Chapter 13 Bankruptcy

With this type of bankruptcy, the debtor pays toward their debt through a payment “plan” over a 3 to 5 year period. There is no “liquidation” in a Chapter 13 bankruptcy, so there is no chance the debtor will lose their property they own at the time of filing. In fact, this is a common reason individuals choose to file a Chapter 13 over a Chapter 7—because they have an asset they do not want to lose, that they would otherwise lose if they filed a Chapter 7.

The amount of your payment plan varies from case to case and is often dependent on your assets, your income, and the kinds of creditors you have.

Chapter 13 Bankruptcy Defined

There are a number of very significant differences between Chapter 13 bankruptcy and Consumer Credit Counseling:
Chapter 13 is not voluntary on the part of the creditors. Creditors have no choice as to what you do or do not do so long as your bankruptcy plan complies with the bankruptcy laws. You are also under automatic stay protection while you are making payments.
Chapter 13 is not a debt consolidation: it is a re-organization. It is possible that you pay only 5% of your debt back and receive a discharge on the remaining 95%. This is very different from Consumer Credit Counseling.
Chapter 13 deals with all debts, not just unsecured debts. Therefore, house payments, car payments, taxes, student loans, credit card debts, and medical bills are also paid through the Chapter 13 plan.
Payments are made in a Chapter 13 bankruptcy while under court-ordered protection from your creditors. This means that all garnishments, levies, repossessions, foreclosures, and all other forms of creditor activity are stopped as of the filing date of the bankruptcy petition and remain stopped as long as your are in compliance with the plan and the bankruptcy code.

Evaluating Bankruptcy

Only individuals may file a Chapter 13 bankruptcy. Partnerships and corporations cannot file a Chapter 13 bankruptcy. Legally married persons may file together (which is called a “joint bankruptcy”). Married persons may also file individually, if they so desire.
No. The law allows you to represent yourself if you so desire.
No. Rule 9001 of the Rules of Bankruptcy Procedures requires you or your attorney to certify that the bankruptcy is not filed for any improper purpose — such as to harass or to cause unnecessary delay. You should not file a bankruptcy petition if the sole purpose is to delay a creditor’s actions.
Ultimately, this is a personal choice; however, there are a number of factors that must be considered in making this decision. The following is a list of reasons you would choose a Chapter 13 bankruptcy over a Chapter 7 bankruptcy.
Excessive Disposable Income—after paying your regular monthly expenses, you have money left over with which to pay your unsecured creditors
Substantial Non-Exempt Equity in Assets That You Wish to Retain—you own assets that you would otherwise lose in a Chapter 7 bankruptcy that you do not want to lose (for example, your equity in the asset exceeds what you are allowed by law to keep). In a Chapter 13 bankruptcy, you are a debtor in possession and continued legal and equitable ownership of all your assets so long as you are making a plan payment to a Chapter 13 trustee.
Significant Non-Dischargeable Debts—these are debts for which you would not receive a discharge in Chapter 7 bankruptcy. These include child support, income taxes, student loans, criminal restitution, government penalties, damages for willful or malicious injury, bad checks, and money obtained by false pretenses.
Prior Chapter 7 Bankruptcy Filing Within Six Years—if you have received a discharge in Chapter 7 bankruptcy within six years, a Chapter 7 bankruptcy is not available to you. Therefore, you would file a Chapter 13 bankruptcy since the six-year waiting period does not apply in Chapter 13 bankruptcy.
Default on Debt Collateralized by Important Asset—if you are significantly behind on secured debt that is collateralized by a house, car, or other significant asset that you wish to keep, Chapter 13 bankruptcy is appropriate. A Chapter 7 bankruptcy does nothing to help you cure defaults on secured debt.
Future Recurring Un-Reimbursed Debts—if you are expecting a debt to occur in the future that is not expected to be paid or reimbursed (for example, the birth of a child or continuing medical treatment for which there is not full insurance coverage), a Chapter 13 bankruptcy is a good option because is preserves your ability to file a Chapter 7 bankruptcy at a later date or to dismiss and re-file including the new un-reimbursed debt.
Co-Debtor on a Personal Debt—if you file for Chapter 7 bankruptcy, your creditor will go after the co-debtor for payment. In a Chapter 13 bankruptcy, the creditor will generally leave the co-debtor alone. There are some very specific rules that apply to this situation.
One of the biggest advantages of Chapter 13 bankruptcy is that you retain the absolute right to dismiss the bankruptcy proceeding at any time without the necessity of a hearing.
In Chapter 13 bankruptcy, you have the absolute right to convert to a Chapter 7 bankruptcy at any time for any reason.
The six-year waiting period in Chapter 7 does not apply to Chapter 13 bankruptcies. There is no waiting period in Chapter 13 bankruptcy; however, if you have filed a bankruptcy petition in Chapter 13 that was voluntarily dismissed, or dismissed with prejudice, you will not be able to re-file a Chapter 13 petition for six months from the dismissal date.

