Chapter 13 – Adjustment of Debts
Chapter 13 bankruptcy provides relief to qualified individuals (including small business owners) by allowing for an organized method of making a reasonable monthly payment to creditors, based upon his/her specific budget. Some individuals are excluded from Chapter 7 due to high income; Chapter 13 may be the next best option in these circumstances.
In Chapter 13, a Debtor proposes a plan to repay all or a portion of his/her debts over 3-5 years. The amount of the monthly payment and the length of the repayment plan are based upon several factors including the Debtor’s income, expenses, and amount/nature of the debts to be paid. A trustee is appointed to the case to receive the payments from the Debtor and distribute the funds to creditors.
The most common uses of Chapter 13 involve:
- Repaying past due mortgage or vehicle payments over time;
- Eliminating second or third mortgage liens (under certain circumstances);
- Restructuring auto loans to save a vehicle from repossession, reduce interest, and/or reduce the principal balance due;
- Paying creditors the value of any non-exempt assets (assets the law doesn’t allow you to protect from creditors) over time;
Secured loans like car loans are also paid through the Chapter 13 Trustee, so the Debtor no longer makes those payments directly in most cases. Secured loans are typically paid 100% (often at reduced interest rates), while unsecured debts may be paid less than 100%. Chapter 13 plan payments typically provide some budget relief and, perhaps an even better aspect: at the end of a 3-5 year payment plan, a Chapter 13 Discharge is entered that covers all remaining unsecured debt (with some limited exceptions).
Business entities, such as corporations, LLCs, partnerships, etc., are not eligible for Chapter 13 relief.
Chapter 13 Timetable
The following time table shows important dates through the early portion of your Chapter 13 case. Some of these dates are very important dates and cannot be missed. They are marked with an asterisk (*). Failure to comply with these deadlines can result in dismissal of your Bankruptcy case. Other deadlines are somewhat flexible but it is important to strive to meet each and every deadline.
| Deadline | Action Required |
|---|---|
| 14 days after filing Petition or Converting to a Chapter 13 Case | Deadline for filing the Plan of Repayment |
| 30 days after filing Petition | Deadline to make first Plan payment |
| One (1) days before § 341 Meeting of Creditors | All due, but unfiled, tax returns must be filed |
| 4-6 weeks after filing Petition | Meeting of Creditors takes place at the United States Bankruptcy Court |
| 30 days after Meeting of Creditors concludes | Deadline for objections to claims of exemption |
| 60 days after Meeting of Creditors | Deadline for Creditors to object to Plan of Repayment |
| 30 days after deadline for Creditors to object to Plan of Repayment | Deadline for Trustee’s objections or Recommendations (this is a soft deadline) |
| 30 days after Trustee’s objections or recommendations | Deadline for Debtor to comply with Trustee’s recommendations |
| 90 days after the Meeting of Creditors | Deadline for creditors to file claims |
| 180 days after the Meeting of Creditors | Deadline for governmental creditors to file claims |
*Important Deadline to Note: Any property that you receive, or acquire a right to receive after the date of filing bankruptcy, by bequest, devise, or inheritance; or from a property settlement or court order in a divorce or separation; or as beneficiary of a life insurance policy or death benefit plan, is property of the Estate. You are required by law to report this information, either to the Trustee, or to your attorney.
The Pros and Cons of Chapter 13 Bankruptcy
PROS
- The “automatic stay” of bankruptcy stops most creditors’ collection actions, including demands, lawsuits, repossessions, sales, or lease terminations.
- Only the Debtor can propose the Chapter 13 Plan. It is effective when confirmed by the Court.
- Upon completion of the Plan, the Debtor is discharged from most types of debt.
- Except as requested by the Debtor, most debts are paid only from the Debtor’s income, not from the sale of any assets.
- The Debtor can hold on to real property subject to a long term note and deed of trust if the Plan is complied with and it provides all necessary stipulations.
- The Debtor can retain a lease of real or personal property if the Plan is complied with and provides for the lease to be ‘assumed’ and for “catch-up” payment, within a few months of any default. Payment of current rental payments would resume.
- The Debtor can keep most personal property that secures a loan, or most real property subject to a note and deed of trust (mortgage), irrespective of a default, or any real property subject to an involuntary lien (e.g. an income tax or judicial lien), if the Plan is complied with and provides for payment of the entire balance of such obligation or of the value of the property securing the debt, whichever is less, by way of monthly payments during the Plan period, with interest at a rate that is often less than the contract rate.
- The Debtor can also hold on to real property, that is not the Debtor’s residence and that is subject to a long term note and deed of trust, under some circumstances.
- A Chapter 13 can be dismissed or converted to a Chapter 7 by the Debtor at any time, unless it can be shown that the Debtor has acted in bad faith.
CONS
- Only an individual can file (i.e. not a corporation, LLC, or partnership).
- The Debtor has to pay unsecured claims to the extent he or she has sufficient income to do so for at least a three year period.
- Recent unpaid income tax must be paid in full under the Plan but usually without interest.
- The Repayment Plan period cannot extend beyond five years.
- There are debt limits imposed upon the Debtor.
- There is a rather short timetable given to file a Plan.
- May delay credit repair by the plan payment period.
NOTE: This is a general listing of benefits. Not all benefits will be available to all Debtors. We would be pleased to consult with you about your specific circumstances – contact our office today!