Reorganization of Debts of an Individual with Regular Income
OVERVIEW
Chapters 13 is designed for individuals with regular income who desire to pay their debts but are currently unable to do so. The purpose of Chapter 13 is to enable financially distressed individual debtors, under court supervision and protection, to propose and carry out a repayment plan whereby creditors are paid over an extended period of time. Pursuant to this chapter, debtors are permitted to repay creditors, in full or in part, in installments over a 4 to 5 year period, during which time creditors are prohibited from contacting or trying to collect on any debt. The typical plan is for a period of 4 to 5 years. However, in no case may a plan provide for payments over a period that is more than 5 years.
Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as his or her unsecured debts are less than $269,250 and secured debts are less than $807,750. 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 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.
HOW CHAPTER 13 WORKS
A Chapter 13 case begins with the filing of the appropriate petition, schedules, statement of financial affairs and Chapter 13 plan. A husband and wife may file a joint petition or individual petitions.
In order to complete all of the aforementioned paperwork the following information is needed:
- A schedule of all creditors and collection agents (including agencies, attorneys and law firms), containing complete addresses, account numbers, amounts claimed due, and dates each debt was incurred;
- A schedule of the debtor’s real and personal property; and
- The amounts of the debtor’s monthly household income and living expenses, i.e., food, clothing, rent or mortgage payments, utilities, insurance, transportation, medical expenses, child care costs, etc.
When a husband and wife file a joint petition or each spouse files an individual petition they should be sure to gather the above detailed data for both spouses. In order to accurately assess financial responsibilities, however, when only one spouse files, the income and expenses of the non-filing spouse must be included.
Currently, the filing fee for a chapter 13 is $185.00 per case. This is the Courts fee and not the legal fee. In addition to the Court’s fee, there is also a legal fee which is dependant upon the amount of work involved with the case.
Upon the filing of the appropriate paperwork, the Chapter 13 Trustee, Ms. Ronda Winnecour, is appointed to administer the case. A primary role of the Chapter 13 Trustee is to serve as a disbursing agent, collecting payments from debtors and making distributions to creditors.
The filing of the petition under Chapter 13 “automatically stays”, any contact in any manner against the debtor or the debtor’s property. As long as the “stay” is in effect, creditors generally cannot initiate or continue any lawsuit, garnishments, or demanding payment. Creditors receive notice of the filing of the case from the Court. Additionally, after the commencement of 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 jointly liable with the debtor, known as a co-debtor.
By virtue of the automatic stay, an individual debtor faced with a threatened foreclosure of the mortgage on his or her principal residence can prevent an immediate sheriff’s sale by filing a Chapter 13 petition. Chapter 13 then affords the debtor the opportunity to catch up on back payments on the mortgage by bringing payments current over a reasonable period of time.
The debtor must file a plan of repayment with the original filing or within 15 days thereafter, unless extended by the court for cause. The chapter 13 plan must provide for the full payment of some claims, such as, tax claims or claims for alimony maintenance or child support, unless the holder of a particular claim agrees to different treatment of the amounts to the trustee on a regular basis, typically monthly. The trustee then distributes the funds to the creditor according to the terms of the plan, which may offer creditors less than full payment on their claims. If the trustee or a creditor objects to confirmation of the plan, the debtor is obligated to pay the amount of the claim or commit to the proposed plan all projected “disposable income” during the period in which the plan is in effect. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or debtor’s dependents.
Within 30 days after the filing of the plan, even if the plan has not yet been approved by the court, the debtor must start making payments to the trustee. A meeting of creditors is usually held 45 to 90 days after the petition is filed. The debtor must attend this meeting and provide proof of his or her social security number, usually through a social security card, and a valid photo ID. Creditors are permitted to appear and ask questions regarding the debtor’s financial affairs and the proposed terms of the plan. If a husband and wife have filed one joint petition, they both must attend the creditors’ meeting. The trustee also will attend this creditors’ meeting. The trustee also will attend this meeting and question the debtor on the same matters. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending. If there are problems with the plan they are typically resolved during or shortly after the creditors’ meeting. Generally, problems may be avoided if the petition and plan re complete and accurate. In a Chapter 13 case, unsecured creditors who have claims against the debtor must file their claims with the clerk’s office within 90 days after the first date set for the meeting of creditors.
If the plan is confirmed by the bankruptcy judge, the Chapter 13 trustee commences distribution of the funds received. If the plan is not confirmed, the debtor has a right to file an amended plan. The debtor also has a right to convert the case to Chapter 7. If the plan or amended plan is not confirmed and the case is dismissed, the court may authorize the trustee to retain a specified amount for costs, but all other funds paid to the trustee are returned to the debtor.
On occasion, changed circumstances will affect a debtor’s ability to make plan payments, a creditor may object o a plan, or a debtor may inadvertently have failed to list all creditors. In such instances, the plan may be amended either before or after confirmation.
MAKING THE PLAN WORK
The provisions of a confirmed plan are binding on the debtor and each creditor. Once the court confirms the plan, it is the responsibility of the debtor to make the plan succeed. The debtor must make regular payments to the trustee, which will require adjustment to living on a fixed budget for a prolonged period. In the Western District of Pennsylvania, there is a local rule that mandates a wage attachment of the debtor’s income, if the debtor is an employee or has attachable income. Pursuant to a wage attachment, the amount of the plan payment is deducted from the debtor’s paycheck and is forwarded to the Chapter 13 trustee. Furthermore, while confirmation of the plan entitles the debtor to retain property as long as payments are made, the debtor should not incur any significant new credit obligations without consulting the trustee, as such credit obligations may have an impact upon the success plan.
THE CHAPTER 13 DISCHARGE
The bankruptcy law regarding the scope of the Chapter 13 discharge is complex and has recently undergone major changes. The Chapter 13 debtor is entitled to a discharge upon successful completion of all payments under the Chapter 13 plan. The discharge has the effect of releasing the debtor from all debts provided for b the plan or disallowed with limited exceptions. Those creditors who were provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
In return for the willingness of the Chapter 13 debtor to undergo the discipline of a repayment plan for 3 to 5 years, a broader discharge is available under Chapter 13 than in a Chapter 7 case. As a general rule, the debtor is discharged from all debts provided for by the plan or disallowed except certain long term obligations (such as a mortgage), debts for alimony or child support, debts for most government funded or guaranteed educational loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution included in a sentence on the debtor’s conviction of a crime. To the extent that these types of special debts are not fully paid to the Chapter 13 plan, the debtor will remain responsible for payment of any balance after the bankruptcy case has concluded.
