Chapter 13 bankruptcy gets its name from the United States Bankruptcy Code in which the 13th chapter of the bankruptcy laws describes the second most common, but less recognizable type of bankruptcy. Chapter 13 is a bankruptcy that is referred to as a “restructuring” or “modification” of your debts through a monthly repayment plan. It is important to know that most people automatically assume a monthly repayment plan means that all debts must be repaid; however, most people that file chapter 13 bankruptcy do not repay all their creditors. In fact, these people generally pay “pennies on the dollar” to unsecured creditors (i.e. credit cards, medical bills, payday/signature loans, etc.) and then receive various benefits in repaying debts they wish to repay (i.e. home mortgage and car loans) or that they must repay (i.e. most taxes, child support and student loans). Generally speaking, a chapter 13 bankruptcy in Illinois or Missouri has fewer restrictions to qualify than a chapter 7 bankruptcy. In every bankruptcy a Trustee is assigned to monitor your case, and a chapter 13 Trustee seeks to receive monthly payments over a 36 to 60 month time period to pay the debts that you must pay according to your income, assets and debts. It is important that you speak with one of our attorneys to determine if a chapter 13 bankruptcy is best for you, and we can even provide a good estimate of your monthly repayment and duration.
When considering filing a bankruptcy it is important to understand that there are several types of bankruptcies, and there are specific reasons why a person should file one bankruptcy over another. It is a myth to believe one bankruptcy is better than the other—one person could greatly benefit from filing a chapter 13 bankruptcy while a different person with different assets, debts and income would not benefit from filing a chapter 13 bankruptcy. The same is true for the other types of bankruptcy. The two most common types of bankruptcies filed by individuals are called chapter 7 and chapter 13. Call our office to schedule an appointment with an attorney to help you determine which bankruptcy is best for your particular situation and future goals
1.How Does A Chapter 13 Work?
In a chapter 13 case, the debtor (person who files for bankruptcy) must submit to the court a plan for the repayment of all or a portion of his or her debts. The plan must be approved by the court to become effective. If the court approves the debtor’s plan, creditors will be prohibited from collecting their claims from the debtor during the course of the case. The debtor must make regular payments to a person called the chapter 13 trustee, who collects the money paid by the debtor and disburses it to creditors in the manner called for in the plan. Upon completion of the payments required in the plan, the debtor is released from liability for the remainder of his or her dischargeable debts.
2.How Does Chapter 13 Differ From Chapter 7 For A Debtor?
The basic difference between chapter 7 and 13 is that under 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 most chapter 13 cases a portion of the debtor’s future income is used to pay as much of the debtor’s debts as is required considering the debtor’s circumstances. Also, a Ch. 13 case normally lasts much longer than a chapter 7 case.
3.When Is Chapter 13 Preferable To Chapter 7 For a Debtor?
Ch. 13 is usually preferable for a person who:
• wishes to repay all or most of his or her unsecured debts and has the income with which to do so within a reasonable time,
• has valuable nonexempt property or has valuable exempt property securing debts, either of which would be lost in a chapter 7 case,
• is not eligible for a discharge under chapter 7,
• has one or more substantial debts that are dischargeable under chapter 13 but not under chapter 7, or
• has sufficient assets with which to repay most debts, but needs temporary relief from creditors in order to do so.
4.How Does Chapter 13 Differ From A Private Debt Consolidation Service?
In a ch. 13 case, the bankruptcy court can provide aid to the debtor that private debt consolidation services cannot provide. For example, the court has the authority to prohibit creditors from attaching or foreclosing on the debtor’s property, to force unsecured creditors to accept a chapter 13 plan that pays only a portion of their claims, and to discharge a debtor from unpaid portions of debts. Private debt consolidation services have none of these powers.
5.What Is A Chapter 13 Plan?
It is a written plan (document) presented to the bankruptcy court by a debtor and his or her attorney. The plan states how much money or other property the debtor will pay to the chapter 13 trustee, how long the debtor’s payments to the trustee will continue, how much will be paid to each of the debtor’s creditors, which creditors will be paid outside of the plan, and certain other technical matters.
6.What Is A Chapter 13 Trustee?
A trustee is a person appointed by the United States Trustee to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor’s plan, and administer the debtor’s ch. 13 case until it is closed. In some cases the trustee is required to perform certain other duties, and the debtor is always required to cooperate with the chapter 13 trustee.
