Common Questions Regarding Chapter 13 Bankruptcy

1. What is a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy case is a proceeding under Federal law in which the debtor seeks relief from creditors.  Chapter 13 allows a person to repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court.  Essentially Chapter 13 is a court protected repayment 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 paid by the debtor and pays out to creditors in accordance with the Chapter 13 plan.  Once the Chapter 13 plan is completed, the debtor is released from liability for the remainder of his or her dischargeable debts.  A Chapter 13 plan runs for 3-5 years.

2. What is the difference between a Chapter 13 case and a Chapter 7 case?
Basically the main difference between a Chapter 7 case and a Chapter 13 case is that in a Chapter 7 the debtor's nonexempt property (if any exists) is liquidated to pay as much as possible of the debtor's debts, while in Chapter 13 a portion of the debtor's future income is used to pay as much of the debtor's debts as is feasible under the debtor's circumstances.  Typically, in a Chapter 7 case the debtor loses most of his or her nonexempt assets and receives a Chapter 7 discharge.  In a Chapter 13 case, the debtor usually retains his or her nonexempt property, but must pay back as much as the trustee deems feasible for the debtor to pay over 3-5 years. 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 or who has a large amount of nonexempt assets to keep their assets and receive the protection of bankruptcy.

3. When is a Chapter 13 more preferable to a Chapter 7?
Chapter 13 is usually preferable when:

  1.  The debtor wishes to repay all or most of his or her unsecured debts and has the ability to do so in a reasonable amount of time.
  2. The debtor has valuable nonexempt property which would be lost in a Chapter 7 case.
  3.  The debtor would not be eligible for Chapter 7 under the mean test.
  4. The debtor is not eligible for a Chapter 7 discharge, because he or she has received a Chapter 7 discharge within 8 year.
  5. The debtor has substantial debts that are not dischargeable under Chapter 7 but would be dischargeable under Chapter 13.
  6. The debtor needs temporary relief from creditors and has sufficient assets with which to repay most of his or her debts.

4. How is Chapter 13 different from a private debt consolidation service?
Chapter 13 is a court protected repayment plan and the courts powers are far beyond those of a private debt consolidation service.  For instance, the court has the authority to force unsecured creditors to accept only a portion of their claims. The court can also prohibit creditors from attaching or foreclosing on the debtor's property and the court can discharge a debtor from unpaid portions of debts.  Private debt consolidation services do not have any of these powers.

5. What is a Chapter 13 discharge?
A Chapter 13 discharge is a court order that releases a debtor from all of his or 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 does not have to pay.  A Chapter 13 discharge occurs once the Chapter 13 plan is completed.  If the plan is not completed, the debtor may be entitled to a partial discharge or may have to convert the case to Chapter 7.

6. What debts are not dischargeable in Chapter 13?
The debts that excluded from discharge in a Chapter 13 are:  debts that were paid outside of the plan, 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 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.

7. What is a Chapter 13 plan?
A Chapter 13 plan is a written plan presented to the bankruptcy court by a debtor. The plan states the amount of money or property the debtor will pay to the Chapter 13 trustee, the duration of the plan, the amount to be paid to each creditor, and other matters.

8. 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 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.

9. Under a Chapter 13 plan, must all debts be paid in full?
No.  Some priority debts are required to be paid in full, but many creditors will only receive pennies on the dollar to the amount they are owed.

10. When do payments on a Chapter 13 begin?
The debt will begin making payments within 30 days of filing the Chapter 13 case.  The payments must be made regularly

11. What is the duration of a Chapter 13 plan?
A chapter 13 plan will last 3-5 years depending on the amount of debt to be paid through the plan and the income of the debtor. Most plans are 5 years.

12. 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.

13. What is the difference between a secured creditor and an unsecured creditor and how are they treated in Chapter 13?
Basically, a secured creditor has collateral, where as an unsecured creditor does not have collateral. There are four ways to deal with secured creditors in Chapter 13 cases: (a) the creditor can accept the  plan, (b) the creditor may retain its lien and require the debtor to pay the entire amount through the plan, (c) the debtor may surrender the collateral, or (4) the creditor can be dealt with outside the plan.  Unsecured creditors are to be paid what is determined to be reasonable feasible to the plan, and any unpaid remaining debt at the end of the plan are discharged.

