Chapter 13 FAQ

This brief outline is not intended to replace the advice of an experienced bankruptcy attorney.

This outline contains only a small portion of what must be considered when filing for bankruptcy protection. It is very important that you obtain legal advice regarding your particular situation.  Consultation with a bankruptcy lawyer is usually little or no cost.

◙  Before Bankruptcy:

1. How does Chapter 13 work?

   Basic Bankruptcy Articles

   General Bankruptcy FAQ

   Chapter 7 FAQ

   Small Business FAQ

   Articles for Debtors

   How to Start a Bankruptcy

   Bankruptcy Glossary

2. Who is eligible for a Chapter 13?

3. What is the Role of an Attorney in a chapter 13 bankruptcy?

4. Important Deadlines and Timeline for chapter 13.

5. What Classes Must be Taken before and During the Bankruptcy?

6. What is the Means Test?

7. Exemptions in Chapter 13

8. What happens if I own property that is not exempt?

9. The cost of Chapter 13

10. How does filing bankruptcy affect my credit rating?

11. Will news of my bankruptcy be published?

12. Do I lose any of my rights, such as the right to vote, because I file for bankruptcy protection?

13. Are my out-of-state debts discharged in bankruptcy?

◙  During Bankruptcy:

1. What is an Automatic Stay?

2. What are the Debtor's Duties in a Chapter 13?

3. What is the role of the Trustee?

4. Surviving in a Chapter 13

5. What about my tax refund check?

6. Must my Employer know about my bankruptcy?

7. How does the Plan of Reorganization work?

8. What do I file if I am self-employed and in a chapter 13?

9. Payments through the Plan

10. Can creditors object to the Plan?

11. Amending the Plan Before Confirmation:

12. The confirmed plan

13. Requesting a Moratorium on Plan payments

14. Modifying the Confirmed Plan

15. Can I buy a house while in a chapter 13?

16. The discharge

17. How will I receive my discharge?

18. What debts are not discharged in a chapter 13 bankruptcy?

19. Can I modify my home loan while in bankruptcy?

◙  After Bankruptcy:

1. How often can I file a Chapter 13?

◙  More Information about Bankruptcy:

1. General Bankruptcy FAQ

How does Chapter 13 work?
The Debtors file documents called Petition, Schedules, Statement of Affairs, along with some other documents with the Bankruptcy Court.  These documents are reviewed by the Chapter 13 Trustee and other creditors.  In addition to the documents the Debtors also file a Plan of Reorganization.  This is called debt adjustment.  The intention is that over the next 3 to 5 years the Debtors will pay all the disposable income (income minus allowed expenses- see Trustee Guidelines and Census Bureau and IRS Data) to their creditors by way of the Bankruptcy Trustee.  At the end of their Plan period their remaining debts will be discharged, unless they are non-dischargeable.

Chapter 13 varies widely from district to district depending on the custom and attitudes of the local trustees and judges about what is "reasonable" and in "good faith".  A successful  Chapter 13 case always requires an experienced bankruptcy lawyer familiar with the prevailing judicial attitudes in the district and the myriad of unwritten local rules.  The failure rate for those who try their chapter 13 case without an attorney is at least 97%.  Under the new bankruptcy law this may now be 100% failure.

Who is eligible for a Chapter 13?
In order to file for a chapter 13 you must:

• Before filing complete the Credit Counseling for Consumers Class.  (Click here and review Step Five)

• Have sufficient regular income to meet monthly living expenses allowed by the chapter 13 Trustee, as allowed by the IRS and make a plan payment. [§109(e), §101(30)]

• Have less than $307,675 of unsecured debt, and less than $922,975 of secured debt. [§109(e)] (as of April 1, 2004)

• Not be a corporation, partnership, stockbroker, or commodity broker. [§109(e), §101(30)]

A liquidated debt is one where the amount the debtor owes is known, or capable of easy calculation.  For example,  a loan is a liquidated debt;  the damages owing in an auto accident are usually unliquidated until judgment is entered.

A strategy frequently used is to file Chapter 7 to discharge those debts that are dischargeable, and file a subsequent Chapter 13 to repay those debts that were not discharged in Chapter 7, or that cold not be dealt with in a chapter 7 (such as paying arrears on houses, etc).

What is the role of an attorney in a chapter 13 bankruptcy case?
The chapter 13 bankruptcy trustees tell me that less than 3% of those filing without an attorney can ever be successful in a chapter 13.  This statistic pre-dates the 2005 Reform Act, which dramatically increased the complexity of filing for bankruptcy protection.  Many people ask me if they "can file their own bankruptcy".  I always answer "Yes, anyone has the legal right to do their own open heart surgery, so why not not their own bankruptcy!"  The laws were complicated before they changed in 2005, now I believe that only an idiot would file their own bankruptcy, no matter "how simple".  In fact, after the law changed many lawyers stopped doing any bankruptcy law because it had become so complex; event fewer will help with chapter 13.  Never listen to the advise of someone who filed their own bankruptcy.  They had a "fool for a client" and probably committed at least one federal crime, but did not get caught.  The new laws are being aggressively enforced and the Attorney General's Office is actively pursuing bankruptcy fraud.  Do not use those who advertise on TV - you will end up paying their advertising costs.  Also, do not use "legal document preparers".  These are folks who want to be attorneys, but decided not to go to school.  Instead, they pretend to know the law, or, worse yet, are disbarred attorneys or other scum who prey off the innocent who do not know better.  Always check out your lawyer with their state bar.  Ask for references from the lawyer.  Most people find good lawyers by asking friends or relatives for referrals.

• Analyze the amount and character of the debts owed by the debtor to determine whether bankruptcy is the best remedy for the debtor’s financial problems.

• Assist the debtor in preparing his estate for bankruptcy, so that a minimum amount of property will later have to be turned over to the Trustee.

