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Chapter 13 Bankruptcy Q&A

The basic difference between Chapter 7 and Chapter 13 is that under Chapter 7 the debtor’s nonexempt prop­erty (if any exists) is liquidated to pay as much as possible of the debtor’s debts, while in most Chapter 13 cases a portion of the debtor’s future income is used to pay as much of the debtor’s debts as is feasible considering the debtor’s circumstances. As a practical matter, under Chapter 7 the debtor loses all or most of his or her nonexempt property and receives a Chapter 7 discharge, which releases the debtor from liability for most debts. Under Chapter 13, the debtor usually retains his or her nonexempt property, must pay off as much of his or her debts as the court deems feasible, and receives a Chapter 13 discharge, which is broader than a Chapter 7 discharge.  A Chapter 13 discharge releases the debtor from liability for several types of debts that are not dischargeable under Chapter 7. However, a Chapter 13 case normally lasts much longer than a Chapter 7 case and is usually more expensive for the debtor.

Chapter 13 is usually preferable for a person who – (1) wishes to avoid a foreclosure by paying back a mortgage arrearage over time; (2) wishes to repay all or most of his or her unsecured debts and has the income with which to do so within a reasonable time, (3) has valuable nonexempt property which would be lost in a Chapter 7 case, (4) is not eligible for a discharge under Chapter 7, (4) has one or more substantial debts that are dischargeable under chapter 13 but not under Chapter 7, (5) has sufficient assets with which to repay most debts, but needs temporary relief from credi­tors in order to do so, or (6) has tax recent tax debt that may not be dischargeable and can be paid off in a plan.

In a Chapter 13 case, the bankruptcy court can provide aid to the debtor that private debt consolidation services cannot provide. For example, the court has the authority to prohibit creditors from attaching or foreclosing on the debtor’s property, to force unsecured creditors to accept a Chapter 13 plan that pays only a portion of their claims, and to discharge a debtor from unpaid portions of debts. In addition, the bankruptcy discharge of the debt is not subject to income tax.  Private debt consolidation services have none of these powers.

It is a court order releasing a debtor from all dischargeable debts and ordering creditors not to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. There are two types of chapter 13 discharges: (1) a full or successful plan discharge, which is granted to a debtor who completes all payments called for in the plan, and (2) a partial or unsuccessful plan discharge, which is granted to a debtor who is unable to complete the payments called for in the plan due to circumstances for which the debtor should not be held accountable. A full Chapter 13 discharge is broader and discharges more debts than a Chapter 7 discharge, while a partial Chapter 13 discharge is similar to a Chapter 7 discharge.

A full Chapter 13 discharge granted upon the completion of all payments required in the plan discharges a debtor from all debts except

  1. debts that were paid outside of the plan and not covered in the plan,
  2. debts for alimony, maintenance, or support,
  3. debts for death or personal injury caused by the debtor’s operation of a motor vehicle while unlawfully intoxicated,
  4. debts for restitution or criminal fines included in a criminal sentence imposed on the debtor,
  5. debts for most student loans or educational obligations,
  6. installment debts whose last payment is due after the completion of the plan, and
  7. debts incurred while the plan was in effect that were not paid under the plan.
  8. fraudulently incurred debts.

A partial Chapter 13 discharge granted when a debtor is unable to complete the payments under a plan due to circumstances for which the debtor should not be held accountable, discharges the debtor from all debts except

  1. secured debts (i.e., debts secured by mortgages or liens),
  2. debts that were paid outside of the plan and not covered in the plan,
  3. installment debts whose last payment is due after the completion of the plan,
  4. debts incurred while the plan was in effect that were not paid under the plan, and
  5. debts that are not dischargeable under chapter 7.

It is a written plan presented to the bankruptcy court by a debtor that states how much money or other prop­erty the debtor will pay to the chapter 13 trustee, how long the debtor’s payments to the chapter 13 trustee will continue, how much will be paid to each of the debtor’s creditors, which creditors will be paid outside of the plan, and certain other technical matters.

No. While priority debts, such as debts for alimony, maintenance and support and debts for taxes, and fully secured debts must be paid in full under a Chapter 13 plan, only an amount that the debtor can reasonably afford must be paid on most other debts. The unpaid balances of most debts that are not paid in full under a Chapter 13 plan are discharged upon completion of the plan.

Usually all of the disposable income of the debtor and the debtor’s spouse for a three-year period must be paid to the Chapter 13 trustee. Disposable income is income received by the debtor and his or her spouse that is not rea­sonably necessary for the support of the debtor and the debtor’s dependents. However, if the debtor earns more than the median income in the state in which he resides, he or she may be forced to be in a five year plan.