14. How are joint or cosigned debts treated in Chapter 13?
If a joint or consigned debt is being paid in full under a Chapter 13 plan, the creditor may not collect the debt from the other person.  If a joint debt is not being paid in full under the plan, the creditor is allowed to collect the unpaid portion of the debt from the other person.  This applies only to consumer debt. 

15. Who is eligible to file a Chapter 13?
To requirements for eligibility to file a Chapter 13 are that the debtor is an individual who (a) resides in, does business in, or owns property in the United States, (b) has regular income, (c) has unsecured debts of less than $336,900, (d) has secured debts of less than $1,010,650, (e) is not a stockbroker or a commodity broker, (f) has not intentionally dismissed another bankruptcy case within the last 180 days, and (g) has received a briefing from an approved credit counseling agency with the last 180 days (www.personalfinanceeducation.com) Businesses entities cannot file Chapter 13.

16. 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.

17. Can a self-employed person file Chapter 13?
Yes.   And  debtor engaged in business may continue to operate the business during his or her Chapter 13 case.

18. Can a Chapter 7 case be converted to a Chapter 13?
Yes. 

19. Will a debtor lose any property if he or she files Chapter 13?
In most cases a debtor will not lose any property. However, if a debtor has valuable nonexempt asset, and has not enough income to satisfy the court, some of the debtor's property may have to be used to pay creditors.

20. What immediate protection does Chapter 13 provide?
The moment a Chapter 13 is filed, the automatic stay comes into effect. The automatic stay is akin to a court ordered restraining order against creditors.  All lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor's property must immediately stop. 

21. What affect does filing a Chapter 13 have on a person's credit rating?
A credit score will likely be worsened in the short run by filing a Chapter 13. However, if most of a person's debts are ultimately paid off under a Chapter 13 plan, credit reporting agencies will take that into account when determining a credit score.  Please see this article about rebuilding after bankruptcy.

22. Who will find out about you filing bankruptcy?
Although, when a Chapter 13 case is filed it becomes public record, the only people that will really know about your filing are your attorney, your creditors, and anyone else who you tell. The public records are not published in the Denver Post, or your local newspapers.

23. How many court appearances is required in a Chapter 13 case?
Most debtors have to appear in court at least twice, and the attorney will appear with the debtor, then the attorney will make all other appearance. The first appearance in which both the debtor and the attorney must appear is the meeting of the creditors, this is not actually a court appearance, and the debtor and the attorney will sit with the Chapter 13 trustee. The meeting of the creditors is for the most part a formality. At the meeting of the creditors the debtor will take an oath and be asked some standard questions by the trustee.  Creditors have an opportunity to appear and ask the debtor questions as well, but that does not happen often. The meeting of creditors is usually held about a month after the case is filed.  The next court appearance is the confirmation hearing, which happens about a month after the meeting of the creditors. The confirmation hearing is in front of a judge, but only the debtor’s attorney is required to attending the hearing.

24. What if the court does not approve a debtor's Chapter 13 plan?
If the court does not initially approve the debtor’s Chapter 13 plan, then the plan may be modified by the debtor.  If the debtor does not want to modify the plan the case can either be converted to a Chapter 7 or dismissed.

25. 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 can usually be modified as to enable the debtor to resume the payments when the debtor is able to continue to make the payments. However, if it appears that the debtor will no longer be able to make the required payments case either r be converted to a Chapter 7 or dismissed.

26. Can a debtor change his or her mind and dismiss the case or convert to Chapter 7?
Yes. 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 or she should do so through his or her attorney to ensure that the dismissal is done properly.

27. What is the role of the bankruptcy attorney in a Chapter 13?
In a typical Chapter 13case the attorney for the person filing will:

a. Examine the debtor's financial situation and determine whether a Chapter 13 case is a feasible for the debtor.

b. Assist the debtor in obtaining the required pre-bankruptcy credit counseling class. We recommend www.personalfianceeducation.com

c. Assist the debtor in preparing a budget.

d. Come up with and implement methods of dealing with secured creditors.

e. Devise a Chapter 13 plan.

f. Prepare and  file all the necessary pleadings and Chapter 13 forms.

g. Attend the meeting of the creditors and the confirmation hearing as well as any other required hearings.

h. Get the Chapter 13 plan approved.

i. Handle the claims filed in the case and filing objections to improper claims

l. Assist the debtor in overcoming any legal obstacles that may arise during the case.

n. Obtain a discharge upon the completion of the plan.

If you any have more questions have them answered by an attorney today. Call 303-277-1927.

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