Chapter 13 Frequently Asked Questions
Common Questions About Chapter 13 Bankruptcy
What is a Chapter 13 bankruptcy?
A chapter 13 bankruptcy allows a person to repay all or a portion of his/her debts under the supervision and protection of the bankruptcy court. Essentially chapter 13 is a court protected debt consolidation plan. No penalties and interest can accrue during the plan. The debtor must make regular payments to the chapter 13 trustee, who collects the money and pays it out to creditors in accordance with the chapter 13 plan. Once the debtor completes his/her payments and any other obligations under the chapter 13 plan, the debtor is released from liability for the remainder of his/her dischargeable debts. A chapter 13 plan runs between three to five years.
What is the difference between a Chapter 13 case and a Chapter 7 case?
The primary difference between a chapter 7 and a chapter 13 bankruptcy is that in chapter 7 the debtor's nonexempt property (if any exists) is liquidated to pay as much as possible of the debtor's debts. In chapter 13, the debtor usually retains his/her nonexempt property, but must pay all of his/her monthly disposable income to the chapter 13 trustee for the life of the chapter 13 plan. The money paid to the trustee over the life of the chapter 13 plan is disbursed to the debtor’s creditors. Chapter 7 cases take less time and are less expensive than chapter 13 cases, but chapter 13 cases allow a debtor who is above the median income (e.g. fails the Means Test) or who has a large amount of nonexempt assets to keep their assets while still benefitting from the protection of bankruptcy.
Who is eligible to file a chapter 13?
An individual cannot file under chapter 13 or any other chapter of bankruptcy 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 the creditor holds liens. No individual may be a debtor under chapter 13 or any chapter of the bankruptcy code unless he/she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. If a debt management plan is developed during required credit counseling, it must be filed with the court.
A corporation or partnership may not be a chapter 13 debtor. An individual with regular income, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts and the individual’s secured debts are less than certain thresholds established by the bankruptcy code. These thresholds change automatically according to a set schedule. As of the writing of this summary, the unsecured debt threshold is $383,175 and the secured debt threshold is $1,149,525.
Is there anything I should not do because I know I am contemplating bankruptcy?
There is a long list of things you shouldn’t do if you are considering a bankruptcy. The first is stop using discretionary credit. This means stop using your credit cards for anything except a true emergency. It is fraud to incur debt you know you do not intend to pay – using a credit card when bankruptcy is imminent is just that. Do not transfer balances between cards or take any cash advances. Do not buy any luxury items on credit. Do not pay any family or friends back for a loan if you intend to file bankruptcy in the next twelve months. Do not make any large payments toward back amounts owed to any one unsecured creditor within the ninety days before you file bankruptcy. Do not give any false or misleading information to anyone about the status of your finances; in particular do not give any misleading written financial statements. Do not mislead your bankruptcy counsel, fail to disclose a material fact, or otherwise play fast and loose with anything (such as fraudulently transferring or hiding assets). Doing any of this can result in a particular debt not being discharged or worse, your entire discharge could be denied and you could be charged with a bankruptcy crime.
Can people file chapter 13 jointly?
A husband and wife may file a joint chapter 13. A couple should file jointly if both spouses are liable for any of the significant debts.
Can a self-employed person file chapter 13?
Yes. A debtor engaged in an unincorporated business may continue to operate the business during his/her chapter 13 case. This generally is not the case in a chapter 7 bankruptcy.
When is a Chapter 13 more preferable to a Chapter 7?
Chapter 13 is preferable when the debtor: has valuable nonexempt property which would be lost in chapter 7; would not be eligible for chapter 7 under the Means Test; is not eligible for a chapter 7 discharge because he/she has received a chapter 7 discharge within the last eight years; has substantial debts that are not dischargeable under Chapter 7 but would be dischargeable under Chapter 13; has a junior mortgage that is unsecured because more is owed on the first mortgage than the property is worth (unsecured second mortgages can be stripped in chapter 13); or the debtor simply wishes to have bankruptcy appear on his/her credit report only seven years instead of ten or feels a moral obligation to make some payments toward the debt.
How is Chapter 13 different from a private debt consolidation service?
