Chapter 13 Bankruptcy is one of the two most common types of Bankruptcy filed by individuals, with the other being Chapter 7. The primary distinguishing factor of Chapter 13 is that individuals pay a portion of their income (their “disposable income“) into a Chapter 13 plan over three to five years. Because of this, people filing Chapter 13 must have sufficient regular, disposable income to fund the Chapter 13 plan, either through outside employment, self-employment or other regular sources of income. The primary reasons for filing a Chapter 13 rather than a Chapter 7 are 1) the individual or couple did not qualify for a Chapter 7 under the Means Test, 2) they want to make up missed house payments in the Chapter 13 plan without facing a foreclosure, 3) they need the flexibility of a Chapter 13 Plan to obtain a discharge of debts not dischargeable in a Chapter 7, 4) they recently filed a Chapter 7 case and are ineligible for another discharge, 5) they want to strip a junior lien from their residence, or 6) they need to file quickly and, unlike Chapter 7, a Chapter 13 may typically be dismissed upon request.
The Chapter 13 Plan is normally filed with the initial Bankruptcy Petition, or soon thereafter. A few weeks later a confirmation hearing is scheduled before the Court. If there are no objections to the proposed Plan, the Court may typically confirm the Plan without even holding a hearing. Objections of the Chapter 13 Trustee or creditors can often be resolved in advance of the hearing date or, in some cases, at the Courthouse. If amendments need to be made, the confirmation hearing is often rescheduled for a later date. Judges and Chapter 13 Trustees will generally allow every opportunity to propose a confirmable Plan, although Chapter 13 Trustees can often be picky. Once a Plan is confirmed by the Court, it is binding on the debtor, creditors and the Chapter 13 Trustee. If a creditor could have objected at confirmation, but failed to do so, the objection is typically waived.
The key question in a Chapter 13 case is “How much do I have to pay each month?” The test for determining your disposable income that must be paid to the Chapter 13 Trustee is similar to, but not identical to, the Means Test used to determine eligibility for Chapter 7. In general, your disposable income will be your total monthly income minus your regular and necessary expenses, such as your regular house payments or rent, car payments, utilities, groceries, insurance, medical expenses not covered by insurance, and educational and child care expenses. In addition, some expenses for charitable contributions and recreation are also allowed. Unfortunately, individuals in Chapter 13 do not always get to determine the deductions for certain expenses, such as utilities, groceries, recreation, etc. If the expenses claimed are more than a fairly low local standard, the Trustee will object and the debtor will have to provide an explanation for the additional expenses. It is fair to say that Chapter 13 typically requires a no-frills lifestyle and little extraspending money through the life of the Chapter 13 Plan. For many people, this will not be a significant change as they have already cut spending. For a few, it may mean a significant change in their lifestyle. Significant changes in income must be reported and often the Plan must be amended to account for changes in disposable income (whether higher or lower).
Once disposable income is determined, the funds are paid to the Chapter 13 Trustee. In Georgia, unless the debtor is self-employed, this is done through automatic deductions from paychecks. The Trustee will take a portion of the funds as a commission and will distribute the rest to creditors based on the terms of the confirmed Chapter 13 Plan. Many debts may be paid directly by the debtor (or “outside the Plan”), such as regular monthly house and vehicle payments, domestic support obligations, student loans, and the like. Courts and Trustees in different states may have different rules on what may be paid outside the Plan.
Under the Plan, general unsecured creditors may be paid anywhere from 1% to 100% of their debt, depending on the amount of debt and disposable income. Many people will pay less money to the Trustee than they were paying on minimum credit card payments or on medical bills. Importantly, monthly payments to the Chapter 13 Trustee do not go up depending on the amount of general unsecured debt. Whether a person has $20,000 or $220,000 in credit card debt, the monthly Plan payment will be the same. At the end of the Chapter 13 Plan period, if the debtor has made all payments and otherwise complied with the terms of the Plan, they will get a discharge of all remaining general unsecured debt. There are, however, a few debts that are not dischargeable in a Chapter 13 such as taxes, student loans and most domestic support obligations like alimony and child support.
This post is a very basic description of Chapter 13. Chapter 13 is a complicated process – much more than Chapter 7 – and is almost impossible to get through without an experienced Bankruptcy lawyer. Volumes of books can be, and have been, written on the subject. We could fill this Blog with hundreds of posts related to Chapter 13. In most Chapter 13 cases, the lawyer is actually paid much of the attorneys fees through the Chapter 13 Plan, with a portion of the “disposable income” paid to the Chapter 13 Trustee. Thus, other than the upfront retainer and filing fee, the remaining fees are paid from a fund that would otherwise be distributed to creditors rather than paid out of pocket by the client. If you believe a Chapter 13 may help you, contact a Bankruptcy lawyer and set up an initial consultation.