Individual debtors earning a regular income may file an individual reorganization under Chapter 13. In addition to the petition, schedules and statement of financial affairs, the debtor is required to submit a proposed plan of reorganization (“plan”).
As with a case under Chapter 7, the filing of the petition under Chapter 13 “automatically stays” most actions against the debtor or the debtor’s property. Chapter 13 also provides a “co-debtor” stay which stops a creditor from trying to collect a “consumer debt” from another individual who is liable with the debtor on the debt. A consumer debt is an obligation incurred for consumer, as opposed to business, needs.
A debtor facing foreclosure can stop the foreclosure sale by filing Chapter 13. The Chapter 13 plan permits the debtor to cure defaults on mortgage debts by repaying the arrears within a reasonable period of time (usually within 36 months). If the mortgage becomes all due during the Chapter 13, the plan must pay off that entire debt by the due date.
Role of the Chapter 13 Trustee
Once the debtor files his/her petition, a trustee is appointed to administer the case. The Chapter 13 trustee’s role is to collect plan payments from debtors and make distributions to creditors according to the debtor’s plan. Like in every other case, the Trustee is also required to examine the debtor at the meeting of creditors and verify the accuracy of the debtor’s bankruptcy schedules and statement of financial affairs.
Chapter 13 Plan
The debtor must file a plan within 15 days of the petition, unless extended by the court, and the debtor must begin making plan payments to the trustee within 30 days of the petition date. The plan provides for monthly payments of a fixed amount to the trustee and must ultimately be confirmed by the court.
Once the debtor’s plan has been confirmed, the trustee begins distributing funds to creditors according to the terms of the plan. A plan can offer unsecured creditors less than full payment of their claims. Automobile loans can be modified so a debtor pays the lender only the value of the car as of the date of the petition. The undersecured portion of the debt is treated like all other unsecured debts in the plan.
As in cases filed under other chapters, a meeting of creditors is held in every Chapter 13 case, and the debtor is examined under oath. The meeting is held about 30-40 days after the petition is filed. The Chapter 13 trustee conducts the meeting and questions the debtor’s financial affairs and the proposed terms of the plan. Creditors may attend and ask questions. Problems with the plan are typically resolved during or shortly after the creditors’ meeting. If there are no plan objections, a confirmation order is submitted at the creditors meeting.
If the trustee or a creditor objects to confirmation of the plan, a hearing is scheduled before the court. The bankruptcy judge will determine whether the plan is feasible and meets the legal requirements for confirmation. A variety of objections may be made, but the most frequent objections are: the total plan payments are less than creditors would receive if the debtor’s assets were liquidated; or the debtor’s plan does not commit all of the debtor’s projected net disposable income for the minimum three-year period.
The debtor must commit all projected “disposable income” during the time the plan is in effect. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents. If the debtor operates a business, disposable income excludes those sums necessary to pay ordinary operating expenses.
If the plan is confirmed by the bankruptcy judge, the Chapter 13 trustee begins distributing the funds received according to the plan. If the plan is not confirmed, the debtor may attempt to modify the plan. The debtor also has a right to convert the case to a Chapter 7.
Making The Plan Work
On occasion, changed circumstances will affect a debtor’s ability to make plan payments, or a debtor may have inadvertently omitted a creditor. In such instances, the plan may be modified either before or after confirmation. Modification after confirmation is not limited to a motion by the debtor. Modifications may be at the request of the trustee or an unsecured creditor.
The provisions of a confirmed plan are binding on the debtor and each creditor. Once the court confirms the plan, it is the responsibility of the debtor to make the plan succeed. Chapter 13 is not designed to solve financial problems that arise after the case is filed. The debtor must make regular payments to the trustee, which will require living on a fixed budget for a long period.
The debtor’s employer may be required to withhold the amount of the plan payment from the debtor’s paycheck and send it to the Chapter 13 trustee. Furthermore, while confirmation of the plan entitles the debtor to retain property, the debtor may not incur any significant new debt without consulting the trustee, if such obligations have an impact upon the execution of the plan. Failure to make plan payments may result in dismissal of the case.
The Chapter 13 Discharge
Under Chapter 13 a debtor is entitled to a discharge upon successful completion of all payments required under the plan. The discharge releases the debtor from all claims provided for in the plan or disallowed by the court. It is the creditor’s duty to file a claim in the case. Those creditors who were provided for in full or in part under the Chapter 13 plan, even if not paid because they failed to file a claim, may not initiate or continue legal action to collect the discharged obligations.
In return for adhering to the requirements of a repayment plan for three to five years, the debtor receives a broader discharge under Chapter 13 than in a Chapter 7 case. Generally, the debtor is discharged from all debts provided for by the plan or disallowed, except certain long term obligations (such as a home mortgage), debts for alimony or child support, debts for most student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and Court imposed fines or criminal restitution. To the extent that these types of debts are not fully paid pursuant to the Chapter 13 plan, the debtor will still be responsible for these debts after the Chapter 13 case has successfully concluded.