Chapter 13 is a repayment plan monitored by the bankruptcy court. Like a private debt consolidation, only one monthly payment is made and the money, less a fee, is disbursed to the debtor’s creditors. Unlike a private debt consolidation plan, however, the disbursing agent is an agent of the federal government, the chapter 13 trustee, whose fee for this service is capped at a ten percent commission. There are no hidden fees and the debtor can trust that the money truly is going to the debtor’s creditors. Unlike private debt consolidation, most chapter 13 plans do not pay the debt in full. Under most chapter 13 plans, unsecured creditors receive only pennies on the dollar and the portion of the debt not paid under the plan is discharged when the debtor’s performance under the plan is complete. The debtor, which court approval, can strip a second mortgage from the debtor’s residence if the second mortgage is wholly unsecured (because the amount owed on the first mortgage exceeds what the real estate is worth) and can prohibit creditors from attaching or foreclosing on the debtor's property. Private debt consolidation services do not have these powers.
Who is a Chapter 13 trustee?
A chapter 13 trustee is usually an attorney who is appointed by the United States Trustee to act as the trustee to the bankruptcy estate of each person who files a chapter 13 bankruptcy. The trustee’s duties are to collect payment from the debtor, make payments to creditors, ensure that the plan is followed, and administer the case until it is closed. When an individual files a chapter 13 petition in the United States Bankruptcy Court for the District of New Hampshire, Lawrence Sumski will be appointed as the chapter 13 trustee because he is the standing trustee who serves in all chapter 13 cases in this district. If the debtor’s home is scheduled for foreclosure, the chapter 13 plan will be fashioned so that Trustee Sumski will disburse enough to the mortgagee over the life of the chapter 13 plan to cure the mortgage arrearage.
What is a Chapter 13 plan?
The debtor proposes a repayment plan to make installments, through the chapter 13 trustee, 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." The most common “cause” to extend the plan beyond three years is that the debtor cannot afford to make the monthly payments necessary to cure his/her mortgage arrearage in a three year period. 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 longer than five years. During the life of the plan, the law generally forbids creditors from starting or continuing collection for pre-petition (e.g. before bankruptcy) debts.
A chapter 13 plan 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 generally will have no direct contact with creditors regarding pre-petition debt while under chapter 13 protection. However, the chapter 13 debtor will need to communicate with the mortgagee when making the regular monthly mortgage payments outside of the plan and with other creditors regarding their ongoing ordinary and necessary monthly living expenses which the debtor also will pay outside of the plan (e.g. utilities etc). The debtor may lose his/her home if he/she fails to make the post-petition regular mortgage payments.
Under a chapter 13 plan, must all debts be paid in full?
No. Some priority debts are required to be paid in full, but the general unsecured creditors often receive only pennies for each dollar they are owed. Provided the debtor completes all of his/her obligations under the chapter 13 plan, the remainder of the dischargeable, general unsecured debt is discharged.
When do payments on a chapter 13 begin?
The debtor must begin making payments to the chapter 13 trustee within 30 days of filing the chapter 13 case. These payments will be due at the same time each month. Deshaies Law will provide you specific instructions on how and where to make the payments.
What happens if the debtor is temporarily unable to make the Chapter 13 payments?
If a situation arises, such as the debtor is temporarily out of work, injured, or otherwise unable to make the payments required under a chapter 13 plan, the plan usually can be modified to enable the debtor to resume the payments when the debtor is able. Deshaies Law will work with Trustee Sumski to come to a mutually acceptable arrangement. However, if it appears that the debtor will no longer be able to make the required payments, the chapter 13 case may be dismissed or converted to a chapter 7 proceeding.
How is a chapter 13 plan approved?
A chapter 13 plan must be approved by the court. Creditors have a right to object to a plan. If an objection is filed it must be ruled on by the court in order for the plan to be approved.
What is the difference between a secured creditor and an unsecured creditor?
A secured creditor has collateral, whereas an unsecured creditor does not have collateral. Collateral is property securing the claim; a house serves as collateral for a promissory note via the mortgage; the title of a car serves as collateral by listing the lender as the title holder until the debt is paid in full.
What is a Chapter 13 discharge?
