What is chapter 13 bankruptcy?
Chapter 13 Bankruptcy is also known as a reorganization bankruptcy. Chapter13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.
While debtors are allowed to keep all of their property, the court approves a new interest-free plan for repayment. A written plan is created giving details of all the transactions that will occur, and the duration of the same. The repayment must begin within thirty to forty-five days after the case has started. The transitory stage of paying a trustee who then pays a creditor, as in Chapter 7 Bankruptcy is usually eliminated with Chapter 13 Bankruptcy. Although, in some cases people may involve a trustee who would take care of disbursing money to the creditors as per the plan. Also, as per the law the creditors must strictly adhere the repayment plan approved by the court and are in fact prohibited to collect any claims from the debtor. Your attorney will prepare new repayment plan to best suit your situation.
The one advantage of Chapter 13 over Chapter 7 Bankruptcy is the full discharge option which is not applicable under Chapter 7 filing. For example, if a debtor manages to complete all necessary payments in the plan, he/she is given a full plan discharge. (There are a few exceptions to this case, which your attorney will guide you about if necessary.) Yet another advantage of the Chapter 13 filing is that a repayment can be created even if creditors disagree with it, as long as it is approved by the Court. Although, in all fairness the court allows creditors also to file an objection, in case they may have any.
There are many reasons why people choose Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. Generally, you are probably a good candidate for Chapter 13 bankruptcy if you are in any of the following situations:
- You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. You may think filing Chapter 13 bankruptcy is simply the “Right Thing To Do” rather than file Chapter 7.
- You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.
- You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future. This would be the case if for some reason you can’t stop incurring new debt.
- You are a family farmer who wants to pay off your debts, but you do not qualify for a Chapter 12 family farming bankruptcy because you have a large debt unrelated to farming.
- You have valuable nonexempt property. When you file for Chapter 7 bankruptcy, you get to keep certain property, called exempt. If you have a lot of nonexempt property (which you’d have to give up if you file a Chapter 7 bankruptcy), Chapter 13 bankruptcy may be the better option.
- You filed a Chapter 7 bankruptcy within the previous eight years. You cannot file for Chapter 7 again until the eight years are up.
A Chapter 13 can be filed if:
- The debtor received a discharge under Chapter 7, 11 or 12 more than four years ago or
- the debtor received a discharge under Chapter 13 more than two years ago.
- You have a co-debtor on a personal debt. If you file for Chapter 7 bankruptcy, your creditor will go after the co-debtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your bankruptcy plan payments.
- You have a tax debt. If a large part of your debt consists of federal taxes, what happens to your tax debts may determine which type of bankruptcy is best for you.
Chapter 13 cannot be filed unless:
- The debtor received a discharge under Chapter 7, 11 or 12 more than four years ago or
- the debtor received a discharge under Chapter 13 more than two years ago.
When a motor vehicle was purchased within 910 days (2 1/2 years) of the filing and a secured creditor has a lien on it, the creditor retains the lien until payment of the entire debt has been made.
The following debt is NOT discharged:
- debt for trust fund taxes
- taxes for which returns were never filed or filed late (within two years of the petition date)
- taxes for which the debtor made a fraudulent return or evaded taxes
- domestic support payments
- Student loans
- Drunk driving injuries
- Criminal restitution
- Civil restitutions or damages awarded for willful or malicious personal actions causing personal injury or death.
All tax returns for the four years prior to filing Chapter 13 must be filed.
Debtors must provide to the trustee, at least seven days prior to the 341 meeting, a copy of a tax return or transcript of a tax return, for the period for which the return was most recently due.
How do I get started?
The first thing you must do is file a simple, two-page form in court asking for relief under chapter 13. The form is called a “Petition” and must be signed by all debtors.
The filed petition is the first official step in the chapter 13 process and it’s the actual filing that puts into motion what’s called an “automatic stay”.
From this point on creditors may no longer demand money from you, bring you to court to collect debt or even to proceed with foreclosure or repossession of your property.
The court will provide a “docket number” which is another way of saying your case number. This docket number can stop foreclosure proceedings and most other actions except those allowed by motion in the bankruptcy court.
The second thing that happens is about 7 – 10 days after filing the petition you’ll be required to submit a document, called the Matrix, which lists of all your creditors names and addresses to the court.
The third thing that happens is about 7 – 10 days after submitting your Matrix, you’ll need to submit a plan outlining exactly how you propose to reorganize under chapter 13. This plan includes your income, liabilities, all assets, monthly expenses, past financial history and evidence that you are capable of fulfilling your financial obligations under your plan.