7.What Debts May Be Paid Under A Chapter 13 Plan?
Most debts, whether they are secured or unsecured. Even debts that are nondischargeable, such as debts for student loans, alimony or child support, may be paid under a chapter 13 plan.
8.Must All Debts Be Paid In Full Under A Chapter 13 Plan?
No. While priority debts, (such as debts for alimony, child support and certain taxes) and fully secured debts must be paid in full under a chapter 13 plan, only an amount that the debtor can reasonably afford must be paid on most other debts. The unpaid balances of most other debts that are not paid in full are discharged upon completion of the plan.
9.How Much Of A Debtor’s Income Must Be Paid To The Trustee Under A Chapter 13 Plan?
Usually all of the disposable income of the debtor and the debtor’s spouse must be paid to the chapter 13 trustee. Disposable income is income received by the debtor and his or her spouse that is not reasonably necessary for the support of the debtor’s dependents. Detailed calculations determine disposable income and should be calculated by an experienced bankruptcy attorney.
10.When Must The Debtor Begin Making Payments To The Chapter 13 Trustee And How Must They Be Made?
The debtor must begin making payments to the chapter 13 trustee within 30 days after the debtor’s plan is filed with the court. The payments must be made regularly on a monthly basis. If the debtor is employed, the court requires the payments to be made by the debtor’s employer on each pay period.
11.How Long Does A Chapter 13 Plan Last?
A chapter 13 plan must last for three years, unless all debts can be paid off in less time. If necessary, a Ch. 13 plan can last for as long as five years, and in a small percentage of cases five years is required.
12.How Are Cosigned Or Guaranteed Debts Handled Under Chapter 13?
If a cosigned or guaranteed consumer debt is being paid in full under a chapter 13 plan, the creditor may not collect the debts from the cosigner or guarantor. However, if a consumer debt is not being paid in full under the plan, the creditor may collect the unpaid portion of the debt from the cosigner or guarantor. A consumer debt is a nonbusiness debt. Creditors may collect business debts from cosigners or guarantors even if the debts are to be paid in full under the debtor’s plan.
13.When Should A Husband And Wife File Jointly Under Chapter 13?
If both spouses are liable for any significant debts, they should consider filing jointly under chapter 13, even if only one of them has income.
14.May A Self-Employed Person File Under Chapter 13?
Yes. A self-employed person meeting the eligibility requirements may file under chapter 13. A debtor engaged in business may continue to operate the business during the case.
15.May A Chapter 7 Case Be Converted To Chapter 13?
A pending chapter 7 case may be converted to chapter 13 at any time at the request of the debtor, upon meeting certain qualifications.
16.Will A Person Lose Any Property If He Or She Files Under Chapter 13?
Usually not. Under chapter 13, creditors are usually paid out of the debtor’s income and not from the debtor’s property.
17.How Does Filing Under Chapter 13 Affect Collection Proceedings And Foreclosures Previously Filed Against The Debtor?
The filing of a chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor’s property. A few days after the case is filed, the court will mail a notice to all creditors advising them of the automatic stay. Most creditors are prohibited from proceeding against the debtor during the entire course of the case. If the debtor is later granted a discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor after the case is closed.
18.May A Person Whose Debts Are Being Administered By A Financial Counselor Or Debt Settlement Company File Under Chapter 13?
Yes. A financial counselor and debt settlement company has no legal right to prevent a person from filing any type of bankruptcy case, including a chapter 13 case.
19.Are The Names Of Persons Who File Under Chapter 13 Published?
When a chapter 13 bankruptcy case is filed in Illinois or Missouri, it becomes a public record and the name of the debtor may be published by some credit reporting agencies. However, newspapers do not usually publish names of persons who file under Ch. 13.
20.Is A Person’s Employer Notified When He Or She Files Under Chapter 13?
In most cases, yes. The court requires a debtor’s employer to make payments to the chapter 13 trustee on the debtor’s behalf. Also, the trustee may contact an employer to verify the debtor’s income. However, if there are compelling reasons for not informing an employer in a particular case, it may be possible to make other arrangements for the required information and payments.
21.Does A Person Lose Any Legal Rights By Filing Under Chapter 13?
No. Filing under chapter 13 is a civil proceeding and not a criminal proceeding. Therefore, a person does not lose any legal or constitutional rights by filing.