Results of Bankruptcy

No. A Chapter 13 bankruptcy does not relieve you of the obligation to make your regular monthly mortgage payment in the exact amount called for in your promissory note.
Possibly. A Chapter 13 WILL change the treatment of a second or third loan that is undersecured or totally unsecured, due to the depreciation of the underlying collateral (the real property), and leave the borrower with an unsecured debt to be paid off pennies on the dollar. Just as with the first mortgage, the second and third mortgage payments must be made in the exact amount called for in the respective promissory notes.

The Process of Declaring Bankruptcy

When you file for bankruptcy, the Court will send an order to all the creditors listed in the creditors matrix filed with the Court. This order forbids your creditors from taking any action to collect a debt. After retaining our office, we will provide you with a standard form letter on our letterhead that you should mail to your creditors. This letter notifies your creditors that you have an attorney representing you. Your creditor should then call us instead of you between the time you retain us and the time the bankruptcy documents are filed with the Court. Once the documents are filed with the Court, the Court will notify your creditors directly.
Yes. However, some debts are not routinely part of a bankruptcy. These debts include utility bills, insurance bills, and other types of monthly recurring debt (for example, car insurance, house insurance, or karate lessons). As a general rule, all debts are scheduled on the bankruptcy schedules, including all credit card debts, medical bills, house loans, car loans, student loans, taxes, signature loans, credit union loans, and any other loans.
The discharge order in bankruptcy discharges only those debts that are included on the bankruptcy schedules. In addition, you must sign a document that is filed with the Court stating all of your debts are listed. You should make every effort to ensure that you listed all of your debts. However, in some limited circumstances, it is not possible to know all of your creditors at the time of filing. In these instances, the Bankruptcy Court will allow you to amend your schedules to add debts that you owed prior to the filing but did not list. There are, however, time limits in which to do this. The time frame for amending your schedules is rather specific. Therefore, you should contact your attorney immediately upon discovering omitted creditors. Any delay in informing your attorney may prevent the addition of the creditor to the bankruptcy schedules and, therefore, may make the unlisted creditor’s debt excepted from discharge. It is very important to make sure all of your debts are listed the first time and, if not, to timely amend your schedules to add the unlisted creditors.
Yes. Assets are rights to property as well as property that you presently possess. For example, the right to insurance proceeds, tax refunds, or marital assets are assets even though you do not currently possess them. If you knowingly and fraudulently conceal any asset from the Bankruptcy Court, you have committed a felony and could be fined up to $5,000.00, imprisoned for up to five years, or both. The Court can also deny your discharge, revoke your discharge, or dismiss or convert your bankruptcy proceeding. Failure to list assets is taken as a very serious matter by the Bankruptcy Court and trustees.
Yes, if you owe them money on the petition date. You are required to list all of your debts.
What if I do not want my house or car loan creditors notified of the bankruptcy?
This is not possible. These creditors are required to be listed as debts in your bankruptcy schedules. These creditors will, therefore, receive notice from the Bankruptcy Court. It is important to recognize that bankruptcy does not prevent you from repaying any debt. Typical debts that debtors continue to repay after filing are house loans, car loans, dentists, doctors, and credit unions.
Not necessarily. In most cases, you never see a judge or enter a courtroom. In all cases, you are required to attend a 341 meeting, which is conducted by the trustee appointed to your case. This is an administrative proceeding and not a judicial proceeding. No judge is present. It is also not conducted in a courtroom. The hearing is normally conducted 30 to 40 days after filing the bankruptcy petition. This hearing is referred to as “the meeting of creditors.” At this meeting, the trustee will ask you questions that are intended to clarify and expand on the information contained in your bankruptcy schedules. Your answers to the trustee’s questions are made under oath and are tape recorded for later playback if necessary. It is absolutely critical that your answers be truthful. At the meeting, creditors are also given the opportunity to ask you questions under oath. The meeting normally lasts an hour or less. Your attorney is present at the meeting with you to assist you in the process.
In certain limited circumstances, the United States trustee’s office will allow a waiver of appearance upon request based on physical disability or unavailability due to geographical consideration due to employment. It is important to understand that a waiver of appearance is only allowed in very exceptional circumstances. Normally, this requires a doctor’s order or a letter from your employer and, even then, the request for waiver is routinely denied. You should expect to be required to appear at the 341 meeting of creditors.
The trustee will issue a show cause order to you requesting you to explain your non-appearance and will reschedule the meeting for another date. If you miss the second meeting, your case will be dismissed.
This is a very difficult question to answer. Generally, creditors are classified as specific types of creditors (for example, secured, under-secured, over-secured, unsecured priority, and unsecured non-priority). The plan of re-organization that is filed with the Court and developed by your attorney and you provides how creditors are to be paid and how long the plan must run. There are a number of very specific rules that require certain classifications of creditors to be treated certain ways. The type of debt that a person has typically determines how much must be paid in and how long the plan must run. The rules in Chapter 13 bankruptcy are fairly clear and it is the attorney’s responsibility to know the rules and apply those rules to your specific circumstances.