A chapter 13 discharge is a court order that releases the debtor from all of his/her dischargeable debts. The discharge also orders creditors not to attempt to collect the debt from the debtor. A debt that is discharged is a debt that the debtor no longer has to pay. A chapter 13 discharge occurs once the debtor’s obligations under the chapter 13 plan are complete. If the plan is not completed, the debtor may be able to request a partial hardship discharge or may have to convert the case to chapter 7 or dismiss it altogether.
What debts are not dischargeable in Chapter 13?
Some debts excluded from discharge in a chapter 13 are: debts for domestic support obligations (alimony and child support); debts for death or personal injury caused by the debtor's operation of a motor vehicle while intoxicated; tax debts that have been assessed within 3 years; debts for restitution or criminal fines; debts for fraud; debts for most student loans; debts for damages in a civil case caused by willful or malicious conduct; debts incurred while the plan was in effect; and debts owed to creditors not given notice of the chapter 13.
Can a debtor change his/her mind and dismiss the case or convert to Chapter 7?
Yes. With some limitations, the debtor has the right to either dismiss a chapter 13 case or convert it to a chapter 7 case at any time for any reason. If a debtor decides to dismiss or convert, he/she should do so through his/her attorney to ensure that the dismissal is done properly.
What effect does filing a chapter 13 have on a person's credit rating?
The debtor’s credit score will get worse in the short term by filing any bankruptcy. However, a chapter 13 bankruptcy will appear on the debtor’s credit report for seven years, as opposed to ten years if the debtor files a chapter 7. Thus, the debtor’s credit will be damaged a bit less by a chapter 13 than a 7. Also, some lenders treat chapter 13 debtors a bit more leniently than those that filed under chapter 7. Until the bankruptcy falls off of the credit report, however, a debtor generally will be offered credit at higher interest rates and with a lower credit limit as compared to individuals with a similar debt to income ratio but no history of bankruptcy. These high rates and the trauma of your present financial circumstances may make you leery of using any credit. However, while you may be hesitant to use any credit, you must use credit, sparingly and wisely, to rebuild your credit over time. You may want to start with a couple pre-paid secured cards with small limits. Pay them on time and over time you should be able to rebuild your credit.
What is a Chapter 13 bankruptcy?
A chapter 13 bankruptcy allows a person to repay all or a portion of his/her debts under the supervision and protection of the bankruptcy court. Essentially chapter 13 is a court protected debt consolidation plan. No penalties and interest can accrue during the plan. The debtor must make regular payments to the chapter 13 trustee, who collects the money and pays it out to creditors in accordance with the chapter 13 plan. Once the debtor completes his/her payments and any other obligations under the chapter 13 plan, the debtor is released from liability for the remainder of his/her dischargeable debts. A chapter 13 plan runs between three to five years.
What is the difference between a Chapter 13 case and a Chapter 7 case?
The primary difference between a chapter 7 and a chapter 13 bankruptcy is that in chapter 7 the debtor's nonexempt property (if any exists) is liquidated to pay as much as possible of the debtor's debts. In chapter 13, the debtor usually retains his/her nonexempt property, but must pay all of his/her monthly disposable income to the chapter 13 trustee for the life of the chapter 13 plan. The money paid to the trustee over the life of the chapter 13 plan is disbursed to the debtor’s creditors. Chapter 7 cases take less time and are less expensive than chapter 13 cases, but chapter 13 cases allow a debtor who is above the median income (e.g. fails the Means Test) or who has a large amount of nonexempt assets to keep their assets while still benefitting from the protection of bankruptcy.
Who is eligible to file a chapter 13?
An individual cannot file under chapter 13 or any other chapter of bankruptcy 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 the creditor holds liens. No individual may be a debtor under chapter 13 or any chapter of the bankruptcy code unless he/she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. If a debt management plan is developed during required credit counseling, it must be filed with the court.
A corporation or partnership may not be a chapter 13 debtor. An individual with regular income, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts and the individual’s secured debts are less than certain thresholds established by the bankruptcy code. These thresholds change automatically according to a set schedule. As of the writing of this summary, the unsecured debt threshold is $383,175 and the secured debt threshold is $1,149,525.
Is there anything I should not do because I know I am contemplating bankruptcy?
