Individual
Debt Adjustment
 The
chapter of the Bankruptcy Code providing for adjustment
of debts of an individual with regular income.
(Chapter 13 allows a debtor to keep property and
pay debts over time, usually three to five years.)
a. Background
b. Advantages of Chapter 13
c. Chapter 13 Eligibility
d. How Chapter 13 Works
e. The Chapter 13 Plan and Confirmation Hearing
f. Making the Plan Work
g. The Chapter 13 Discharge
h. The Chapter 13 Hardship Discharge
Background
A chapter 13 bankruptcy is also called a wage
earner's plan. It enables individuals with regular
income to develop a plan to repay all or part
of their debts. Under this chapter, debtors propose
a repayment plan to make installments to creditors
over three to five years. If the debtor's current
monthly income is less than the applicable state
median, the plan will be for three years unless
the court approves a longer period "for cause."
(1) If the debtor's current monthly income is
greater than the applicable state median, the
plan generally must be for five years. In no case
may a plan provide for payments over a period
longer than five years. 11 U.S.C. §1322(d).
During this time the law forbids creditors from
starting or continuing collection efforts.
This chapter discusses six aspects of a chapter
13 proceeding: the advantages of choosing chapter
13, the chapter 13 eligibility requirements, how
a chapter 13 proceeding works, what may be included
in chapter 13 repayment plan and how it is confirmed,
making the plan work, and the special chapter
13 discharge.
Advantages of Chapter
13
Chapter 13 offers individuals a number of advantages
over liquidation under chapter 7. Perhaps most
significantly, chapter 13 offers individuals an
opportunity to save their homes from foreclosure.
By filing under this chapter, individuals can
stop foreclosure proceedings and may cure delinquent
mortgage payments over time. Nevertheless, they
must still make all mortgage payments that come
due during the chapter 13 plan on time. Another
advantage of chapter 13 is that it allows individuals
to reschedule secured debts (other than a mortgage
for their primary residence) and extend them over
the life of the chapter 13 plan. Doing this may
lower the 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 co-signers. Finally,
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.
Chapter 13 Eligibility
Any individual, even if self-employed or operating
an unincorporated business, is eligible for chapter
13 relief as long as the individual's unsecured
debts are less than $336,900 and secured debts
are less than $1,010,650. 11 U.S.C. § 109(e).
These amounts are adjusted periodically to reflect
changes in the consumer price index. A corporation
or partnership may not be a chapter 13 debtor.
Id.
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. 11 U.S.C.
§§ 109(g), 362(d) and (e). In addition,
no individual may be a debtor under chapter 13
or any chapter of the Bankruptcy Code unless he
or she has, within 180 days before filing, received
credit counseling from an approved credit counseling
agency either in an individual or group briefing.
11 U.S.C. §§ 109, 111. There are exceptions
in emergency situations or where the U.S. trustee
(or bankruptcy administrator) has determined that
there are insufficient approved agencies to provide
the required counseling. If a debt management
plan is developed during required credit counseling,
it must be filed with the court.
How Chapter 13
Works
A chapter 13 case begins by filing a petition
with the bankruptcy court serving the area where
the debtor has a domicile or residence. Unless
the court orders otherwise, the debtor must also
file with the court: (1) schedules of assets and
liabilities; (2) a schedule of current income
and expenditures; (3) a schedule of executory
contracts and unexpired leases; and (4) a statement
of financial affairs. Fed. R. Bankr. P. 1007(b).
The debtor must also file a certificate of credit
counseling and a copy of any debt repayment plan
developed through credit counseling; evidence
of payment from employers, if any, received 60
days before filing; a statement of monthly net
income and any anticipated increase in income
or expenses after filing; and a record of any
interest the debtor has in federal or state qualified
education or tuition accounts. 11 U.S.C. §
521. The debtor must provide the chapter 13 case
trustee with a copy of the tax return or transcripts
for the most recent tax year as well as tax returns
filed during the case (including tax returns for
prior years that had not been filed when the case
began). Id. A husband and wife may file a joint
petition or individual petitions. 11 U.S.C. §
302(a). (The Official Forms may be purchased at
legal stationery stores or downloaded from the
Internet at www.uscourts.gov/bkforms/index.html.