• Review the Debtor's history of payments and transfers to determine possible exposure to Debtor and others.

• Assemble the information and data necessary to prepare the bankruptcy schedules and statements for filing.

• Assist the Client in understanding their duties in a chapter 13.

• Draft the Plan of Reorganization, based on the debtor's situation, the law and the practical solutions available.

• Prepare the proper petitions, schedules, and statements for filing with the bankruptcy court.

• Determine whether the education classes are necessary.  If so, file the required certificates with the court.

• File the bankruptcy petitions, schedules, and statements with the court and obtaining the necessary injunctions and restraining orders.

• Address issues related to redemption, surrender or reaffirmation.

• File and notice the Plan of Reorganization.

• Attend the Meeting of Creditors with the debtor.

• Address issues raised by the Bankruptcy Trustee and creditors related to the Plan and other documents filed with the Court.

• Attend Plan Confirmation hearings.

• Address modifications of the Plan, as circumstances change during the life of the Plan.

• Prepare and file amended schedules as required by the Debtor's change of circumstances and/or the court.

Are my out-of-state debts discharged in bankruptcy?
Yes. Bankruptcy is a federal proceeding and the bankruptcy court has the jurisdiction and power to discharge debts contracted anywhere in the Country, whether in or out of your state of residence.  Of course, there are certain debts that cannot be discharged in bankruptcy.

How does the Plan of Reorganization work?
The plan must also meet two other tests:

Best Interest of Creditors Test : the plan must give  unsecured creditors at least as much on their claim as they would have received if the debtor filed Chapter 7 ; and

Best Efforts Test :  all projected disposable income (the amount left after payment of allowed expenses: see Trustee Guidelines and Census Bureau and IRS Data) must be paid into the plan for the "applicable commitment period" which could be 3 to 5 years (or maybe more).

The plan must also provide for payment in full of priority claims and generally provide for payment of the value of secured claims on cars, etc., in full over the life of the plan.  The Bankruptcy Reform Act changed the amount necessary to pay on vehicles that were purchased in the 2 1/2 years prior to filing, or other personal property purchased within the year prior to filing.  See §1325(a)(10)-hanging paragraph which seems to mean that the full amount of the debt shall be paid for these two new exemptions.  Debts such as home mortgages, that exceed the length of the Plan, do no need to be paid in full in the life of the plan, though the plan may cure any defaults on long term debt (arrears).  This is why a chapter 13 is used when a trustee' sale is pending against the Debtor's residence or other property.

Payments can be the same over the life of the plan, or they can start low and increase at intervals, or they can vary with the seasons.  But see §1325(a)(5)(B)(iii)(I) which requires equal monthly payments equal to the adequate protection required.  Plan payments must reflect a change in income.  Therefore, if the Debtor receives a raise and does not have any allowed increased in expenses, then the additional monies from the raise must be paid to the Trustee.

In Arizona it is not unusual that the taxes, arrears on the mortgage and the car are all paid, but the credit card companies see little, if any money.  At the end of the Plan the credit card debts are still forgiven, or discharged.

Payments through the plan
The debtor must make the first payment on the plan within 30 days of the filing of the plan and each month thereafter. Payments begin before the first meeting of creditors (the §341 meeting) and continue even while objections to confirmation are pending. Payments must be made in certified funds, such as money orders or cashiers checks, or by voluntary wage deduction.

If you stop making plan payments, the Trustee will ask that your case be dismissed.

Can creditors object to the plan?
Yes, but normally Creditors' objections are limited to the value of the secured item or the dollar amount you are scheduled to pay through the plan. They can object only if they contend the plan does not meet the best interests of creditors test and the best efforts test, or if they contend the debtor has not proposed the plan in good faith.  The trustee can raise any objection that a creditor could raise. Under the Reform Act of 2005 the creditors may have more grounds for objection (required payments, prior discharges, etc.)

Objections to confirmation are usually resolved by negotiation between the debtor's counsel and the objecting party, usually by some sort of compromise. If the parties can't reach a compromise, the judge will decide the question.

Amending the Plan Before Confirmation:
The plan must meet the tests for plan confirmation. Sometimes, the amount of money to be paid into a plan must be increased, where the claims that are actually filed and allowed are greater than estimated at the beginning of the case.

The confirmed plan:
Once the plan is confirmed, it binds all the parties: the creditors must accept the payments provided; the values given in the plan for the secured portion of claims are  fixed; and the debtor's payments over the life of the plan are fixed, unless the debtor's circumstances change and the plan is modified.

What About my tax refund check?
Any right that you had to a tax refund at the time of filing the bankruptcy is an asset of your bankruptcy estate and belongs to your Trustee. At the time that you get your tax refund check, you must turn that check over to the Trustee. Depending on the circumstances you may be required to surrender 2 to 3 years of refunds.  Rethink why you are getting a refund check.  By overpaying your taxes you are losing the opportunity to use those funds for your own purpose.  The best solution is to calculate your wage deductions based on your current situation.  Don't use your refund check as a "savings account". 

Must my Employer be told I am filing for Bankruptcy?
Perhaps.  There are two issues that may involve you employer.  First, the bankruptcy Trustee will request that you provide copies of several documents (tax returns, bank statements, etc).  One of these items will be copies of some of your pay stubs before filing.  If you refuse to provide this information then the Trustee may send a form to your employer seeking information about your wages. Second, the basic foundation of a chapter 13 is the monthly Plan payment made to the Bankruptcy Trustee.  In some cases a wage assignment of those Plan payments may be required by the Court, the Trustee or your circumstances.  Each situation is unique.   The law prohibits your employer using the mere filing of a bankruptcy to deny you employment, unless you work in financially sensitive areas (securities, brokers, etc).