Chapter 13 is a section of the Bankruptcy Code which allows individuals (not corporations or partnerships) who are in financial difficulty to pay their creditors over time, while under the protection of the Bankruptcy Court. As with a Chapter 7, at the moment of filing the bankruptcy petition, the Bankruptcy Court issues an order, preventing creditors from taking any action against you.
What is a Chapter 13 Bankruptcy? The general concept of a Chapter 13 is that the debtor makes monthly payments to a Chapter 13 trustee, who, in turn, pays creditors according to their status. Typically, in a Chapter 13 all interest stops on unsecured debts. (In certain situations unsecured creditors receive 4% interest.) These differences are discussed more fully below.
Why Should I File Chapter 13? Whether you should file a Chapter 13 instead of filing under another chapter, such as Chapter 7, involves detailed analysis into your financial situation, and you should consult with an experienced attorney prior to making this decision. However, some factors suggesting that a Chapter 13 should be filed are the following:
Are you faced with a foreclosure or seizure of property? If your home mortgage lender has filed a foreclosure action or other property, such as a vehicle, has been seized, you have little choice, if you want to save this property. You must file a Chapter 13 proceeding. You will be able to catch up on the past due amount (“cure the arrearage”) over an extended period of time under the protection of the Bankruptcy Court, and you will not lose the property.
Do you have property that would be lost in a Chapter 7? As explained in the page concerning Chapter 7, one of the duties of the Chapter 7 trustee is to “liquidate” (sell, if necessary) property, and then distribute the proceeds to creditors. If you have property which would at risk in a Chapter 7, and you do not want to lose this property, then you will want to consider a Chapter 13. For example, if a Chapter 7 debtor has a vehicle that is paid for (and the vehicle is worth enough), the Chapter 7 trustee may well sell the vehicle. In a Chapter 13 framework, the vehicle is not lost.
Are your nondischargeable debts large in comparison with your dischargeable debts? If the bulk of your debt is nondischargeable debt such as student loans or most taxes, and you need protection from your creditors, a Chapter 7 proceeding will not be successful in the long run. Although the automatic stay will protect you from creditor harassment up until the time that the Chapter 7 discharge is granted (normally about 90-150 days from the date that the petition is filed), after the discharge a creditor with a nondischargeable debt is free to start up collection efforts again. The Chapter 7 discharge, then, although it will cover some debt, will leave most of the debt still owing. The answer? File a Chapter 13, if possible, to pay the debt while under the protection of the Bankruptcy Court.
Do you have debts that are nondischargeble in Chapter 7, but are dischargeable in Chapter 13? There are some debts that are not dischargeable in a Chapter 7 that are dischargeable in a Chapter 13. Some of these include debts incurred by fraud or false representations, embezzlement or larceny; and debts incurred by willful and malicious injury to another person or their property.
If, at the end of the Chapter 13 plan, you have not been able to pay all of this kind of debt, the rest will be discharged.
Who May File a Chapter 13? Only an individual with regular income who owes less than currently $394,725 in unsecured debt and currently $1184,200 in secured debt. These debts must also be noncontingent and liquidated, meaning that they must be for a certain, fixed amount and not subject to any conditions or bona fide disputes.
How Does A Chapter 13 Work? As mentioned above, in a Chapter 13 plan, the debtor makes monthly payments to a trustee, who then pays creditors. To make these monthly payments, you must have some source of income that is regular, such as employment income or rental income. You are required to pay all of your “disposable income.” (see below) to the Trustee for 36 months or more (again, see below). The Trustee will pay some creditors in full. These include secured creditors and creditors who hold “priority debts”, such as most tax debt. Other unsecured debt will also be paid by the Trustee, but, depending on various factors (see below), you may not be required to pay these debts in full. If, at the end of the plan, there remains a balance on the unsecured debt, the balance is discharged, and you will not owe it any more. (There are some exceptions, for example, student loans). You do not lose any property in a Chapter 13, unless your plan proposes surrender of this property.
How Much Do I Pay Per Month And For How Long? You are required to pay your “disposable income”, which is defined as income that is not reasonably necessary for the maintenance and support of you or your dependents, during the “applicable commitment period” (discussed below). Under the bankruptcy code as it existed prior to October 17, 2005, disposable income was calculated by subtracting reasonable monthly expenses from actual monthly income. Under current law, however, this no longer is true. Believe it or not, pursuant to the required “means test” the amount of your monthly income is equal to your average monthly income received during the previous six months, and not actual income received at the time of filing. This can result in ludicrous results. For example, consider the example of a debtor who, during the six months before filing, enjoyed a high income, but whose income now is much lower. The bankruptcy code, as written, requires the use of the higher, but no longer real, income. Conversely, a debtor who during the last six months had a comparatively low income but who now earns a high income would not have to use the higher income in calculating disposable income. Bankruptcy courts have struggled to attempt to reconcile the disposable income as determined by the means test with the amount left after deducting actual expenses from actual income. Various solutions have been arrived at. For example, in the Eastern District of Louisiana, where I practice, the court might allow the lower disposable income amount calculated by subtracting actual expenses from actual income, but require interest to be paid to unsecured creditors.