They are not available from the court.)
The courts must charge a $235 case filing fee
and a $39 miscellaneous administrative fee. Normally
the fees must be paid to the clerk of the court
upon filing. With the court's permission, however,
they may be paid in installments. 28 U.S.C. §
1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy
Court Miscellaneous Fee Schedule, Item 8. The
number of installments is limited to four, and
the debtor must make the final installment no
later than 120 days after filing the petition.
Fed. R. Bankr. P. 1006(b). For cause shown, the
court may extend the time of any installment,
as long as the last installment is paid no later
than 180 days after filing the petition. Id. The
debtor may also pay the $39 administrative fee
in installments. If a joint petition is filed,
only one filing fee and one administrative fee
are charged. Debtors should be aware that failure
to pay these fees may result in dismissal of the
case. 11 U.S.C. § 1307(c)(2).
In order to complete the Official Bankruptcy Forms
that make up the petition, statement of financial
affairs, and schedules, 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 individuals must gather this information
for their spouse regardless of whether they are
filing a joint petition, separate individual petitions,
or even if only one spouse is filing. In a situation
where only one spouse files, 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.
When an individual files a chapter 13 petition,
an impartial trustee is appointed to administer
the case. 11 U.S.C. § 1302. In some districts,
the U.S. trustee or bankruptcy administrator (2)
appoints a standing trustee to serve in all chapter
13 cases. 28 U.S.C. § 586(b). The chapter
13 trustee both evaluates the case and serves
as a disbursing agent, collecting payments from
the debtor and making distributions to creditors.
11 U.S.C. § 1302(b).
Filing the petition under chapter 13 "automatically
stays" (stops) most collection actions against
the debtor or the debtor's property. 11 U.S.C.
§ 362. Filing the petition does not, however,
stay certain types of actions listed under 11
U.S.C. § 362(b), and the stay may be effective
only for a short time in some situations. The
stay arises by operation of law and requires no
judicial action. As long as the stay is in effect,
creditors generally may not initiate or continue
lawsuits, wage garnishments, or even make telephone
calls demanding payments. The bankruptcy clerk
gives notice of the bankruptcy case to all creditors
whose names and addresses are provided by the
debtor.
Chapter 13 also contains a special automatic stay
provision that protects co-debtors. Unless the
bankruptcy court authorizes otherwise, a creditor
may not seek to collect a "consumer debt"
from any individual who is liable along with the
debtor. 11 U.S.C. § 1301(a). Consumer debts
are those incurred by an individual primarily
for a personal, family, or household purpose.
11 U.S.C. § 101(8).
Individuals may use a chapter 13 proceeding to
save their home from foreclosure. The automatic
stay stops the 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. Nevertheless,
the debtor may still lose the home if the mortgage
company completes the foreclosure sale under state
law before the debtor files the petition.11 U.S.C.
§ 1322(c). 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.
Between 20 and 50 days after the debtor files
the chapter 13 petition, the chapter 13 trustee
will hold a meeting of creditors. If the U.S.
trustee or bankruptcy administrator schedules
the meeting at a place that does not have regular
U.S. trustee or bankruptcy administrator staffing,
the meeting may be held no more than 60 days after
the debtor files. Fed. R. Bankr. P. 2003(a). During
this meeting, the trustee places the debtor under
oath, and both the trustee and creditors may ask
questions. The debtor must attend the meeting
and answer questions regarding his or her financial
affairs and the proposed terms of the plan.11
U.S.C. § 343. If a husband and wife file
a joint petition, they both must attend the creditors'
meeting and answer questions. In order to preserve
their independent judgment, bankruptcy judges
are prohibited from attending the creditors' meeting.
11 U.S.C. § 341(c). The parties typically
resolve problems with the plan either during or
shortly after the creditors' meeting. Generally,
the debtor can avoid problems by making sure that
the petition and plan are complete and accurate,
and by consulting with the trustee prior to the
meeting.
In a chapter 13 case, to participate in distributions
from the bankruptcy estate, unsecured creditors
must file their claims with the court within 90
days after the first date set for the meeting
of creditors. Fed. R. Bankr. P. 3002(c). A governmental
unit, however, has 180 days from the date the
case is filed file a proof of claim.11 U.S.C.
