Chapter 13

What Is Chapter 13 Bankruptcy?

In General

Bankruptcy is a means to suspend debt collection efforts against you temporarily during the course of the Bankruptcy Court proceeding. When you file for Bankruptcy the Federal Court grants an “automatic stay,” which prevents creditors from attempting to collect on debts you owe them.

Your creditors may petition the Court for relief form the automatic stay. A creditor whose petition is granted may resume collection efforts. Creditors whose loans are secured by property could then be permitted to take possession of that property.

At the end of the legal proceeding, if the Court finds that you are indeed bankrupt your qualifying debts are “discharged.” Discharged means that the debts are forgiven, and you have no further obligation for their repayment. The Court could deny your discharge, if you concealed assets or fraudulently transferred assets prior to filing Bankruptcy.

Certain debts cannot be discharged. Such debts include child support, alimony, student loans, debts incurred due to the debtor committing fraud or theft, and most taxes, although there are exceptions for some taxes under certain circumstances.

The legal doctrine behind Bankruptcy is giving bankrupt debtors a “fresh start.” Depending upon your circumstances, to qualify for this fresh start you may have to give up certain property (Chapter 7 Bankruptcy) or you may have to repay a portion of your outstanding debt (Chapter 13 Bankruptcy) while under the supervision of the Court.

As a result of the 2005 Bankruptcy Reform Act, it is now more difficult to qualify for Chapter 7 Bankruptcy. Debtors are subject to a means test, and if their income exceeds limits set by the government, the debtor must file under Chapter 13 Bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is a reorganization plan for individuals. In a Chapter 13 Bankruptcy you repay your creditors from your future income rather than by liquidating your current assets.

In Chapter 13 the debtor proposes a plan for repayment of creditors with monthly payments that are feasible to make. The plan must last at least three years, and may not last longer than five years.

The plan proposed by the debtor must be approved by the trustee and the Bankruptcy Court. To be approved the plan must give the creditors at least what they would have received in a Chapter 7 Bankruptcy. Creditors may file a motion with the Court objecting to the plan as proposed.

If you propose a plan that is approved, you will make payments to the trustee, who will then make distributions to your creditors. Your creditors cannot continue their collection efforts during the course of your plan. When you have made your last payment under your plan, any remaining amount due to creditors for qualifying debts are discharged, and you are freed from any further obligation for their repayment.

During a Chapter 13 plan, debtors who propose to repay less than 100% to their creditors must live on a budget under the supervision of the Court, and pay any “excess income” to their creditors, in addition to their regular payments. Even if the creditors are repaid in full the Bankruptcy remains on the debtor’s credit record.

While under the supervision of the Court in a Chapter 13 plan, debtors may not acquire additional debt or sell assets without the prior approval of the Court.

If the debtor fails to make all payments under plan, any creditor may petition the court to convert the Chapter 13 plan to Chapter 7 liquidation.

Debtors often choose Chapter 13 over Chapter 7 Bankruptcy if they have valuable non-exempt property that would have to be liquidated in a Chapter 7 Bankruptcy, or if they expect to be “back on their feet” soon and simply need time to make up missed payments. Chapter 7 Bankruptcy