While In Bankruptcy

As a general rule, ongoing, regular monthly mortgage payments are made directly by you to the mortgage company and are not included in the plan repayment made to the Chapter 13 trustee. In some limited cases, the ongoing, regular monthly mortgage payment is included in the plan payment made to the Chapter 13 trustee (this is the exception and not the rule).
As a general rule, ongoing, regular monthly mortgage payments are made directly by you to the mortgage company and are not included in the plan payment made to the Chapter 13 trustee. The pre-petition mortgage arrearage (the amount you were behind on the mortgage payments before filing the petition, including late fees and foreclosure costs) is paid through the monthly plan payment made to the Chapter 13 trustee. The payment made to the trustee must fully cure the pre-petition mortgage arrearage within the life of the plan. This means that when you complete the Chapter 13 bankruptcy, you are fully caught up on your mortgage payments.
Payment for car loans, with some very limited exceptions, are made through the plan payment made to the Chapter 13 trustee. Chapter 13 bankruptcy offers some very distinct advantages over Chapter 7 bankruptcy in regard to automobile payments. In a Chapter 13 bankruptcy, a car loan can be “crammed down” and “stretched out.” These methods are used when the collateral is worth less than the amount of the debt or when the number of payments left on the debt is less than the length of the plan. The following examples illustrate the cram down and stretch out methods:
Cram Down Method—Suppose that the value of your automobile is $10,000 but you owe $16,000 on it. In Chapter 13 bankruptcy, you have the ability to cram down the secured portion of the amount owed to the value of the collateral (in this case, $10,000) and pay the balance owed, if at all, as unsecured debt.
Stretch Out Method—Suppose that you owe $5,000 on an automobile at regular monthly payments of $350.00 per month. In Chapter 13 bankruptcy, you have between 36 and 60 months to repay the debt owed, even if the value of the collateral is more than the amount owed. Thus the car payment can be stretched out over 36 months, effectively lowering the monthly payment to $150.00. The ability to “refinance” your secured loans through Chapter 13 is sometimes the only way to have enough cash flow to keep your property.
Income taxes are paid without interest and without penalties. This allows you to pay these debts off much more rapidly than trying to pay principal, interest, and penalties all at the same time.
No, at least not without a court order. In Chapter 13, your are expected to stay on a cash basis. This means that you are not allowed to incur new debt while in the Chapter 13. In some limited circumstances, you are allowed to incur new debt while in a Chapter 13; however, it can only be done after a hearing and only upon approval by the bankruptcy judge.
No, at least not without a court order. In Chapter 13, you are expected to not sell or otherwise dispose of your property without a court order. In some limited circumstances, you are allowed to dispose of property while in a Chapter 13; however, it can only be done after a hearing and only upon approval by the bankruptcy judge.
In certain limited circumstances, the Court will allow a debtor to “suspend” or “abate” payments upon motion to the Court. Specific reasons must be given in order to avoid the responsibility of making a plan payment (for example, a sickness or temporary loss of income). If such events occur, you should contact your attorney immediately rather than doing nothing and having your case dismissed by the Court.
This is a very serious matter. The one payment that cannot be missed in a Chapter 13 bankruptcy is the post-petition mortgage payment (payments that come due after filing the petition with the Court). If the post-petition mortgage payment is not made when due, the attorney for the mortgage company files a motion with the Court to set aside the bankruptcy protection so they can continue or initiate foreclosure proceedings. Once the motion is filed by the attorney for the mortgage company, you lose your ability to dismiss the case voluntarily and refile within a 180-day period.
The Chapter 13 plan that is filed with the Court provides for the frequency of plan payment (monthly, weekly, bi-monthly, or bi-weekly) and for the method of payment (wage withholding or direct payment). In most instances, the payment is monthly and is paid directly by the debtor to the Chapter 13 trustee’s office.
Once the Chapter 13 plan is confirmed and the objection deadline expires, the Chapter 13 trustee beings making disbursements to creditors according to the confirmed Chapter 13 plan of re-organization from the funds you pay to the trustee.
Every six months, the trustee’s office will mail you and your attorney a report that reflects the total money received and disbursed by the trustee and details all amounts paid to specific creditors.
If you are paying your creditors 100%, you are allowed to pay the plan off earlier than 36 months. However, if you are paying less than 100%, you are not allowed to pay the plan off earlier than 36 months.