Once you’ve filed your plan you’ll have an opportunity to file amendments as necessary. For instance, you may need to add creditors, or modify your plan based on an income change, or some other unforeseen circumstance. Amendments may require additional filing fees.
Is it true that I won’t actually see a Judge?
Usually, people applying for Chapter 13 never see a Judge. More than likely you’ll be assigned a Trustee who handles the particulars of your case. Only if your creditors contest your case and the Trustee cannot work out the issues, will you appear before a Judge.
Do I get to pick my Trustee?
No, the court assigns all trustees. You’ll be contacted for a 341 meeting 1 to 3 months after filing bankruptcy. This is a meeting at which the debtor is questioned under oath by creditors, a trustee, examiner, or the United States trustee about his/her financial affairs. Normally, there will only be one of these meetings.
Who are the players in the 341 meeting?
Besides you, there is the court appointed trustee, all your creditors, and, if hired, your attorney. The trustee coordinates the meeting, asking most of the questions. The trustee acts on behalf of both you and the creditors to ensure your plan meets all the Bankruptcy rules, and ensures unsecured creditors are protected and allocated as high of a return as possible.
Who else attends the 341 meeting?
Basically everyone listed as a creditor will be invited to attend. Don’t be alarmed about this because most of your creditors won’t even bother to show up. If any creditors do show up, they have the right to question you, (you’ll be under oath) regarding your financial situation and your proposed plan. All they really want to know is if you are planning on paying more than 50 cents on the dollar.
What happens after the 341 meeting?
If you’ve outlined a solid plan (one with good intentions) everyone will accept it and the meeting is adjourned. You are expected to start making your proposed payments on the schedule outlined in the agreed upon plan.
So, who do I have to pay and when do I start?
All your debts fall into three categories; secured creditors, unsecured creditors, and post-petition creditors
Secured Creditors: are usually on big ticket items such as a mortgages (first and second), and large motor homes, boats, and so forth. You pay these creditors directly, just as before filing bankruptcy. These payments called, “payments outside the plan” are to be made on their normal due dates. For instance if your mortgage is due on the 10th of the month then you must resume making the payment on or before that date.
NOTE: Failure to make payments on secured property gives creditors the right to ask for relief from the automatic stay and proceed with seizure actions such as foreclosing on your home.
Unsecured Creditors: These are the unsecured debts (and some secured debt) that accrued before filing bankruptcy and that you agreed to pay in your repayment plan.
You write one check each month (money order, cashiers check, bank check) with the docket number clearly written on it and send it to the Trustee who then pays each of your creditors.
IMPORTANT TIP: It’s a good idea to demonstrate “good faith” by bringing your first check, made out in the amount you propose in your plan, to the 341 meeting, especially if it’s been 1-2 months since you filed Chapter 13.
WARNING! If creditors try to contact you in an attempt to have you reaffirm an old debt or pay them money, DO NOT give them any money or sign any papers! Stick to your court-approved payment plan and notify the Trustee of this and any other illegal contact attempts.
Post-petition Creditors: These are debts (credit cards, phone bills, car payments, mortgage payments, etc.) incurred after you filed for bankruptcy and must be paid in a timely fashion since they are not protected under your payment plan.
How many months do I have pay off the debts?
This depends upon your plan which should be based on your income over the life of the plan, and the size of the debt. You’ll get anywhere from 36 up to 60 months.
Can I pay it off early?
Not really, because if your income would allow for faster payback than 36 months, the Trustee will normally set the plan at 36 months and require a larger percentage of funds go to your unsecured creditors.
Can I pay the trustee extra money if I’m able too?
It’s not recommended. If your income changes permanently you must inform the court so your payment plan can be adjusted. But, if you come into a few extra dollars, save it for emergencies.
Under the plan, how much am I expected to pay on unsecured debts?
Normally it’s 50 percent of the creditors claim spread over the 36 (or up to 60 months) plan. For instance; if you owed $5,000 on a credit card then you would typically pay back $2,500 or about $69 per month.
What if I owe so much that I’ll need more than 60 months to pay off my creditors?
Some creditors may be willing to work with you to come up with creative payment options but if not, then normally your case will be converted to a Chapter 7 Bankruptcy.
Can they still foreclose on my house after I have filed bankruptcy?
Not if you’ve made all mortgage payments on time. Otherwise the court may give them permission to foreclose.
What happens if I stop paying or can’t pay the Trustee?
