Nellor Law Office

Common Chapter 13 Questions

The Nellor Law Office provides legal services to debtors and creditors in chapter 13 bankeruptcy cases and proceedings.

A general summary of chapter 13 can be found elswhere on this website. The following is a list of common questions about chapter 13 bankruptcy cases together with answers to those question. This list is not exhaustive. It is intended to provide a basic overview of chapter 13 bankruptcy relief.

1. What is chapter 13?

Chapter 13 is a part of the Bankruptcy Code that allows debts to be repaid over time, from future income, under the protection of the court.

2. How does chapter 13 work?

A debtor submits a written plan to the court that sets forth how past debt will be paid, in whole or in part, from future income. Normally the plan is to make periodic payments to a trustee from future income. The trustee distributes those payments to creditors. A discharge is granted after the plan is completed.

3. Who can file for chapter 13 relief?

Any natural person (not a partnership or a corporation) who resides, does business or has property located in the United States, who has regular income and has unsecured debts totaling less than $250,000.00 and secured debts totaling less than $750,000.00, can file for chapter 13 relief. The only exception— persons who were involved in another bankruptcy case that was dismissed because the debtor did not follow court orders during the preceding 180 days.

4. May a husband and wife file chapter 13 together?

Yes. A husband and wife may file a joint petition and pay only one filing fee if each of them is otherwise eligible to file chapter 13.

5. Can self–employed persons file chapter 13?

Yes. And, if you are self–employed, you can continue to operate your business during the chapter 13 case.

6. Can I file chapter 13 if I am using a debt consolidation or consumer credit counseling service?

Yes. A financial counselor, credit agency, or debt consolidation service has no legal right to prohibit anyone from filing for chapter 13 relief.

7. How does chapter 13 differ from chapter 11?

Chapter 13 is streamlined to reduce the cost of the common, consumer, cash–flow problem. For example, creditors get to vote on and approve a chapter 11 plan. There is no creditor voting in chapter 13. A debtor gets to keep his or her property in most chapter 13 cases even if creditors are not paid in full.

Chapter 11 is much larger in scope than chapter 13. It provides more alternatives to reorganizing than chapter 13. Chapter 11 is designed to handle much larger and more complex financial problems than normally found in a consumer situation. Chapter 11, for example, has no debt limitations for filing, but chapter 13 does. Creditors have much more control in chapter 11—they are entitled to vote on a debtors plan before the court considers approving it. In addition, debtors normally do not get to keep their property unless all creditors are fully paid.

8. How does chapter 13 differ from chapter 12?

Chapter 12 and chapter 13 are very similar. The differences lie in the focus of the two different kinds of relief that each chapter provides. Chapter 12 is designed to provide financial relief to family farms. For example, family farm debt is often much higher than consumer debt, so the debt limitations for filing chapter 13 can be a problem for a family farmer. In addition, Income from farming operations is seasonal, as opposed to regular monthly wages. The most significant substantive difference between the two kinds of relief, however, is that chapter 12 allows a debtor to adjust debt on family farm real estate but chapter 13 does not allow debts to be adjusted on family residential real estate.

9. How does chapter 13 differ from a debt consolidation or consumer credit counseling service?

Chapter 13 is supervised by the court. The court issues orders that are binding on creditors. Creditor consent is not necessary to approve a repayment plan. Creditors are prohibited from taking action against you or your property by bankruptcy law and can be punished by the court if they violate bankruptcy law. A debt consolidation service is completely voluntary for, and requires the consent of, all creditors.

10. How does chapter 13 differ from chapter 7?

The entire focus of the two kinds of relief is different. A chapter 7 uses liquidation of a debtor’s property as the vehicle to provide relief. A chapter 13 is designed to rehabilitate a debtor financially using future income. This means that:

In a chapter 7 a debtor’s non–exempt property is sold to pay debts, while under chapter 13 a portion of the debtor’s future income is used to repay creditors;
A person who files chapter 7 usually loses all of his or her non–exempt property. A chapter 13 debtor usually retains all of his or her property;
A chapter 13 discharge is broader than a chapter 7 discharge, and;
A chapter 13 case usually lasts much longer than does a chapter 7.

11. When is chapter 13 preferable to chapter 7?

Chapter 13 is generally preferable if you:

Want (or have) to repay all or some of your debt;
Have income that exceeds your living expenses other than debt payments;
Have valuable non–exempt property;
Have valuable exempt property securing debts, which would be lost in a chapter 7 case;
Are not eligible for a chapter 7 discharge;
Have one or more debts dischargeable under chapter 13 that are not dischargeable under chapter 7, or;
Have sufficient assets or income to repay most debts but need temporary relief from creditors to do so.