As mentioned above, when determining “disposable income”, you are allowed to deduct “reasonable” expenses. If your income is above the state median for a household of your size, then these “reasonable” expenses are not necessarily the expenses you actually incur. Some of these expenses are based on national or regional standards, irrespective of what you actually spend. Needless to say, this can require involved and detailed analysis, and determining the amount you will pay in a Chapter 13 plan can be very difficult, and this is one of the reasons you need an experienced attorney.
How long does a Chapter 13 plan last? Typically, a Chapter 13 plan lasts from between 36 months to 60 months. The length of the plan depends on several factors: the amount of your average monthly gross income calculated over the six month period prior to the month of filing, the monthly amount of your disposable income, the amount and kind of debt that you have, and the value of your nonexempt property. If the historical average monthly gross income is over the state median you will be forced into a 60 month plan, unless you can pay 100% of your unsecured debt within a shorter period of time. Beyond this, let me give you some examples:
Assume you are facing a foreclosure of your home, and the amount necessary to “reinstate” the mortgage (the total of the past due amounts, plus attorney’s fees, court costs, etc.) is $5,000. You have a recent car loan, and you are two payments ($720) behind. Additionally, you owe the IRS $1,000 for last year’s tax. Finally, you have $10,000 in credit card debt. You have little or no equity in your home or car, and have property worth $400 that is not exempt. You and your attorney have agreed that $750 of the fee will be paid in your Chapter 13 plan.
Your Chapter 13 plan must pay the $5,000 reinstatement amount on your mortgage. Also, the amount past due on your car loan will be paid in your plan. Finally, the plan must pay the IRS the full amount owed, because it is “priority” debt, and therefore must be paid in full.
If you have “disposable income” of $525 per month, you will be able to pay all of this amount within 36 months. This is the best possible situation. Now, if your disposable income is only $250 per month, you will still be able to “cure the arrearage” (pay the past due amount) on the home mortgage and car loan, and you will be able to pay the IRS the full amount owed, but you cannot pay the credit card debt in full. If your plan remains at 36 months, you will pay a little over 3% of the credit card debt. This is acceptable, however. At the completion of the plan payments, you will receive a discharge from the remaining 97% of the credit card debt you were unable to pay.
Now assume that you are current with home home mortgage payments, and that you have the same $10,000 in credit card debt. The value of your home is $175,000, and the balance on your mortgage is $100,000. In this situation, your plan must provide to pay all of the unsecured debt, with interest. Why? Because of a rule that creditors in a Chapter 13 must be paid at least as they would be paid if the debtor filed a Chapter 7. Here, even after deduction of the Louisiana homestead exemption of $25,000 and other deductions, such as the fictitious costs of selling the property, the nonexempt equity in your home easily exceeds the $10,000 in credit card. If you filed a Chapter 7, your home would be liquidated (sold) by the Chapter 7 Trustee. Your mortgage lender would be paid, administrative expenses (such as the Trustee’s fee and a real estate commission) would be paid, and you would receive $25,000, which is the amount of your homestead exemption. The amount remaining most probably would be enough to pay your unsecured creditors. This being so, you must pay them in full in the Chapter 13 plan. Not only that, but you probably would have to pay those unsecured creditors interest (currently, 6% in the Eastern District of Louisiana), which is contrary to the usual rule that unsecured creditors do not receive interest through a Chapter 13 plan. The good news? You have managed to pay your debt at favorable rates, and you have saved your home from being lost.
What Are The Disadvantages of Chapter 13? Except for the disadvantage of having to file the Chapter 13 in the first place, there are no real “disadvantages” to a Chapter 13. There are some restrictions, however. If you miss payments that are due under your Plan, your case will be dismissed by the Court. This will put you back in the same condition as you were in prior to filing. You will lose the protection of the Court, and your creditors will again be free to pursue collections, foreclosure, etc. While in a Chapter 13 plan, you cannot borrow money (incur new debt) without first obtaining court approval. You cannot use credit cards while in a Chapter 13. Also, part of the rebate of State and Federal Taxes (if you qualify for a rebate) will be collected by the Chapter 13 Trustee to pay your creditors.
What is the cost of filing Chapter 13? Court costs for a Chapter 13 are currently $310 (slightly less than the currently $335 for a Chapter 7). In the Eastern District of Louisiana where I practice, which encompasses the New Orleans area, the Bankruptcy Court has established the “no look” attorney’s fee for a Chapter 13 which is currently set at $2,500. Fortunately, the Court allows for payment of the fee through the plan and I typically defer most of the $2,500 into the plan. In addition, to the above fee I collect for the court filing costs, the cost of credit counseling and debtor education and the cost of downloading a credit report to your bankruptcy forms. It is less expensive initially, though not in the long run, to file a Chapter 13 bankruptcy than a Chapter 7 bankruptcy. Some chose a to file a Chapter 13 case over a Chapter 7 bankruptcy for that reason. In addition to the attorney fees the Eastern District of Louisiana allows for $300 annual attorney payments is the succeeding years of a Chapter 13 bankruptcy. I will work with you to arrive at a payment plan that fits with your personal situation.