There is a long list of things you shouldn’t do if you are considering a bankruptcy. The first is stop using discretionary credit. This means stop using your credit cards for anything except a true emergency. It is fraud to incur debt you know you do not intend to pay – using a credit card when bankruptcy is imminent is just that. Do not transfer balances between cards or take any cash advances. Do not buy any luxury items on credit. Do not pay any family or friends back for a loan if you intend to file bankruptcy in the next twelve months. Do not make any large payments toward back amounts owed to any one unsecured creditor within the ninety days before you file bankruptcy. Do not give any false or misleading information to anyone about the status of your finances; in particular do not give any misleading written financial statements. Do not mislead your bankruptcy counsel, fail to disclose a material fact, or otherwise play fast and loose with anything (such as fraudulently transferring or hiding assets). Doing any of this can result in a particular debt not being discharged or worse, your entire discharge could be denied and you could be charged with a bankruptcy crime.
Can people file chapter 13 jointly?
A husband and wife may file a joint chapter 13. A couple should file jointly if both spouses are liable for any of the significant debts.
Can a self-employed person file chapter 13?
Yes. A debtor engaged in an unincorporated business may continue to operate the business during his/her chapter 13 case. This generally is not the case in a chapter 7 bankruptcy.
When is a Chapter 13 more preferable to a Chapter 7?
Chapter 13 is preferable when the debtor: has valuable nonexempt property which would be lost in chapter 7; would not be eligible for chapter 7 under the Means Test; is not eligible for a chapter 7 discharge because he/she has received a chapter 7 discharge within the last eight years; has substantial debts that are not dischargeable under Chapter 7 but would be dischargeable under Chapter 13; has a junior mortgage that is unsecured because more is owed on the first mortgage than the property is worth (unsecured second mortgages can be stripped in chapter 13); or the debtor simply wishes to have bankruptcy appear on his/her credit report only seven years instead of ten or feels a moral obligation to make some payments toward the debt.
How is Chapter 13 different from a private debt consolidation service?
Chapter 13 is a repayment plan monitored by the bankruptcy court. Like a private debt consolidation, only one monthly payment is made and the money, less a fee, is disbursed to the debtor’s creditors. Unlike a private debt consolidation plan, however, the disbursing agent is an agent of the federal government, the chapter 13 trustee, whose fee for this service is capped at a ten percent commission. There are no hidden fees and the debtor can trust that the money truly is going to the debtor’s creditors. Unlike private debt consolidation, most chapter 13 plans do not pay the debt in full. Under most chapter 13 plans, unsecured creditors receive only pennies on the dollar and the portion of the debt not paid under the plan is discharged when the debtor’s performance under the plan is complete. The debtor, which court approval, can strip a second mortgage from the debtor’s residence if the second mortgage is wholly unsecured (because the amount owed on the first mortgage exceeds what the real estate is worth) and can prohibit creditors from attaching or foreclosing on the debtor's property. Private debt consolidation services do not have these powers.
Who is a Chapter 13 trustee?
A chapter 13 trustee is usually an attorney who is appointed by the United States Trustee to act as the trustee to the bankruptcy estate of each person who files a chapter 13 bankruptcy. The trustee’s duties are to collect payment from the debtor, make payments to creditors, ensure that the plan is followed, and administer the case until it is closed. When an individual files a chapter 13 petition in the United States Bankruptcy Court for the District of New Hampshire, Lawrence Sumski will be appointed as the chapter 13 trustee because he is the standing trustee who serves in all chapter 13 cases in this district. If the debtor’s home is scheduled for foreclosure, the chapter 13 plan will be fashioned so that Trustee Sumski will disburse enough to the mortgagee over the life of the chapter 13 plan to cure the mortgage arrearage.
What is a Chapter 13 plan?
The debtor proposes a repayment plan to make installments, through the chapter 13 trustee, 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." The most common “cause” to extend the plan beyond three years is that the debtor cannot afford to make the monthly payments necessary to cure his/her mortgage arrearage in a three year period. 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 longer than five years. During the life of the plan, the law generally forbids creditors from starting or continuing collection for pre-petition (e.g. before bankruptcy) debts.
