creditors whose names and addresses are provided by the person filing bankruptcy .

When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. In some districts, the U.S. trustee or bankruptcy administrator 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 the person filing chapter 13 bankruptcy and making distributions to creditors.

The person filing chapter 13 bankruptcy is required to meet with the chapter 13 trustee between 20 and 40 days after the petition is filed. The trustee will conduct a Section 341 meeting of creditors to review the financial documents and court papers filed with the clerk of the court when the bankruptcy case was filed. During this meeting, the bankruptcy trustee places the person filing chapter 13 bankruptcy under oath, and both the trustee and creditors, if present, may ask questions. To file chapter 13 bankruptcy, a person must agree to attend the meeting in person. This is a great time to have a bankruptcy attorney at one's side. The person filing chapter 13 bankruptcy must truthfully answer questions regarding financial affairs and property. If both spouses have filed a joint petition, both must attend the creditors' meeting and answer questions.

Again, the person filing chapter 13 bankruptcy must tell the truth or risk losing the bankruptcy discharge. More importantly, false testimony under oath would be perjury and could result in criminal prosecution. The person filing chapter 13 bankruptcy is also required to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The bankruptcy laws require the trustee to ask questions at the meeting of creditors to ensure that the person filing chapter 13 bankruptcy is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on one's credit history, the ability to fund the repayment plan with future income, the ability to file a bankruptcy case under a different bankruptcy chapter, and the effect of receiving a discharge. Some trustees provide written information on these topics at or before the meeting to ensure that the person filing chapter 13 bankruptcy is aware of this information. The bankruptcy judge assigned to your case will not attend the meeting.

Most people who file chapter 13 bankruptcy file chapter 13 to save their home from foreclosure. The automatic stay stops a pending foreclosure proceeding as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. However, a person filing chapter 13 bankruptcy cannot prevent eviction by filing a chapter 13 bankruptcy case if the home was already lost to foreclosure. 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.

Any creditor hoping to receive distributions from the bankruptcy estate must file their proof of claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed file a proof of claim.

After the meeting of creditors, the person filing chapter 13 bankruptcy, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on the bankruptcy filer's chapter 13 repayment plan.

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The Chapter 13 Plan and Confirmation Hearing

The person filing chapter 13 bankruptcy must file a repayment plan within 15 days after the bankruptcy case is is filed. A plan must be submitted for court approval and must provide for payments of fixed amounts to the bankruptcy trustee on a regular basis, typically monthly. Once confirmed by the bankruptcy court, the trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.

There are three types of claims provided for in a repayment plan: priority, secured, and unsecured. Priority claims are unsecured claims held by creditors who are granted special status by the bankruptcy laws, such as most taxes and the costs of the bankruptcy proceeding. Secured claims are those for which the creditor, absent chapter 13 filing, could have the right to foreclosue on certain assets or reposses assets if the person filing chapter 13 does 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 the person filing chapter 13 bankruptcy.

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 the debtor contributes all disposable income towards a five-year repayment plan.

If you want to save your home, then the person filng bankruptcy must agree to pay future monthly mortgage payments in an amount consistent with the terms of the original note. No modification of the postpetition mortgage payment is allowed at this time, although Congress has been considering legislation. Any default in the mortgage payment obligation prior to the chapter 13 bankruptcy case being filed can be restructured in a chapter 13 plan. The mortgage arrearge can typically be repaid on a month-by-month basis over a several year period. If the person filing chapter 13 wants to keep other 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 to 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 and not just the value of the collateral at the time the case was filed. Payments to certain secured creditors may be extended beyond the original loan repayment schedule. This plan treatment can be quite confusing to non-attorneys, and a skilled bankruptfcy lawyer should be contacted 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 person filing bankruptcy will pay all income over the term of the plan and as long as unsecured creditors receive at least as much under the plan as they would receive if the assets of the person filing bankruptcy were liquidated under chapter 7.

The person filing chapter 13 bankrutpcy must start making monthly plan payments to the chapter 13 trustee within 30 days after filing the bankruptcy case. The first payment must be made even if the plan has not yet been approved by the court. Failure to make the plan payments is fundamental to confirming a repayment plan and a statutory ground to dismiss the bankruptcy case. If any secured loan payments or lease payments come due before the debtor's plan is confirmed, the person filing chapter 13 bankruptcy 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.