What are you getting for your money? The most important factor should be how competent and experienced the attorney is. When selecting an attorney, you need to ask several important questions. Am I comfortable with this attorney? Does the attorney sincerely care for me and my legal problem, or am I just another case? Does this attorney have the experience and expertise to handle the problems that may arise in my case? Ask the attorney how many Chapter 13 bankruptcy cases he or she has handled. Is the attorney personally handling the main portions of my case, or instead, delegating the work to secretaries or paralegals? Of course, there is nothing wrong with an attorney using support staff to assist in the preparation of your case. However, you should guard against the situation where most of the preparation with you is done by a paralegal. The fee I quote you includes all the above costs. Some attorneys artificially make their fees appear to be a bargain by not including the costs that you will have to pay in addition to their fee.
Do I Need An Attorney At All? Yes!! What I have said concerning the need for an attorney in a Chapter 7 bankruptcy is doubly true in a Chapter 13. You may be tempted to attempt to prepare and file the bankruptcy documents yourself. After all, you can buy the forms and fill in the blanks by yourself. That way, you avoid the attorney’s fee (you still have to pay the court costs). Or, there are some “bankruptcy preparers” who charge a minimal fee to prepare and file the necessary paperwork to file a bankruptcy. While in some cases this may not be a major problem, it has been my personal experience that the risk is simply not worth it. Much of what goes into the bankruptcy petition, schedules and statements comes from insightful and probing questioning from a qualified bankruptcy attorney. Bankruptcy preparers are strictly prohibited from practicing law and, therefore, cannot give legal advice or even ask the necessary questions to make sure you are completing your paperwork fully and completely. Even if they were legally allowed to do so, they are not able to adequately assess the laws surrounding exemptions and to determine what your best options are. In preparing the documents yourself, with or without the assistance of a bankruptcy preparer, you may assume, for example, that there is no problem with not listing a particular asset or debt, or reaffirming a particular debt, only to find out months or even years later that you did not get rid of that debt, or that you may lose an asset, or any number of other problems. Perhaps most importantly, without an attorney, you will not have representation in court if the need should arise (and it often does when paralegals handle things). Further, if you list things incorrectly in your petition, schedules or statements, or omit necessary items, it is YOUR problem, not the paralegal’s problem. You sign all your bankruptcy papers under penalty of perjury. Ultimately, the debtor may have to spend several thousand dollars to attempt to remedy a situation that could have been prevented, or at least planned for, at the beginning. Bankruptcy is a very important decision. It is basically the first step towards your entire financial future. The entire bankruptcy system is designed so that attorneys represent all parties involved, whether they be debtors or creditors. That is what we are trained to do. Do you want to trust this future to yourself or to a non-licensed non professional? This is the time that you should do things correctly. Don’t skimp and save at this point. Hire the most competent attorney that you can afford and take the first step towards your fresh start.
What Debts Can Be Discharged In Chapter 13? First of all, any debt that you can discharge in a Chapter 7 will also be dischargeable in a Chapter 13. Further, there are other debts that, while they cannot be discharged in a Chapter 7, can be discharged in Chapter 13 (see above).
What About My Credit? What I have said about this topic in the Chapter 7 page applies here, as well. Let me add, however, that it is possible that a completed Chapter 13, especially if creditors were paid at 100%, will be more favorably regarded by prospective creditors. After all, a Chapter 13 is a debt repayment plan, not outright debt elimination. This is by no means clear, however, and there are many factors to consider and discuss with your attorney. One is that the bankruptcy filing will be included in your credit record for up to 10 years. Any prospective creditor can be expected to obtain your credit report in deciding whether to extend credit, and to include as a factor the bankruptcy filing. How much will the bankruptcy hurt your chances of getting credit in the future? In order to answer this question, one issue will be what condition your credit record was in at the time of filing bankruptcy. If, as sometimes happens, your credit is excellent up until the time of filing, then the bankruptcy can be expected to be damaging. However, if the credit record is not good, the bankruptcy filing will be less damaging, and actually may be of benefit to your creditworthiness. You may not get as high a credit limit as you once had, or be able to borrow large sums of money, but getting some credit (such as a secured or even an unsecured credit card) shouldn’t be that difficult, and you can rebuild your credit over time. What you will likely face for some time are higher interest rates and higher down payments. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record, other credit problems, etc. Many of my clients who have received a Chapter 13 discharge report to me that they have been successful in rebuilding credit, and have purchased homes, vehicles and other assets on credit.
Nothing contained herein should be construed to constitute advice for your personal situation. Furthermore, this is intended as a peripheral glance at the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws. Whether or not you should file a Chapter 7 or Chapter 13 bankruptcy, or seek any other type of relief, will vary depending on your personal situation. This decision should only be made after careful consideration and analysis, and after consultation with a professional. The information regarding bankruptcy law you see here may contain information and rules peculiar to the Eastern District of Louisiana. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.