12. Will I lose my property in a chapter 13?

Usually not. A plan can propose a sale of all or part of your property, but there is no legal requirement that you do so.

13. What is a chapter 13 plan?

It is a written document presented to the court that describes your proposal to repay creditors.

There are two basic kinds of chapter 13 plans— extension plans and composition plans. An extension proposes to repay creditors in full over an extended period of time. A composition proposes to repay creditors part of what is owed to them (for example, 50%) over an extended period of time. Either kind of plan is acceptable.

14. Must debts be paid in full in chapter 13?

No. Some debts are given a priority that requires full payment. These include some tax debts and secured debts. Otherwise the only requirement is that creditors must receive what they would have received had you filed a chapter 7. Debts that are not paid in full are discharged when the plan is completed.

15. What debts can be paid in a chapter 13 plan?

All debts and liabilities can be treated in a chapter 13 plan. Secured debts, unsecured debts, and even non–dischargeable debts can be paid under chapter 13.

16. Do creditors have to approve the plan?

No. The court must approve the plan. Creditors do not get to vote on the plan. Creditors may object to confirmation of the plan, however, if it does not conform to the legal requirements of the bankruptcy code.

17. What are the requirements for the court to approve a chapter 13 plan?

The formal requirements for court approval— called confirmation— are:

The plan complies with the legal requirements of chapter 13;
All fees have been paid;
The plan was proposed in good faith;
Each unsecured creditor will receive at least as much as it would if you filed a chapter 7;
It appears that you will be able to make the payments and comply with the plan, and;
Each secured creditor has consented to the plan, will receive a return of its collateral, or will retain its lien and be paid the value of the collateral.

18. What happens if the court does not approve the plan?

You can modify the plan and ask for confirmation of the modified plan. You can also convert the case to chapter 7 or dismiss the chapter 13.

19. How long does a chapter 13 plan last?

A chapter 13 plan must last for 36 months unless it proposes to repay all debt in full in a shorter period of time. A plan can be extended to a maximum of 60 months if necessary.

20. What happens if I temporarily cannot make my plan payments?

The plan can be modified to delay the term or change the amount of the payments. The case can also be dismissed, the case can be converted to chapter 7, or you may be eligible to apply for a hardship discharge.

21. What if I am unable to complete the plan payments?

If you can not finish the plan you can either dismiss the case, convert the case to chapter 7, modify the plan so that it can be completed, or ask the court to enter a hardship discharge.

22. What is a chapter 13 discharge?

A discharge is a court order that releases you from all dischargeable debts. The order also prevents creditors from collecting or attempting to collect their debts. A debt that is discharged is one that the debtor is released from and does not have to pay.

There are actually two kinds of discharges that can be granted in chapter 13. The first, a complete discharge, is granted when the plan is successfully complete. The second, commonly known as a hardship discharge, is granted when the plan can not be completed due to circumstances that a debtor is not accountable for.

23. What debts are discharged by a complete chapter 13 discharge?

All debts of any kind or amount, whether they are actual or estimated, are discharged, except:

Debts that were not included in the plan;
Debts for alimony, maintenance, or support;
Debts that the court determines arose due to death or personal injury caused by a debtor while operating a motor vehicle while lawfully intoxicated;
Debts for restitution included in a criminal sentence;
Debts for student loans or other educational benefits that became due within the last 7 years, unless the court determines that repayment in the future would create an undue hardship on the debtor or the debtor’s dependents;
Installment debts whose last payment is due after the plan is completed, and;
Debts that were incurred while the plan was in effect.

24. What debts are discharged by a hardship discharge?

All debts of any kind or amount, whether they are actual or estimated, except:

Many (but not all) tax debts;
Debts incurred by false pretenses, fraud, or false financial statements;
Debts that are not listed in the schedules (unless the case is results in no assets being available to creditors);
Debts for alimony, maintenance, or support;
Debts incurred as a result of an intentional injury to another person or another person’s property;
Debts for certain fines or penalties;
Debts for student loans or other educational benefits that became due within the last 7 years, unless the court determines repayment in the future would create an undue hardship on the debtor or the debtor’s dependents;
Debts that arose due to death or personal injury caused by a debtor while operating a motor vehicle while lawfully intoxicated;
Debts that a debtor did not or could not have received a discharge for in a previous bankruptcy case;
Debts that were not included in the plan;
Debts for restitution included in a criminal sentence;
Installment debts whose last payment is due after the plan is completed, and;
Debts that were incurred while the plan was in effect.