§ 502(b)(9).
After the meeting of creditors, the debtor, the
chapter 13 trustee, and those creditors who wish
to attend will come to court for a hearing on
the debtor's chapter 13 repayment plan.
The Chapter 13
Plan and Confirmation Hearing
Unless the court grants an extension, the debtor
must file a repayment plan with the petition or
within 15 days after the petition is filed. Fed.
R. Bankr. P. 3015. A plan must be submitted for
court approval and must provide for payments of
fixed amounts to the trustee on a regular basis,
typically biweekly or monthly. 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: priority, secured,
and unsecured. Priority claims are those granted
special status by the bankruptcy law, such as
most taxes and the costs of bankruptcy proceeding.
(3) Secured claims are those for which the creditor
has the right take back certain property (i.e.,
the collateral) if the debtor 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 debtor.
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" - discussed
below - to a five-year plan.11 U.S.C. § 1322(a).
If the debtor wants to keep the 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 the 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, not just the value of
the collateral (which may be less due to depreciation).
Payments to certain secured creditors (i.e., the
home mortgage lender), may be made over the original
loan repayment schedule (which may be longer than
the plan) so long as any arrearage is made up
during the plan. The debtor should consult an
attorney 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 debtor will pay all
projected "disposable income" over an
"applicable commitment period," and
as long as unsecured creditors receive at least
as much under the plan as they would receive if
the debtor's assets were liquidated under chapter
7. 11 U.S.C. § 1325. In chapter 13, "disposable
income" is income (other than child support
payments received by the debtor) less amounts
reasonably necessary for the maintenance or support
of the debtor or dependents and less charitable
contributions up to 15% of the debtor's gross
income. If the debtor operates a business, the
definition of disposable income excludes those
amounts which are necessary for ordinary operating
expenses. 11 U.S.C. § 1325(b)(2)(A) and (B).
The "applicable commitment period" depends
on the debtor's current monthly income. The applicable
commitment period must be three years if current
monthly income is less than the state median for
a family of the same size - and five years if
the current monthly income is greater than a family
of the same size. 11 U.S.C. § 1325(d). The
plan may be less than the applicable commitment
period (three or five years) only if unsecured
debt is paid in full over a shorter period.
Within 30 days after filing the bankruptcy case,
even if the plan has not yet been approved by
the court, the debtor must start making plan payments
to the trustee. 11 U.S.C. § 1326(a)(1). If
any secured loan payments or lease payments come
due before the debtor's plan is confirmed (typically
home and automobile payments), the debtor 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. Id.
No later than 45 days after the meeting of creditors,
the bankruptcy judge must hold a confirmation
hearing and decide whether the plan is feasible
and meets the standards for confirmation set forth
in the Bankruptcy Code. 11 U.S.C. §§
1324, 1325. Creditors will receive 25 days' notice
of the hearing and may object to confirmation.
Fed. R. Bankr. P. 2002(b). While a variety of
objections may be made, the most frequent ones
are that payments offered under the plan are less
than creditors would receive if the debtor's assets
were liquidated or that the debtor's plan does
not commit all of the debtor's projected disposable
income for the three or five year applicable commitment
period.
If the court confirms the plan, the chapter 13
trustee will distribute funds received under the
plan "as soon as is practicable." 11
U.S.C. § 1326(a)(2). If the court declines
to confirm the plan, the debtor may file a modified
plan. 11 U.S.C. § 1323. The debtor may also
convert the case to a liquidation case under chapter
7. (4) 11 U.S.C. § 1307(a). 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,
but the trustee must return all remaining funds
to the debtor (other than funds already disbursed
or due to creditors). 11 U.S.C. § 1326(a)(2).
Occasionally, a change in circumstances may compromise
the debtor's ability to make plan payments. For
example, a creditor may object or threaten to
object to a plan, or the debtor may inadvertently
have failed to list all creditors. In such instances,
the plan may be modified either before or after
confirmation. 11 U.S.C. §§ 1323, 1329.
Modification after confirmation is not limited
to an initiative by the debtor, but may be at
the request of the trustee or an unsecured creditor.