The debtor must begin making payments to the Chapter 13 trustee within 30 days after the debtor’s case is filed with the court, and the plan must be filed with the court within 15 days after the case is filed. The payments must be made regularly, usually on a monthly basis. If the debtor is employed, some courts require the payments to be made by the debtor’s employer; otherwise, the payments can be made by either the debtor or the debtor’s employer.

A chapter 13 plan must last for three years to five years, unless all debts can be paid off in full in less time.

Any natural person may file under Chapter 13 if the person – (1) resides in, does business in, or owns property in the United States, (2) has regular income, (3) has unsecured debts of less than $419,275*, (4) has secured debts of less than $1,257,850*, (5) is not a stockbroker or a commodity broker, and (6) has not been a debtor in another bankruptcy case that was dismissed within the last 180 days on certain technical grounds. A person meeting the above requirements may file under Chapter 13 regardless of when he or she last filed a bankruptcy case or received a bankruptcy discharge. Corporations, partnerships, and limited liability companies may not file under Chapter 13.

*The debt limits are subject to change every 3 years.

A husband and wife may file jointly under Chapter 13 if each of them meets the requirements listed in the answer to Question 18 above, except that only one of them need have regular income and their combined debts must meet the debt limitations described in the answer to Question 18 above.

If both spouses are liable for any significant debt, they should file jointly under chapter 13, even if only one of them has income.  Also, if both of them have regular income, they should file jointly.

Yes.  A self-employed person meeting the eligibility requirements listed m the answer to Question 18 above may file under Chapter 13.  A debtor engaged in business may continue to operate the business during the Chapter 13 case.

In a typical first bankruptcy filing, the filing of a Chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor’s property, except in certain cases involving residential landlord tenant matters. A few days after the case is filed, the court will mail a notice to all creditors advising them of the automatic stay. Certain creditors may be notified sooner, if necessary. Most creditors are prohibited from proceeding against the debtor during the entire course of the Chapter 13 case. If the debtor is later granted a Chapter 13 discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor after the case is closed.

It may worsen it, at least temporarily. However, if most of a person’s debts are ultimately paid off under a Chapter 13 plan, that fact may be taken into account by credit reporting agencies. If very little is paid on most debts, the credit-rating effect of a Chapter 13 case may be similar to that of a chapter 7 case.

When a Chapter 13 case is filed, it becomes a public record and the name of the debtor may be published by some credit reporting agencies. However, newspapers do not usually publish the names of persons who file under Chapter 13.

It depends. Some courts require a debtor’s employer to make payments to the chapter 13 trustee on the debtor’s behalf. Typically, that is not the case in the Eastern District of Pennsylvania. Also, the Chapter 13 trustee may contact an employer to verify the debtor’s income. However, if there are compelling reasons for not informing an employer in a particular case, it may be possible to make other arrangements for the required information and payments.

The debtor has the right to either dismiss a Chapter 13 case or convert it to Chapter 7 at any time for any reason. However, if the debtor simply stops making the required Chapter 13 payments, the court may compel the debtor or the debtor’s employer to make the payments and to comply with the orders of the court. Therefore, the debtor who wishes to discontinue a Chapter 13 case should do so through his or her attorney.

Only two types of credit obligations or debts incurred after the filing of the case may be included in a Chapter 13 plan. These are (1) debts for taxes that become payable while the case is pending, and (2) consumer debts arising after the filing of the case that are for property or services necessary for the debtor’s performance under the plan and that are approved in advance by the Chapter 13 trustee All other debts or credit obligations incurred after the case is filed must be paid by the debtor outside the plan Some courts issue an order prohibiting the debtor from incurring new debts during the case unless they are approved in advance by the Chapter 13 trustee.  Therefore, the approval of the Chapter 13 trustee should be obtained before incurring credit or new debts after the case has been filed.  The incurrence of regular debts, such as debts for telephone service and utilities, do not require the trustee’s approval.

If the debtor is temporarily out of work, injured, or otherwise unable to make the payments required under a Chapter 13 plan, the plan can usually be modified so as to enable the debtor to resume the payments when he or she is able to do so. If it appears that the debtor’s inability to make the required payments will continue indefi­nitely or for an extended period of time, the case may be dismissed or converted to Chapter 7.

Unsecured creditors must file their claims with the bankruptcy court within 90 days after the first date set for the meeting of creditors in order for their claims to be allowed. Unsecured creditors who fail to file claims within that period are barred from doing so, and upon completion of the plan their claims will be discharged. The debtor may file a claim on behalf of a creditor, if desired. After the claims have been filed, the debtor may file objections to any claims that he or she disputes. When the claims have been approved by the court, the Chapter 13 trustee begins paying unsecured creditors as provided for in the Chapter 13 plan. Payments to secured creditors, priority creditors, and special classes of unsecured creditors may begin earlier, if desired.

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