Chapter 13 Overview

An Overview of What to Expect

Chapter 13 Bankruptcy is often referred to as a "wage earner plan" or a "debt repayment plan".  In some ways, a Chapter 13 Bankruptcy is similar to the debt repayment program of the various consumer credit counseling services, but there are important differences.

In Chapter 13 Bankruptcy, the Debtor files a "Chapter 13 Plan" with the Bankruptcy Court, agreeing to make the best effort to pay off as much debt as possible over a three to five year period of time.  Some debts must be paid in Chapter 13; others may not be.

The Debtor makes a monthly payment to a bankruptcy trustee.  The payment is determined by monthly take-home pay, less monthly living expenses.  For example, if take-home pay is $2,000 per month, and living expenses are $1,800 per month, the payment to the Trustee will be $200 per month.

Generally, in Chapter 13, secured debts must be paid in full, as well as "priority" debts (most back taxes and child support).  Any funds left over after payment of secured and priority debts are split equally among the unsecured creditors.  They each receive some percentage of what is owed, depending on the ability to pay.  Most unsecured debts remaining at the end of the case are discharged.  This is distinguished from credit counseling services where debts are paid in full over an extended repayment period.

The Chapter 13 plan is made up of the payments required for the various debts that are included in a Chapter 13 bankruptcy, as well as the fees for the trustee and attorney.  For example, if a debtor wishes to  keep a house but is behind in the payments, keep a vehicle and pay IRS tax debts, then a Chapter 13 plan may include the following components, assuming a 5-year (60 month) plan:

(Divided by plan length of 60 months  =  $1071.97/month plan payment to Trustee)

Of course, a debtor's income, minus expenses, must provide that there is enough money left over to pay this monthly payment to the Trustee each month.  If not, the Trustee will object to the Chapter 13 plan as "unfeasible".


CHAPTER 13 - ADVANTAGES

What Are the Advantages of Chapter 13 Bankruptcy?

Chapter 13, in some circumstances, can offer significant advantages over Chapter 7.  The main advantages are:

• More debts are dischargeable in Chapter 13 than in Chapter 7;
• Non-dischargeable back taxes and child support can be repaid over the life of the plan without interference from the creditors and, usually, without further interest and penalties once the bankruptcy petition is filed;
• A Debtor can keep property in a Chapter 13, which might be lost to the Trustee in Chapter 7;
• Secured debts in Chapter 13 may be reduced to the value of the property involved, depending on when the debt was incurred.  Generally, a secured vehicle debt created within 2 1/2 years before filing must be paid in full.  Secured vehicle debts older than 2 1/2 years require paying the value of the collateral.  For example, if a Debtor has a vehicle worth $6,000 but owed $8,000 against it, the secured debt is reduced to $6,000 - the value of the vehicle.  For obvious reasons, this is referred to in legal jargon as a "cram down".  Interest rates on secured debts may be reduced to the rate set by law, currently prime rate plus for a range of 7% to 9%;
• A Debtor can prevent auto repossessions and home foreclosures and, in the case of a home foreclosure, repay the delinquency over a period of time.

CHAPTER 13 - DISADVANTAGES

What Are The Disadvantages of Chapter 13 Bankruptcy?

While Chapter 13 can offer some real advantages to a Debtor, there are significant disadvantages as well:

• While in a Chapter 13 bankruptcy, the Debtor is required to file all of their Federal and State tax returns when due.  A Chapter 13 Trustee may request that you furnish proof that these returns have been filed.  Chapter 13 cases are now coming under greater scrutiny from the Court and from the Trustee;
• If a Debtor has a significant increase in income midway through the case, monthly payments to the Trustee may be increased as well;
• A Chapter 13 case requires a Debtor to be "in bankruptcy" for at least three years, whereas a Chapter 7 case is normally concluded within an average of four months;
• Lump-sum distributions, i.e. personal injury settlements, inheritances, etc., received during the case normally have to be turned over to the Trustee;
• The Court must approve incurring any new debt during the term of the bankruptcy, such as replacing a wrecked or broken down vehicle;
• The Debtor is under the supervision of the Trustee and the Court for the entire time frame of the bankruptcy.  Any actions to acquire new debt or sell property must be approved by the Court and the Trustee.  If a vehicle is wrecked or stops working and it needs to be replaced, it may take as long as 35 to 45 days to work through the process;
• If you receive any lump sum monies during the bankruptcy, such as tax refunds, insurance proceeds, inheritance or estate distributions, personal injury settlements, etc., the Trustee has a claim upon that money for the benefit of unsecured creditors.  A Motion for Refund can be filed to request that some of the money be retained by the Debtor, but it requires approval by the Trustee and the Court.

CHAPTER 13 - COURT

Do I Have to Appear in Court?

As in a Chapter 7 case, each debtor must attend a "meeting of creditors" in a Chapter 13 case.  Again, this meeting typically takes about five minutes.  At the hearing, the Trustee will ask the Debtor some basic questions about residence and employment and will review the Chapter 13 Plan for legal sufficiency.

There may be other events that may require court appearances, but these are usually limited and plenty of advance notice will be provided.

Once the meeting of creditors is concluded, the Chapter 13 Trustee will evaluate your case to see that your plan complies with all aspect of the law.  The Trustee will review the debts to be included, the payments to be made to each creditor, the feasibility of your plan, etc.  Once this has been done, your plan will either be confirmed (or approved), or your Trustee will file an objection to confirmation of your plan.  Confirmation is the bull's eye that is aimed for in a Chapter 13.  If an objection is received, your attorney must modify or change elements of your bankruptcy to satisfy the concerns of the Trustee.  Sometimes this can be as simple as adding a specific debt or, in some cases, may be very complicated. During this period, you are still required to make all of your payments to the Trustee.  When your case is confirmed, then the Trustee will send out "catch-up" payments to all secured creditors and then begin monthly disbursements as required under your plan.

After the "meeting of creditors", it is unlikely that you will have to appear in Court again.  However, there are numerous situations where a hearing may be set in your case and you will receive a notice of a court date.  Any time a Trustee or a creditor files a motion or other request for action with the Court, it will usually be set automatically for a court date.  This is the manner in which the Court keeps track of pending issues.  If you receive such a notice, please contact your attorney to verify whether it is something you need to plan on attending.  Most routine motions or creditor matters are settled before the court date.  However, there are a small number of matters that cannot be settled, and these may require your presence in court for testimony.  Your lawyer should keep you informed of the potential need for any such court attendance.  It is always a good thing to check with your attorney several days before a scheduled court date, just to confirm its status.


CHAPTER 13 - COST

Cost

Our legal fees in Chapter 13 cases typically range from $3,000 to $4,000, depending on the complexity of the case.  In addition, there is a $274 filing fee for the Bankruptcy Court.

Our normal policy is to require a $350 retainer prior to filing, which includes the Court's filing fee of $274 with a $76 credit on your attorney's fees.  The remainder of the attorney's fees are paid by the Trustee from the Debtor's monthly payments.  This fee includes all work through and including confirmation of your bankruptcy plan.

Any work done after confirmation is separately billed, but is still paid by the Trustee from the Debtor's monthly payment.