Chapter 13
1. Who May File a Chapter 13?
Only an individual with regular income may file a chapter 13 petition. The individual cannot have more than $1,080,000 in secured debts and $386,000 in unsecured debts. Section 109(e). The debt limits apply to non-contingent, liquidated debts.
2. General
In a chapter 13, the individual proposes a plan to his or her creditors within 15 days after filing the petition. The plan may cure defaults on home mortgages and other secured debts over three to five years. The plan must pay all of the net disposable income of the debtor over three to five years and that total amount must be more than creditors would receive in a chapter 7. Section 1325.
3. Chapter 13 Trustee
Chapter 13 trustees are full time standing trustees whose duties include reviewing and commenting on the chapter 13 plan proposed by the debtor. When the plan is confirmed by the court, the plan payments are made monthly to the trustee who then distributes the funds to the creditors. The trustee typically receives 11% of the plan payment as compensation for the efforts.
4. Benefits of Chapter 13 Filing
Chapter 13 affords several benefits to the individual debtor over chapter 7:
a) the debtor loses no assets whatsoever;
b) the debtor may cure arrearages owed to his secured creditors;
c) the debtor may strip second liens on his home provided the home is worth less than the amount owed to the first;
d) the debtor may modify the rights of secured creditors in certain limited situations;
e) more debts are discharged than in a chapter 7;
f) interest and penalties stop on all unsecured debt including taxes for which no lien has yet been filed;
g) there is slightly less stigma to the filing and certainly to the successful conclusion of the chapter 13 (or so the creditor's bar tells us);
d) the debtor may change his mind at any time and simply dismiss the case.
5. Chapter 13 Caveats
The chapter 13 debtor must however be aware of the following:
a) while the case may be dismissed by the debtor at any time, it also may be converted to chapter 7 by the court before it is dismissed. A dismissal would trump the conversion if entered first but until the case is dismissed, it may be converted;
b) property of the estate includes all postpetition earnings of the debtor and any other assets acquired by the debtor;
c) the debtor must make plan payments for three to five years. If the debtor's income increases, generally the plan payments must increase (unless the original plan provided for 100% payment to all creditors);
d) the debtor must pay the Chapter 13 Trustee a fee usually based on a percentage of the plan payments for the life of the plan.
e) any default recorded on the debtor's property remains until the end of the plan and discharge. If the case terminates without a discharge, the secured creditor need not record a new Notice of Default.
f) the discharge is not entered until the end of the plan. If the case is dismissed for any reason, there is no discharge.
6. The Chapter 13 Discharge
Upon completion of the Chapter 13 plan, the debtor receives a discharge of all debts existing on the petition date and not paid during the plan. In other words, if the plan pays creditors 20% of their claims over the course of the plan, the remainder is discharged upon completion of the payments.