Chapter 13 - Overview
Chapter 13 bankruptcy is designed to help debtors with sufficient disposable income to reorganize their debts and pay off certain creditors. It is also one of the primary tools for saving homes from being sold in a foreclosure. An individual that files for Chapter 13 is required to make a monthly payment to the Court based on what they can comfortably afford to pay. In return for this payment, the law grants a Chapter 13 debtor many rights and benefits not available in a Chapter 7 case. For example, a Chapter 13 debtor may decide to use his or her case to re-pay delinquent taxes which are too recent to eliminate in bankruptcy, and which incur penalties and interest outside of Chapter 13. One of the most common uses of Chapter 13 is to save a person’s home by stopping an upcoming foreclosure of the property. It can similarly be used to protect a vehicle from repossession, even if it has recently been repossessed by the creditor.
For those individuals with high income, a Chapter 13, unlike a Chapter 7, will not completely eliminate all un-secured debts. Rather, it either makes it easier for you to pay them off, or allows you to pay them off at a reduced rate, sometimes for pennies on the dollar. In order to qualify for a Chapter 13 bankruptcy, your unsecured debts must be less than $360,475 and your secured debts must be less than $1,081,400. These numbers are increased periodically.
A knowledgeable Los Angeles bankruptcy attorney can give you more insight into whether Chapter 13 bankruptcy is right for your particular situation. Like Chapter 7, the law since October 17, 2005 requires a person that files for Chapter 13 to similarly complete a credit counseling course prior to filing. However, it is very easy to do so, and it can be done from the comfort of your home in about 1.5 hours. A Chapter 13 case is confirmed once the Judge approves the plan that has been proposed to the Court.Chapter 13 Debt Repayment Plan
An attorney starts your Chapter 13 proceedings by filing a petition with the bankruptcy court that serves your area. With this petition, an attorney also files:
- Schedules of your assets and liabilities,
- A schedule of your current income and expenditures,
- A schedule of executory contracts (contracts where the performance is still pending) and unexpired leases,
- A statement of your financial affairs,
- Evidence that you’ve gone to credit counseling,
- A copy of a debt repayment plan developed through credit counseling, and
- Other documents relevant to your financial condition.
Next, an impartial trustee is appointed to evaluate and administer the case. Part of the trustee’s role is looking over your debt repayment plan, collecting payments and making distributions to certain creditors that are entitled to a payment.
Three types of claims—priority, secured, and unsecured—must be identified in the plan. The priority claims are such things as taxes, alimony, and the costs of the bankruptcy process. These must be paid in full unless the priority creditor agrees to another arrangement and treatment.
Secured claims are those claims in which a creditor can take back property as collateral if you do not pay off the debt, such as a home or a vehicle. If you want to keep the collateral, the plan can stipulate that the claimant for this type of claim will receive at least the value of the collateral. You can basically keep any asset you like, so long as you pay for it. For example, this means that if you wish to keep your home, you can do so as long as you pay your mortgage payment each month after your bankruptcy case is filed. You can also stop foreclosure and stop repossession of your vehicle through an appropriate Chapter 13 debt repayment plan.
Unsecured claims are those claims in which the creditor does not have a security interest in any property to back it up. The most common example of an unsecured debt is credit card debt and pay day loans. The plan does not always require that you pay your unsecured debt in full, and in many cases a “0% plan” is proposed and approved by the court. Here, a Chapter 13 case is approved, but no disbursements to unsecured creditors are required. Other times, the Court will not approve a “0% plan,” but will still approve a low percent plan, such as 5%.
However, every Chapter 13 case is different, and the percentage, if any, which must be re-paid to unsecured creditors will vary from case to case depending in part upon an individual person’s “disposable income.” Unsecured creditors must receive as much as they would be paid if your un-exempt assets were simply liquidated to pay off your debts in a Chapter 7 bankruptcy. This is known as the “liquidation test.” However, many times, the liquidation test will not require that any payment be paid to unsecured creditors. However, where the liquidation test does mandate that a certain minimum percentage be paid to unsecured creditors, the specific amount you need to pay will be based in part on the number and amount of exemptions you are able to claim. California has two exemption systems and you may choose which of the systems to use in calculating how you will pay off your debts.Chapter 13 Bankruptcy Process
All collection actions are automatically stayed (stopped) by filing a Chapter 13 bankruptcy petition. This means creditors cannot file or continue to file a lawsuit against you, your wages cannot be garnished, and creditors cannot call you directly to demand payment. Any individual who is jointly liable with you for a consumer debt incurred for a personal, family, or household reason may also have collection activity for that debt stayed.
Typically a Chapter 13 trustee will hold a meeting of your creditors within 31-45 days of the petition being filed. This is known as the “341(a)” meeting of creditors. At this meeting, you are placed under oath and asked questions by the trustee. Bankruptcy judges are not permitted to attend the meetings. Your debt repayment plan is also reviewed. While it is called a “meeting of creditors,” creditors almost never attend this initial meeting. Instead, they will show up via their attorney at your “confirmation hearing,” which takes place before a bankruptcy judge. If represented by an attorney, a debtor will not be required to attend the confirmation hearing. Instead his or her attorney will appear on behalf of the debtor.
Approximately four months after the case is filed, creditors must file a “proof of claim” with the court if they wish to participate in the distribution of funds.
The plan must outline regular payments of fixed amounts to the trustee who will then distribute these funds to creditors according to what the plan orders. A confirmed repayment plan binds the debtor to its terms. Once all payments are made and other conditions are met, the court will enter a discharge of the debtor and of dischargeable debts.
Developing an adequate debt repayment plan is easier done with the help of an attorney who has detailed knowledge of California’s exemption systems and how the Chapter 13 process works. Contact an experienced Los Angeles bankruptcy lawyer like Devin Sawdayi at 310-475-9399 or via our online form.