Chapter 13 Bankruptcy

Many times a person in financial trouble either cannot, or does not wish to file a chapter 7 bankruptcy.  This is may be for a variety of reasons, which could be because:

• You are making too much money under the means test to qualify for a chapter 7
• You have equity in your home and you would lose it were you to file chapter 7
• Your car was seized and you want to get it back so you can restructure your car loan under a “cram down”
• You want to stop a foreclosure sale on your home and get caught up in payment
• You need to structure repayment of your debt to the IRS

A Chapter 13 is designed for people with income to repay all or a portion of their debts over three to five years. During the three to five year period, creditors cannot begin or continue attempts to collect debts.

In certain respects, a chapter 13 operates like a debt consolidation loan.  Instead of having to worry about paying each of your creditors each month, you make one single monthly payment to the trustee who administers your case.  Once your plan is confirmed by the bankruptcy court, the creditors are then paid from the money you pay the trustee.  Depending upon the circumstances, your unsecured creditors (generally credit cards and medical bills) may be paid only a small percentage of what you actually owe them, with the balance of your debt to them discharged at the conclusion of your three to five year plan. 

How a chapter 13 bankruptcy works

Like a chapter 7 bankruptcy, the case begins with the filing of a petition.  The chapter 13 bankruptcy debtor must also submit a “plan” explaining how the creditors will be dealt with during the three to five year life of the plan.  The plan will include details of how much the debtor plans to pay the trustee each month, if there is any property the debtor has that will be surrendered, whether the debtor plans to “cure” any past due amounts owed to the mortgage company, whether the debtor wants to restructure a car loan through a “cramdown,” and how much if anything the unsecured creditors will receive from the payments received by the trustee.

After the petition is filed, a trustee will be appointed to administer the case. The trustee will hold a meeting between the creditors and debtors after the petition is filed. After the meeting, there will be a hearing on the debtor’s repayment plan, which must be submitted with the petition or shortly after the petition is filed. Within 30 days after filing the case, the debtor must begin making payments to the trustee. The trustee will disburse fixed payments from the debtor to the creditors according to the plan. Creditors may not get full payments on their claims, depending on what type of claims are involved.

Also, like a chapter 7 bankruptcy, a hearing called a “meeting of creditors” is held within as little as thirty days after the bankruptcy filing.  If the trustee, after examining the debtor under oath and review financial documentation, is satisfied that the debtor is honest and that the plan is in the best interest of the creditors, the hearing is called to a close.

The creditors are then given an opportunity to object to the plan.  If no such objection is received, the case is scheduled for a confirmation hearing at which point, if the court believes the plan is in the best interest of creditors, it will be confirmed by the court.