Chapter 13 is an alternative to Chapter 7 bankruptcy, and is designed for individuals with regular income who want to pay their debts, but need some time to do so.
Under Chapter 13 debtors repay their creditors, either in full or in part, over a period of up to three years. Plans can be made for up to five years with court approval.
Who is Eligible to File Under Chapter 13?
Any individual may apply for relief under Chapter 13, provided their unsecured debts are less than $269,750, and their secured debts are less than $807,750. Corporations and partnerships may not file under Chapter 13.
Individuals may not file under Chapter 13 (or any other chapter) if in the last 180 days a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court, or failed to 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.
How does Chapter 13 Work?
The debtor begins by filing a petition with the bankruptcy court in their home district. As with a Chapter 7 filing, the debtor must file with the petition schedules of assets and liabilities, current income and expenditures, executory contracts and unexpired leases. A schedule of exempt assets is also filed. Bankruptcy forms can be purchased at a stationery store (they are not available from the court), or an attorney can help you prepare the forms.
The debtor must pay the court a $155 case filing fee, and a $30 miscellaneous administrative fee.
Once the Chapter 13 plan petition is filed, most legal actions are "stayed", and most creditors cannot start or continue lawsuits, garnishee wages, or even make telephone calls demanding payment. (Creditors are notified of the filing by the court clerk).
This "stay" allows a debtor who is behind on their mortgage payments on their principal residence to cure any defaults by bringing the payments current over a reasonable time period.
The plan of repayment must be filed with the initial petition, or no later than 15 days thereafter. A meeting of creditors is held in all cases, generally 20 to 50 days after the petition is filed. The debtor must attend the meeting, and the creditors may question the debtor on their assets and financial situation.
A confirmation hearing will then be held in court, and the bankruptcy judge will determine if the plan is feasible, and meets all Bankruptcy Code standards. Creditors are notified of the hearing, and they may object to confirmation. Common grounds for objection would be that the payments in the plan are less than what they would receive in a Chapter 7 liquidation, or that the debtor's plan does not commit all of the debtor's projected disposable income for the three year period of the plan.
Within thirty days of filing the plan, the debtor must start making payments to the trustee, even if the plan has not yet been approved by the court.
If the plan is not approved, the debtor can modify the plan, or convert the case to a Chapter 7 liquidation.