It depends! If the problem is temporary, usually not more than three months, then contact the Trustee and ask to work out an alternate payment plan. If you’re acting in good faith, the Trustee will normally work with you.
However, if you cannot work out a plan, or simply fail to make the payments then, the Trustee will have your case either converted to a Chapter 7 or completely dismissed in which case you’ll lose all bankruptcy protection.
The important point here is to communicate with the Trustee!
Besides my filing fee, what other fees will I have to pay?
None unless there are amendments or additional motions or your chapter 13 is converted to a Chapter 7.
What are the tax obligations of a person filing a bankruptcy?
The tax obligations of the person filing a bankruptcy petition vary depending on whether you file a Chapter 7 or Chapter 13.
Unlike chapter 7, when filing a Chapter 13 bankruptcy petition, you do not create a separate taxable estate for federal tax purposes. You file the same federal income tax return (Form 1040) that was filed prior to the bankruptcy petition.
When filing a Chapter 7 bankruptcy petition, you create a separate taxable bankruptcy estate, consisting of property that belongs to you before the filing date, and is completely separate from you as an individual taxpayer. The trustee is responsible for preparing and filing the estate’s tax returns (Form 1041) and paying its taxes. The individual debtor remains responsible for filing returns (Form 1040) and paying taxes on any income that does not belong to the estate.
What happens to my federal tax debts?
It depends whether you file a Chapter 7 or a Chapter 13.
A Chapter 7 debtor can wipe out federal income taxes if all the following are met:
- the IRS had not filed a prior tax lien on the assets you own (if they have, the lien survives bankruptcy, which means that the government may still seize property to collect the discharged tax debts)
- you didn’t file fraudulently or try to evade paying your taxes
- your liability is for a tax return filed at least two years prior to the bankruptcy
- the tax return was due more than three years ago and
- tax deficiencies that were assessed on prior returns were assessed at least 240 days prior to the filing of the bankruptcy.
In a Chapter 13 filing, you’ll pay the IRS as part of your repayment plan.
My spouse is declaring bankruptcy; should he file alone or should we file together?
Whether married couples should file a joint petition or a single one depends on various factors: type of property, the amount of community debt involved, and how the property is held (e.g., community, joint tenancy, or an estate-by-the entirety).
Filing together eliminates the separate debts of you and your spouse and all the jointly-held marital debts. Filing alone leaves the non-bankrupt spouse still liable for his or her share of joint debts, but wipes out the spouse’s separate debts and his/her share of the joint debts.
If you are legally separated, have divided your property, and taken care of all the financial considerations, your best option may be to have your spouse go it alone. If all the debts were incurred before you were married, there is no point in having you both file.
Community property and common law, also called equitable distribution are the two types of martial property ownership. The vast majority of states apply the equitable distribution rules; nine states apply the community property rules. If you live in a common law property state, your spouse’s bankrupt estate will include his/her separate property and half of the jointly-held marital property. The non-bankrupt spouse will not have to worry about the effects of the bankruptcy on his or her separate property.
However, the bankruptcy court takes a dim view if the non-bankrupt spouse is merely holding the property or has received the property from the bankrupt spouse within one year of filing bankruptcy. In this case, this transaction is considered fraudulent, and the property will be turned over to the bankruptcy trustee.
In community property states, spouses equally own all property earned or received during the marriage, splitting 50-50. In bankruptcy, then, all the community property you and your spouse own jointly is part of the bankruptcy estate, regardless whether you join in the filing.
Your separate property — property you owned before the marriage — is not effected by your spouse’s bankruptcy. Property held by your spouse will be used to settle debt first, and then non-exempt community property will be used.
What is “Equitable Distribution”?
Most states employ “equitable distribution” in dividing marital (community) property as a result of the dissolution of marriage (divorce).
Instead of a strict fifty-fifty split (in which each spouse receives exactly one-half of the marital or separate property), equitable distribution looks at the financial situation that each spouse will be in after the termination of the marriage.
While equitable distribution is more flexible, it is harder to predict the actual outcome, since the various factors are subjectively weighed.
Factors considered in equitable distribution include:
- Earning power of the spouses (one might be much greater than the other)
- Separate property of the spouses (one might be greater in value than the other)
- One spouse having done all the work to acquire the property
- The value that one spouse contributed as the home-maker for the family
- Economic fault of one spouse in wasting and dissipating marital property
- Duration of the marriage
- Age and relative health of the spouses
- The responsibility for providing for children of the marriage
- Spousal abuse or marital infidelity (to penalize the offending spouse)
For additional information please visit the US Bankruptcy Court’s Website