A chapter 13 plan 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 generally will have no direct contact with creditors regarding pre-petition debt while under chapter 13 protection. However, the chapter 13 debtor will need to communicate with the mortgagee when making the regular monthly mortgage payments outside of the plan and with other creditors regarding their ongoing ordinary and necessary monthly living expenses which the debtor also will pay outside of the plan (e.g. utilities etc). The debtor may lose his/her home if he/she fails to make the post-petition regular mortgage payments.
Under a chapter 13 plan, must all debts be paid in full?
No. Some priority debts are required to be paid in full, but the general unsecured creditors often receive only pennies for each dollar they are owed. Provided the debtor completes all of his/her obligations under the chapter 13 plan, the remainder of the dischargeable, general unsecured debt is discharged.
When do payments on a chapter 13 begin?
The debtor must begin making payments to the chapter 13 trustee within 30 days of filing the chapter 13 case. These payments will be due at the same time each month. Deshaies Law will provide you specific instructions on how and where to make the payments.
What happens if the debtor is temporarily unable to make the Chapter 13 payments?
If a situation arises, such as the debtor is temporarily out of work, injured, or otherwise unable to make the payments required under a chapter 13 plan, the plan usually can be modified to enable the debtor to resume the payments when the debtor is able. Deshaies Law will work with Trustee Sumski to come to a mutually acceptable arrangement. However, if it appears that the debtor will no longer be able to make the required payments, the chapter 13 case may be dismissed or converted to a chapter 7 proceeding.
How is a chapter 13 plan approved?
A chapter 13 plan must be approved by the court. Creditors have a right to object to a plan. If an objection is filed it must be ruled on by the court in order for the plan to be approved.
What is the difference between a secured creditor and an unsecured creditor?
A secured creditor has collateral, whereas an unsecured creditor does not have collateral. Collateral is property securing the claim; a house serves as collateral for a promissory note via the mortgage; the title of a car serves as collateral by listing the lender as the title holder until the debt is paid in full.
What is a Chapter 13 discharge?
A chapter 13 discharge is a court order that releases the debtor from all of his/her dischargeable debts. The discharge also orders creditors not to attempt to collect the debt from the debtor. A debt that is discharged is a debt that the debtor no longer has to pay. A chapter 13 discharge occurs once the debtor’s obligations under the chapter 13 plan are complete. If the plan is not completed, the debtor may be able to request a partial hardship discharge or may have to convert the case to chapter 7 or dismiss it altogether.
What debts are not dischargeable in Chapter 13?
Some debts excluded from discharge in a chapter 13 are: debts for domestic support obligations (alimony and child support); debts for death or personal injury caused by the debtor's operation of a motor vehicle while intoxicated; tax debts that have been assessed within 3 years; debts for restitution or criminal fines; debts for fraud; debts for most student loans; debts for damages in a civil case caused by willful or malicious conduct; debts incurred while the plan was in effect; and debts owed to creditors not given notice of the chapter 13.
Can a debtor change his/her mind and dismiss the case or convert to Chapter 7?
Yes. With some limitations, the debtor has the right to either dismiss a chapter 13 case or convert it to a chapter 7 case at any time for any reason. If a debtor decides to dismiss or convert, he/she should do so through his/her attorney to ensure that the dismissal is done properly.
What effect does filing a chapter 13 have on a person's credit rating?
The debtor’s credit score will get worse in the short term by filing any bankruptcy. However, a chapter 13 bankruptcy will appear on the debtor’s credit report for seven years, as opposed to ten years if the debtor files a chapter 7. Thus, the debtor’s credit will be damaged a bit less by a chapter 13 than a 7. Also, some lenders treat chapter 13 debtors a bit more leniently than those that filed under chapter 7. Until the bankruptcy falls off of the credit report, however, a debtor generally will be offered credit at higher interest rates and with a lower credit limit as compared to individuals with a similar debt to income ratio but no history of bankruptcy. These high rates and the trauma of your present financial circumstances may make you leery of using any credit. However, while you may be hesitant to use any credit, you must use credit, sparingly and wisely, to rebuild your credit over time. You may want to start with a couple pre-paid secured cards with small limits. Pay them on time and over time you should be able to rebuild your credit.
CONTACT US NOW
FOR YOUR FREE INITIAL CONSULTATION
FOR YOUR FREE INITIAL CONSULTATION