|Chapter 13 Bankruptcy - 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." 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.
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 $307,675 and secured debts are less than $922,975. 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.
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.
(4) a statement of financial affairs.
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). 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 our Forms Page on this
website. 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). 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. 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
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.
4. A detailed list of the debtor's monthly living expenses (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 US Trustee or
bankruptcy administrator appoints a standing trustee to serve in all Chapter 13
cases. 28 U.S.C. § 586(2)(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 US Trustee or
bankruptcy administrator schedules the meeting at a place that does not have
regular US Trustee or bankruptcy administrator staffing, the meeting may be held
no more than 60 days after the debtor files. 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. 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.
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. 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 claims are those granted special status by the bankruptcy law, such as
most taxes and the costs of bankruptcy proceedings.
Secured claims are those for which the creditor has the right to take back certain
property (collateral) if the debtor does not pay the underlying debt.
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 to buy the
collateral (auto 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.
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. 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
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 (such as, child support, alimony), or
fails to make required tax filings during the case. 11 U.S.C. §§ 1307(c) and (e),
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
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
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.
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. §§
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).
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.
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.