11 U.S.C. § 1329(a).
Making the Plan
Work
The provisions of a confirmed plan bind the debtor
and each creditor. 11 U.S.C. § 1327. Once
the court confirms the plan, the debtor must make
the plan succeed. The debtor must make regular
payments to the trustee either directly or through
payroll deduction, which will require adjustment
to living on a fixed budget for a prolonged period.
Furthermore, while confirmation of the plan entitles
the debtor to retain property as long as payments
are made, the debtor may not incur new debt without
consulting the trustee, because additional debt
may compromise the debtor's ability to complete
the plan. 11 U.S.C. §§ 1305(c), 1322(a)(1),
1327.
A debtor may make plan payments through payroll
deductions. This practice increases the likelihood
that payments will be made on time and that the
debtor will complete the plan. In any event, if
the debtor fails to make the payments due under
the confirmed plan, the court may dismiss the
case or convert it to a liquidation case under
chapter 7 of the Bankruptcy Code. 11 U.S.C. §
1307(c). The court may also dismiss or convert
the debtor's case if the debtor fails to pay any
post-filing domestic support obligations (i.e.,
child support, alimony), or fails to make required
tax filings during the case. 11 U.S.C. §§
1307(c) and (e), 1308, 521.
The Chapter 13
Discharge
The bankruptcy law regarding the scope of the
chapter 13 discharge is complex and has recently
undergone major changes. Therefore, debtors should
consult competent legal counsel prior to filing
regarding the scope of the chapter 13 discharge.
A chapter 13 debtor is entitled to a discharge
upon completion of all payments under the chapter
13 plan so long as the debtor: (1) certifies (if
applicable) that all domestic support obligations
that came due 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 (if the U.S. trustee or bankruptcy
administrator for the debtor's district has determined
that such courses are available to the debtor).
11 U.S.C. § 1328. The court will not enter
the discharge, however, until it determines, after
notice and a hearing, that there is no reason
to believe there is any pending proceeding that
might give rise to a limitation on the debtor's
homestead exemption. 11 U.S.C. § 1328(h).
The discharge releases the debtor from all debts
provided for by the plan or disallowed (under
section 502), with limited exceptions. Creditors
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.
As a general rule, the discharge releases the
debtor from all debts provided for by the plan
or disallowed, with the exception of certain debts
referenced in 11 U.S.C. § 1328. 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 debtor's conviction of a
crime. To the extent that they are not fully paid
under the chapter 13 plan, the debtor 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
by the debtor 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. 11 U.S.C.
§§ 1328, 523(c); Fed. R. Bankr. P. 4007(c).
The discharge in a chapter 13 case is somewhat
broader than in a chapter 7 case. Debts dischargeable
in a chapter 13, but not in chapter 7, 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. 11 U.S.C. § 1328(a).
The Chapter 13
Hardship Discharge
After confirmation of a plan, circumstances may
arise that prevent the debtor from completing
the plan. In such situations, the debtor may ask
the court to grant a "hardship discharge."
11 U.S.C. § 1328(b). Generally, such a discharge
is available only if: (1) the debtor's failure
to complete plan payments is due to circumstances
beyond the debtor's control and through no fault
of the debtor; (2) creditors have received at
least as much as they would have received in a
chapter 7 liquidation case; and (3) modification
of the plan is not possible. Injury or 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. 11 U.S.C. § 523.
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NOTES
1. The "current monthly income" received by the debtor is a defined term in the Bankruptcy Code and means the average monthly income received over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and including income from the debtor's spouse if the petition is a joint petition, but not including social security income or certain payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A). return to text
2. In North Carolina and Alabama, bankruptcy administrators perform similar functions that U.S. trustees perform in the remaining forty-eight states. The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the U.S. trustee program is administered by the Department of Justice. For purposes of this publication, references to U.S. trustees are also applicable to bankruptcy administrators. return to text
3. Section 507 sets forth 10 categories of unsecured claims which Congress has, for public policy reasons, given priority of distribution over other unsecured claims. return to text
4. A fee of $15 is charged for converting a case under chapter 13 to a case under chapter 7. return to text
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