22.May Employers Or Government Agencies Discriminate Against Persons Who File Under Chapter 13?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under chapter 13. It is also illegal for local, state, or federal government agencies to discriminate against a person as to the granting of licenses, permits, student loans, and similar grants because that person has filed under ch. 13.
23.What Is Required For Court Approval Of A Chapter 13 Plan?
The court may confirm a ch. 13 plan if:
• the plan complies with the legal requirements of chapter 13;
• all required fees, charges and deposits have been paid;
• priority claims will be paid in full under the plan;
• the plan was proposed in good faith;
• each unsecured creditor will receive under the plan at least as much as it would have received had the debtor filed under chapter 7;
• it appears that the debtor will be able to make the required payments and comply with the plan; and
• each secured creditor has been addressed in this plan to be paid or surrendered.
24.What If The Court Does Not Approve A Debtor’s Chapter 13 Plan?
If the court does not approve the plan proposed by a debtor, it will usually give its reasons for refusing to do so. The debtor may modify the plan and seek court approval of the modified plan. A debtor who does not wish to modify a proposed plan may either convert the case to chapter 7 or dismiss the case.
25.How Are The Claims Of Unsecured Creditors Handled Under Chapter 13?
Unsecured creditors must file their claims with the bankruptcy court within 90 days after the first date set for the meeting of creditors in order for their claims to be allowed. Unsecured creditors who fail to file claims within that period are barred from doing so, and upon completion of the plan their claims will be discharged without having to be paid. The debtor may file a claim on behalf of a creditor, if desired. After the claims have been filed, the debtor may file objections to any claims that he or she disputes. When the claims have been approved by the court, the chapter 13 trustee begins paying unsecured creditors as provided for in the plan.
26.What If The Debtor Is Temporarily Unable To Make The Chapter 13 Payments?
If 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 so as to enable the debtor to resume the payments when he or she is able to do so. If it appears that the debtor’s inability to make required payments will continue indefinitely or for an extended period, the case may be dismissed or converted to chapter 7. A debtor has several options, each with certain requirements, that require assistance from your bankruptcy attorney.
27.What If The Debtor Incurs New Debts Or Needs Credit During A Chapter 13 Case?
Debts or credit obligations incurred after the case is filed must be paid by the debtor outside the plan, and cannot be included in the current chapter 13 bankruptcy. The courts issues an order prohibiting the debtor from incurring new debts during the case unless they are approved in advance by the chapter 13 trustee. Therefore, the approval of the trustee should be obtained before incurring credit or new debts after the case has been filed via your bankruptcy attorney. The incurrence of regular debts, such as debts for telephone service and utilities, do not require the trustee’s approval.
28.What Should The Debtor Do If He Or She Moves While The Case Is Pending?
The debtor should immediately notify his/her attorney so that the bankruptcy court and the chapter 13 trustee records can be updated. Most communications in a chapter 13 case are by mail, and if the debtor fails to receive an order of the court or a notice from the trustee because of an incorrect address, the case may be dismissed or other unfavorable action may be taken.
29.What If The Debtor Later Decides To Discontinue The Chapter 13 Case?
The debtor has the right to either dismiss a chapter 13 case or convert it to chapter 7 if he/she qualifies at any time for any reason. However, if the debtor simply stops making the required payments, the court may compel the debtor or the debtor’s employer to make the payments and to comply with the orders of the court. Therefore, the debtor who wishes to discontinue a Ch. 13 case should do so through his or her attorney.
30.What Is The Role Of The Debtor’s Attorney In A Chapter 13 Case?
The debtor’s attorney performs the following functions in a typical case:
• Examining the debtor’s financial situation and determining whether chapter 13 is a feasible alternative for the debtor, and if so, whether a single or a joint case should be filed.
•Assisting the debtor in the preparation of a budget.
• Devising and implementing methods of dealing with secured creditors.
• Assisting the debtor in devising a plan that meets the needs of the debtor and is acceptable to the court.
• Preparing the necessary pleadings and chapter 13 forms.
• Filing the chapter 13 forms and pleadings with the court.
• Attending the meeting of creditors, the confirmation hearing, and any other court hearings required in the case.
• Assisting the debtor in obtaining court approval of a chapter 13 plan.
•Checking the claims filed in the case, filing objections to improper claims, and attending court hearings thereon.
• Assisting the debtor in overcoming any legal obstacles that may arise during the course of the case.
• Assisting the debtor in obtaining a discharge upon the completion or termination of the plan.
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Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.