Chapter 13 is known as the wage earner or
repayment plan bankruptcy. You can think of
Chapter 13 as a debt consolidation, where
you group all your debt together, and repay
creditors over three to five years through
an installment payment plan formulated with
the help of your attorney. Chapter 13 can be
filed more often than Chapter 7, as long as
it is filed in "good faith".
The main advantage of filing under Chapter
13 is that your property is not liquidated
by the trustee as in Chapter 7. You keep all
of your property as long as you comply with
the plan. But you are not completely
discharging your debt. You must pay your
creditors a percentage on the dollar
established in accordance with your assets
and ability to pay.
Not everyone can file under Chapter 13. For
instance, there is a debt ceiling, or limit
to the amount of debt you can have. Total secured
debt cannot exceed $750,000, and
unsecured debt cannot exceed $250,000.
The plan must also be feasible. To be
eligible, you must have regular income such
as wages, pensions, self-employment or other
income sufficient to fund the plan. The plan
cannot run longer than five years, and you
must show the court that you have enough
disposable income to pay your plan payments
within that time.
Corporations cannot file under Chapter 13,
and must use the more complex and expensive
Chapter 11 bankruptcy if they wish to
reorganize. A business proprietor that is
not incorporated, however, can file under
Chapter 13 provided the debt ceiling and
other provisions under Chapter 13 are met.
The Chapter 13 Trustee acts
as a disbursing agent. He collects your
installment payments, and distributes them
to creditors according to the plan.
All creditors may not be fully paid.
Unsecured creditors, in many cases, may be
paid only a small percentage on the dollar,
and upon successful completion of the plan
the remainder of their debt is discharged similar
to Chapter 7.
To determine how much of your creditors will
be paid in Chapter 13, the bankruptcy
code provides two guidelines which
determine the minimum amount unsecured
creditors must receive through the plan.
First, the disposable income test requires
that you pledge all of your disposable
income into the plan for at least a three
year period of time. Disposable income is
your monthly income after your monthly
living expenses are paid. In other words,
you must pay unsecured creditors as much as
you can afford for at least three years.
Second, under the Chapter 7 test, you must
pay unsecured creditors the same amount
through your Chapter 13 plan as they would
get had your property been liquidated under
Chapter 7. Put another way, your plan must
pay unsecured creditors an amount equal to
the value of your non-exempt property.
Let's take an example. Assume we have a
husband and wife owning a home with $30,000
worth of equity.
Remember, only $20,000 worth of equity can
be exempted. That leaves $10,000 worth of
equity which, theoretically, would have been
distributed to unsecured creditors if a
Chapter 7 petition were filed. So, under the
Chapter 7 test, this means that unsecured
creditors must receive a total of $10,000
over the duration of a Chapter 13 plan. Now,
let's assume there is $14,000 in total unsecured
debt. By dividing $14,000 into the
minimum $10,000 to be paid, you arrive at
the percentage to be paid to unsecured
creditors. 10,000 divided by 14,000 equals
0.71 or seventy-one cents on the dollar.
What about priority and secured debts? In
every case, your plan must pay priority
creditors in full. Also, secured creditors
are entitled to be paid an amount equal to
the value of their collateral.
The difference between the value of the
collateral and the balance of the note is
the unsecured portion of the debt, and is
grouped together and paid the same
percentage as the other unsecured debts such
as credit cards.
You must also provide for a trustee
commission of approximately 5% of the total
debt paid through the plan. A simplified
Chapter 13 Plan would look like the chart
below. Let's assume this debtor owes $1,500
in back taxes, has $12,000 in credit card
and other unsecured debt, and has a $6,000
loan secured with a car having a value of
$4,000. Also, let's assume this debtor has
no non-exempt equity and very little
disposable income, which makes this debtor
eligible to pay the minimum five cents on
the dollar to their unsecured creditors.
Similar to Chapter 7, in Chapter 13 you must
attend a Section 341 meeting
of creditors, held within 45 days of the
filing. Unlike Chapter 7, however, the
meeting is followed by a confirmation
hearing. At the confirmation hearing, the
plan is presented to a bankruptcy judge for
his review. If there are no objections, and
the plan meets the requirements of Chapter
13, then the judge will confirm the plan,
which makes it binding uponcreditors.
The first payment under the plan is due
approximately 30 days after filing the
petition. Thereafter, the payments must be
made regularly under the terms of the plan. Debtors can
make payments to the trustee themselves, or
for convenience, the payments can be
deducted directly from their wages.
Chapter 13 may have some advantages aside
from allowing you to retain property which
is otherwise non-exempt in Chapter 7. For
instance, your co-signors are protected if
the co-signed debt is paid in full through
the plan. Delinquent mortgage payments,
back property taxes and missed car payments
can be paid through the plan to stop foreclosure or
Chapter 13 is commonly used to save a home
from foreclosure. Under the code, a plan
which proposes to pay all mortgage arrears
through the plan can decelerate a mortgage default.
You must, however, have enough disposable
income both to fund the plan, and to start
making the current mortgage payments once
again directly to the lender as they become
due after the petition is filed. You can pay
student loans, child support arrears or
restitution through the plan, and some debts
which are non-dischargeable in Chapter 7 may
be partially dischargeable as an unsecured
debt in Chapter 13.