Discrimination Due to Bankruptcy

No. 11 U.S.C. section 525 prohibits government units and private employers from discriminating against you because of a bankruptcy filing or because you failed to pay a non-dischargeable debt.
The federal, state, county, or municipal government may not discriminate against you with respect to the issuance of a license or permit because you filed bankruptcy. No employer, government or private, can lawfully terminate your employment or discriminate with respect to your employment as a result of filing bankruptcy.
Utility companies cannot discontinue service or refuse to provide you services because of a bankruptcy. They can, however, require you to pay a reasonable deposit. This is normally construed as an amount twice the amount of your average monthly bill.
You may not be discriminated against in obtaining future student loans on the grounds that you filed bankruptcy or failed to pay a student loan that is discharged in bankruptcy.
No. Chapter 13 does not look better on your credit record than a Chapter 7 bankruptcy. There are a number of reasons for this:
In Chapter 13 bankruptcy, you are actually in bankruptcy for 3 to 5 years. This means that the point at which you are allowed to begin re-establishing credit is postponed for 3 to 5 years since you are not allowed to incur new debt in a Chapter 13 bankruptcy.
Creditors tend not to be sophisticated enough to distinguish between a bankruptcy that repays creditors (Chapter 13) and one that does not (Chapter 7). Creditors do not give special credit for repaying debts in a Chapter 13 bankruptcy.
If the Chapter 13 bankruptcy fails, all debts continue to be owed less the amounts paid into the plan. Creditors will use the amounts still owed against you when attempting to establish new credit.

Getting Started

Set an appointment to come into any of our three locations to meet with an attorney to discuss your debt-related problems. You will have the opportunity at that time to formally retain the attorney or you can wait and do so at a later date.
First, you should consult with an attorney. An attorney can help you plan for the bankruptcy and decide when to file a bankruptcy petition. Additionally,
You should stop using your credit cards. If you borrow money with the specific intent of discharging the debt in bankruptcy rather than repaying it, the debt is not dischargeable. For example, certain luxury purchases over $1,000 made within 60 days of the bankruptcy filing are not dischargeable. Cash advances aggregating $1,000 made within 60 days of the bankruptcy filing are not dischargeable. Debts involving materially false financial statements are not dischargeable.
You should not transfer your assets to friends, family, or business associates to protect the assets from your creditors. The transfer may be considered a fraudulent conveyance. If it is, you may lose both the property and your right to a bankruptcy discharge.
You should not destroy any business or financial records. If you do, you can lose your right to a bankruptcy discharge.
You should carefully choose the creditors you do pay. Some creditors (for example, landlords, secured creditors, and some utilities) should be paid under most circumstances. Conversely, if you pay a credit card debt that will eventually be discharged, you may be throwing money away. Your attorney will advise you on which creditors to pay.

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