Creditors will receive 25 days notice of the hearing and may object to confirmation after reviewing its terms. Either a creditor or the trustee could object to the proposed repayment plan. The most frequent objections are that payments offered under the plan are not being paid to the trustee by the bankruptcy filer or that payments to be paid to creditors are less than creditors would receive if the assets owned by the person filing chapter 13 bankruptcy were liquidated or that the bankruptcy filier does not commit all projected disposable income for the required three or five year period.

The bankruptcy court will review the original or any modified repayment plan at the confirmation hearing. The confirmation hearing is typically held no later than 45 days after the meeting of creditors. At the hearing, the bankruptcy judge must decide whether the plan is feasible and meets the standards for confirmation set forth in the bankruptcy laws. 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, the bankruptcy filer may file a modified plan. Typically, the person filing bankruptcy will attempt to negotiate the resolution of any object prior to the confirmation hearing. If a resolution can be negotiated, then the repayment plan is modified and the court will entertain the modified plan. If the court will not confirm a modified plan or if the financial circumstances of the bankrutptcy filer has deteriorated since the case was filed, then the bankruptcy filer may consider converting the case to a chapter 7 case. 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 to the trustee and debtor's counsel, but the trustee must return all remaining funds to the person filing bankruptcy.

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Making the Plan Work

A confirmed bankruptcy plan is a binding arrangement. The prior contractual terms entered into prior to the bankruptcy are no longer controlling. Instead, the provisions of a confirmed plan bind the debtor and each creditor. The person filing bankruptcy must make every effort to make the plan succeed. The person filing chapter 13 bankruptcy must make regular payments to the trustee with certified funds either directly or through payroll deduction. Often, the hardest part of a chapter 13 case is the adjustment to living on a fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles the person filing bankruptcy to retain property as long as payments are made, no new debt may be incurred without court approval garnered after a motion and hearing. The court review the terms of the proposed additional debt with an eye towards the impact on the bankruptcy filer's ability to fund the plan.

The trustee prefers that the person filng chapter 13 bankruptcy make plan payments through payroll deductions. This practice increases the likelihood that payments will be made timely and that the plan will be completed successfully. If the person filing bankruptcy fails to make the payments due under the confirmed plan, then the court may dismiss the case or convert it to a liquidation case under chapter 7 of the bankruptcy laws. The court may also dismiss or convert the case if the bankruptcy filer fails to pay any post-filing domestic support obligations, including child support and alimony, or fails to make required tax filings during the case.

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The Chapter 13 Discharge

A person filing chapter 13 bankruptcy is entitled to a discharge upon completion of all payments under the chapter 13 plan so long as the bankruptcy filer: (1) certifies that all domestic support obligations that came due, if any, prior to making such certification have been paid; (2) has 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, 11 and 12 cases); and (3) has completed an approved course in financial management.

The discharge releases the person filing bankruptcy from all debts provided for by the plan or otherwise disallowed, with limited exceptions. Creditors provided for in full or in part under the chapter 13 plan are prohibited from initiating or continuing any legal action against the bankruptcy filer to collect the discharged obligations.

As a general rule, the discharge releases the person filing chapter 13 bankruptcy from all debts provided for by the plan or disallowed, with the exception of certain debts. 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 the bankruptcy filer's conviction of a crime. To the extent that they are not fully paid under the chapter 13 plan, the person filing chapter 13 bankruptcy 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 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 nondischargeable.

The discharge in a chapter 13 case is somewhat broader than the discharge in a chapter 7 case. Debts dischargeable in a chapter 13 case, but not in a chapter 7 case, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.

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The Chapter 13 Hardship Discharge

After confirmation of a plan, circumstances may arise that prevent the person filing chapter 13 bankruptcy from completing the plan. In such situations, like severe disability, the bankruptcy filer may petition the court to grant a hardship discharge. Generally, such a discharge is available only if: (1) the failure to complete payments is due to circumstances for which the bankruptcy filer should not be justifiably held accountable; (2) the value of property actually distributed under the plan on each allowed unsecured claim is not less than the amount that would have been paid had the estate been liquidated under chapter 7; and (3) modification of the plan is not practicable. Severe physical injury or mental 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 nondischargeable in a chapter 7 case.

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