25. How is a chapter 13 case started?

A chapter 13 case is commenced by filing a petition for relief with the court clerk requesting relief under chapter 13. Only a debtor can file a chapter 13 petition— creditors cannot file an involuntary chapter 13 against you. A number of other documents must be filed with the petition. If there is an emergency, most of the other documents required can be filed within 15 days after the petition.

26. How much is the filing fee and when is it paid?

The filing fee is $313.00 for either a single or a joint (husband and wife) case. The fee is normally paid when the case is filed. If you are unable to pay when the case is filed, the court can allow payment in installments, with the final installment due 120 days after the case is filed. The court can also extend payment of the filing fees for a period not to exceed 180 days after filing. If the filing fee is not ultimately paid in full the case will be dismissed.

27. What other fees are charged in a chapter 13 case?

The trustee collects a fee from the money disbursed to creditors under the plan. That fee is equal to between 3% and 10% of the money the trustee distributes to creditors each month. The exact percentage fee is set periodically by the Attorney General of the United States. The trustee fees are in addition to attorney fees and the filing fee.

28. Where is a chapter 13 case filed?

The case must be filed with the clerk of the court in the district where the debtor has resided or maintained a principal place of business for the greatest portion of the preceding 180 days.

29. Do I have to go to court?

You must appear at a meeting of creditors (also known as a §341 hearing). Technically, the meeting of creditors is not a court appearance. The trustee conducts the meeting. You are required to answer questions at this meeting about your property and financial affairs, and the plan, under oath. For many persons this is the only hearing that is required. If debts are to be reaffirmed, if property is to be redeemed or other matters related to the chapter 13 case arise, other court appearances, before the bankruptcy judge, may be needed.

30. How does filing a chapter 13 affect other proceedings, foreclosures, or lawsuits?

Filing a chapter 13 automatically stops all lawsuits, attachments, garnishments, foreclosures, or other collection activities against you or your property. This is known as the automatic stay.

The court clerk will usually mail a notice to all creditors advising them of the stay a few days after the case is filed. The debtor’s attorney, or even the trustee, can deliver notice to creditors before the court notice is mailed if necessary. If a creditor does happen to seize something, or take further actions, the action is void (in this district) and can be set aside by the court. If a creditor continues with a suit or collection activity after it knows about the chapter 13 case, the court may punish the creditor by imposing fines or awarding you damages.

31. How does filing a chapter 13 affect my credit rating?

There is really no such thing as a “credit rating.” There are credit reporting agencies that gather information from creditors about how their customers are paying obligations. These agencies make reports about credit histories available to persons or businesses that request them. A person’s “credit rating” is determined by the person who is reading the report.

The fact that a chapter 13 was filed can be (and usually is) listed on a credit report. Some creditors consider bankruptcy to be a negative factor in determining whether to extend credit. Others will allow an explanation of why the chapter 13 was necessary and will evaluate a person’s credit risk based on the facts that led to the bankruptcy. Still others do not care at all.

The real purpose of chapter 13, however, is to put you in a financial position where you can afford to by things over time, or otherwise borrow money. If you are in a situation where chapter 13 is an alternative, your credit report will show that you do not have the present ability to borrow money because you have too many debts to pay from the income you have. After chapter 13 those debts will be gone, and your credit report will show the ability to repay a loan from existing income. In the end, that is what a “credit rating” is all about.

32. Will my name be published if I file chapter 13?

A chapter 13 case is a public record. The name of the debtor may be published by some credit reporting agencies. Consumer bankruptcies are not normally published in the local newspapers.

33. Will my employer be notified if I file chapter 13?

Employers are not normally contacted by the court when a chapter 13 case is filed. It is, however, likely that a chapter 13 trustee will contact an employer to verify the wage status and to make arrangements for a wage assignment for the moneys you propose to pay under the plan. If there are reasons for an employer not to be contacted, the trustee should be informed so that other arrangements can be made for the trustee to receive any employment or wage information he or she may desire.

34. Can I be fired or demoted if I file chapter 13?

No. It is illegal for either private or governmental employers to discriminate against an employee as to employment because that person has filed for chapter 13 relief.

35. Can someone deny me a license or permit if I file chapter 13?

No. It is illegal for federal, state or local governmental agencies to discriminate against a person as to the granting of licenses (including driver’s licenses), permits, or similar grants, because that person has filed for chapter 13 relief.

36. What is a chapter 13 trustee?

A chapter 13 trustee is an officer of the court appointed to collect a debtor’s plan payments, supervise the plan and pay a dividend to creditors. In addition, the trustee has administrative duties and is in charge of seeing that a debtor performs his or her duties in the chapter 13 case. A trustee is appointed in every case from a panel of qualified persons.

