Chapter 13 Bankruptcy
Chapter 13 is only available to individuals with regular income from any source (including sole proprietorships), not just wages. Partnerships and corporations are not eligible for chapter 13 relief. The purpose of chapter 13 is to help individual debtors reorganize their finances by making payments to creditors through a Chapter 13 plan for a at least three years, but no more than five years. 11 U.S.C. § 1322(d). A condition precedent to qualifying for Chapter 13 relief is that no debtor may have unsecured debts in excess of $307,675, and secured debts in excess of $922,975. 11 U.S.C. § 109(e).
The Chapter 13 Process
A Chapter 13 bankruptcy case begins with the filing a petition for relief pursuant to the United States Bankruptcy Code (the “bankruptcy petition”). 11 U.S.C. § 301(a). The bankruptcy petition is filed with the Bankruptcy Court in the district where the individual debtor lives (In your case the Northern District of Texas or the Eastern District of Texas). The debtor, in addition to the bankruptcy petition, must also file schedules listing all assets and all liabilities, an income and expense report, a statement of financial affairs and a chapter 13 plan. Federal Rules of Bankruptcy Procedure 1007(b), 3015(b). Married persons may file a joint bankruptcy petition or one or both spouses may file individual bankruptcy petitions. 11 U.S.C. § 302(a). Joint petitioners pay only one filing fee. If only one spouse files, the income and expenses of the non-filing spouse must be included in the debtor’s schedules, which numbers are used to determine the amount of the Chapter 13 plan payment.
Upon the commencement of the Chapter 13 bankruptcy case, a Chapter 13 trustee is appointed to administer the case. The initial role of the Chapter 13 trustee is to ensure the Chapter 13 plan is proper and proposed in good faith. Once the Chapter 13 plan is confirmed, the Chapter 13 trustee collects all plan payments from the debtor and makes distributions to the debtor’s creditors pursuant to the plan.
The Chapter 13 trustee conducts a meeting of creditors (341(a) hearing), and the debtor is examined under oath concerning the schedules, statement of financial affairs and the Chapter 13 plan. Creditors may attend the meeting of creditors and ask questions. Debtors (both husband and wife if jointly filed) must attend the meeting. Problems with the plan are typically resolved during or shortly after the creditors’ meeting. If there are no formal plan objections, the debtor may proceed towards confirmation.
The Chapter 13 Plan
Chapter 13 is the ideal vehicle for a debtor facing foreclosure. As indicated supra, the filing of a Chapter 13 bankruptcy case results in an “automatic stay” which can stop a foreclosure sale. By commencing a case under Chapter 13 a debtor may be able to permanently stop any foreclosure sale by providing to cure any defaults on the mortgage(s) within a reasonable period of time (about 36 months) in the plan. 11 U.S.C. § 1322(b).
The debtor is required to file a Chapter 13 plan 15 days after the filing of the bankruptcy petition. Federal Rules of Bankruptcy Procedure 3015(b). The debtor must commit to pay into the plan all projected “disposable income” for the duration of the plan. 11 U.S.C. § 1322(a). 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 is defined as excluding those amounts which are necessary for the payment of ordinary operating expenses. 11 U.S.C. § 1325(b)(2).
As stated above, the Chapter 13 plan dictates which creditors are paid and how much of their allowed claim they are paid. While secured creditors are specifically provided for in a Chapter 13 plan, unsecured creditors are not. Unsecured creditors will only receive a distribution from the Chapter 13 plan if a proof of claim is timely filed with the bankruptcy court. Unsecured creditors have to file their proof of claim within 90 days after the first date set for the meeting of creditors. Federal Rules of Bankruptcy Procedure 3002(c). A governmental unit, however, may file a proof of claim until the expiration of 180 days from the date the case is filed. 11 U.S.C. § 502(b)(9).
The Bankruptcy Code affords both the Chapter 13 trustee and the debtor’s creditors the opportunity to object to the confirmation of the Chapter 13 plan. If the trustee or a creditor objects to confirmation of the Chapter 13 plan, a hearing is scheduled before the Bankruptcy Court. There are a number of objections that can be made by trustees and creditors, but the most frequent objections are: (1) the total plan payments are less than creditors would receive if the debtor’s assets were liquidated under Chapter 7 of the Bankruptcy Code; or (2) the debtor’s plan does not commit all of the debtor’s projected net disposable income for the minimum three-year period. If the objection is sustained and the plan is not confirmed, the debtor may attempt to modify the plan, convert the case to a Chapter 7, or allow the bankruptcy case to be dismissed.
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. 11 U.S.C. §§ 1323, 1329. A motion to modify the Chapter 13 plan may be made by the debtor, an unsecured creditor or the trustee. 11 U.S.C. § 1329(a).
The provisions of a confirmed plan are binding on all interested parties. Creditors must refrain from any collection activities for the duration of the plan. The debtor must continue to make the plan payments in a timely fashion for the life of the plan. A failure of either party to the plan (creditor or debtor) will result in negative consequences. For the debtor, a breach of the plan might lead to dismissal or a motion for relief from the automatic stay, which, if granted will allow a creditor to go forward with collection efforts including foreclosure or repossession.
The Chapter 13 debtor is entitled to a discharge upon successful completion of all payments. 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, 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 debts for restitution or a criminal fine. 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.