37. What are my responsibilities to a trustee?

You must cooperate with the trustee in the administration of the chapter 13 case. If you do not cooperate, your discharge could be denied or the case could be dismissed.

38. How much of my income must be paid to the trustee?

This depends somewhat on whether your plan is an extension or composition. If you can repay all of your debt within thirty–six months (an extension plan), only the income necessary to complete the plan payments within the term of the plan are necessary. If a plan is a composition (creditors are to be repaid a percentage of what is owed, not 100%), you debtor must pay all disposable income to the trustee for thirty–six months.

39. When must I start making payments to the trustee?

The first payment must be made within thirty days [30] after the plan is filed with the court. The plan must be filed within fifteen [15] days after the case is filed. Payments must be made on a regular basis.

40. How are payments made to the trustee?

Payments can be made directly by you or your employer. The trustee in this district requires a wage assignment (payments directly from the employer) unless there are compelling reasons not to involve the employer.

41. What is a secured creditor?

A secured creditor is a person who holds collateral for the payment of a debt. A secured creditor holds a lien on property you own or control. Real estate mortgages or contracts and installment contracts for cars or furniture where the creditor has retained a security interest are typical examples of situations where the creditor is secured.

42. What is an unsecured creditor?

A creditor that has no lien on property is known as an unsecured creditor.

43. What happens to unsecured creditors in chapter 13?

Unsecured creditors must file a proof of claim with the court within ninety days [90] after the first date for the meeting of creditors. Unsecured creditors who fail to file claims in time are barred from doing so and their debts will be discharged. The trustee examines the claims and may object to any claim that are improper. The court will hold a hearing to determine whether the trustee’s objection is valid. If the trustee does not object, the claim is allowed. Allowed unsecured claims receive a dividend from the trustee according to the plan.

44. Do all unsecured creditors have to be paid the same?

No. Unsecured claims can be divided into separate classes and be treated differently if there is a reasonable basis for doing so.

45. How are cosigned and guaranteed debts treated in chapter 13?

The answer depends on the kind of debt and what the plan proposes to do with the debt that is cosigned or guaranteed. If the debt is a consumer debt that is to be paid in full the creditor may not collect it from the cosigner or guarantor. If the debt is a consumer debt that is not to be paid in full, the creditor may collect the unpaid portion from the cosigner or the guarantor. If the debt is not a consumer debt, the creditor can collect it from the cosigner or guarantor, whether the plan proposes to repay it in full or not.

46. What happens if I incur more debt during chapter 13?

Some debts that are incurred after the case is filed can be included in (added to) the chapter 13 plan. These include debts for taxes that become payable while the case is pending and consumer debts approved by the trustee arising after the case was filed that are necessary for the debtor’s performance under the plan. All other debts incurred by the debtor after the case is filed must be dealt with outside of the plan.

47. What happens if I need credit during chapter 13?

This most commonly arises when a family car needs to be replaced or a residence requires significant repairs. These require the approval of the trustee.

48. What happens if I move before the chapter 13 is done?

You must immediately notify the court clerk and the trustee, in writing, of any address change. This is necessary because all persons involved in the chapter 13 case can rely on the address stated in the petition for all communications with a debtor by mail. If you move and do not notify the court or the trustee, you can be served with binding notices by having the communication mailed your old address.

49. What if I decide to stop chapter 13?

ou have an absolute right to discontinue (dismiss) the chapter 13 case at any time.

50. How much are attorney fees in chapter 13 cases?

There is no single, fixed, market price for bankruptcy cases. If you shop around your local community you will find that some attorneys quote fees at flat rates and others will charge based on the number of hours their services take. Some lawyers will give you an estimate of the expected fees after a basic analysis of the work that needs to be done.

The amount of attorney fees in a bankruptcy case also depends on the kind of bankruptcy relief that is involved. In business cases, the amount charged varies greatly depending on the size of the business, the type of business involved, the extent of the relief needed by the debtor, the attitude and aggressiveness of the creditors, the type of reorganization contemplated by the debtor and whether the business’ owners are in agreement or disagreement regarding the method of reorganization.

Having said all of this, however, the normal practice for chapter 13 cases, is for the debtor’s attorney to receive payment for earned fees from the payments the debtor makes to trustee. The attorney has a priority claim for fees earned in the chapter 13 case. The court must approve these fees before they can be paid. The trustee then pays the ordered fees, in periodic installments, from the plan payments. If additional fees are incurred the attorney is limited to submitting an application to the court every four months.