Chapter 13 Frequently Asked Questions
What is a Chapter 13 bankruptcy case and how does it work?
In a chapter 13 reorganization, the debtor pays back a portion or in rare cases all of their debts. Chapter 13 plan payments can be as little as $100/month or much higher (several thousand) depending on income, household size, and whether there are debts which must be paid back in full such as mortgage arrears and priority tax debts. You will make payments directly to the Chapter 13 trustee, who will then distribute the payments to your creditors according to the repayment schedule confirmed by the court.Your attorney will submit a plan for approval. If there are objections by creditors or the trustee, the attorney musts resolve those objections before the court will approve the plan. In many cases, your attorney will submit an original plan and one or two amended plan before confirmation. The duration of the plan is three to five years and depends on your income. If you are below median income, you will usually be in a three year plan.
What is the main difference between a chapter 13 and 7 bankruptcy?
A chapter 7 is a straight discharge without repayment plan. A debtor does not make payments in a chapter 7 case, however, non-exempt assets (if any) will be liquidated. In a chapter 13, a debtor makes payments to the bankruptcy trustee before receiving a discharge. There is no liquidation of assets in a chapter 13. In a chapter 7, some of your property may be liquidated (additional vehicles, boats, rental homes, a portion of next years tax refunds) before you receive a discharge. In most cases, the majority of a debtors property is exempt from turn-over.
When is a Chapter 13 bankruptcy case preferable to a Chapter 7 bankruptcy case?
Some debtors may not qualify for a chapter 7 because of a previous bankruptcy or because their income is too high. Chapter 13 bankruptcy may be preferable to someone who has property which would be liquidated in a chapter 7 bankruptcy (e.g. rental property with equity). Finally, a person may have debts which would not be discharged in a chapter 7 bankruptcy but which can be discharged or provided for in a chapter 13.
Does the bankruptcy means test apply to a chapter 13?
Yes, the means test calculation (Form 22B) determines two things in a chapter 13 including: whether the repayment duration will be three years or five years and it determines the minimum distribution to unsecured creditors such as credit cards, medical, pay day loans, etc.
How is chapter 13 different from credit consolidation?
There are two important difference. Your creditors are forced into a Chapter 13 bankruptcy once you file. They cannot opt out. Whereas, some creditors may not agree to take part in a consolidation program particularly medical creditors. The second critical difference is that a chapter 13 is a best efforts repayment plan. Most debtors pay just a fraction of their debt back in a chapter 13 and the remaining balances are discharged. A consolidation requires that you pay back all of your debts at a reduced interest rate that is negotiated by your agent.
When does a person receive a discharge?
You must complete all of your plan payments to receive a discharge in chapter 13 otherwise the trustee will file a motion to dismiss the case. If you experience financial hardship during your repayment plan, your attorney can request a reduced payment or you may be a good candidate for a chapter 7.
What does the chapter 13 trustee do?
A chapter 13 trustee is a person appointed by the United States Trustee to administer chapter 13 bankruptcies. The trustee represents the best interests of your unsecured creditors and may object to a proposed plan if the trustee believes the debtor is not making fair payments to creditors. A debtor makes payments to the trustee who then mails checks to the creditors based on the terms of the plan. Some debts are paid before others such as mortgage arrears and tax debts. The unsecured creditors receive payments based on a pro rata basis.
How much will I have to pay each month?
There are many factors which will affect your payment amount. If you have a mortgage that is behind on payments and you want to keep the home, you must pay back all of the missed payments (arrears) during the plan. Therefore, your payment must be large enough to provide for the arrears in full. Certain tax debts must also be paid back in full. In most cases, it is not required that the unsecured debts be paid back in full. Your income and household size determine how much, if any, your unsecured creditors must be paid.
What are the eligibility requirements for a chapter 13?
Anyone who resides in the U.S. may file a Chapter 13 bankruptcy case. Debtors must have regular income (certain commission based earners may not qualify), and has unsecured debts of less than $394,725, and secured debts of less than $1,184,200. If your debts exceed these limits, you may consider filing under chapter 11 which can be filed by individuals as well as businesses. To file under chapter 13, you must not be a stockbroker or a commodity broker. You should not a chapter 13 if you intentionally dismissed another bankruptcy case within the last 180 days. Prior bankruptcy discharges may affect eligibility for a discharge as well. This area gets complicated. Your attorney can explain.
What responsibilities does my attorney have in a chapter 13?
The following services are Basic Services common to most Chapter 13 cases. Some cases will not require all of these services, but such services are considered essential to competent and effective representation of most debtors in Chapter 13. By utilizing the Presumptively Reasonable Fee (“PRF”) procedure, the attorney for the debtor(s) agrees to perform these services as part of the chapter 13 case. If providing these services results in a fee in excess of the PRF, counsel must apply for fees in accordance with the Bankruptcy Code and Rules. The PRF procedure is intended to cover pre-confirmation fees. If necessary, counsel may file a fee application for fees incurred post-confirmation.
- Meet with the debtor(s) to review and analyze the debtor(s)’ financial situation.
- Counsel the debtor(s) on whether the filing of a bankruptcy case is appropriate and necessary and, if so, whether to file a Chapter 7 or Chapter 13 case.
- Advise the debtor(s) of their statutory obligations once a bankruptcy is filed, both pre and post-confirmation.
- Evaluate the timing of the filing.
- Evaluate conflict of interest issues.
- Explain to the debtor(s) the nature and amount of fees and expenses to be charged for the Basic Services. Provide the debtor(s) with a copy of this Exhibit A of Basic Services.
- If required to e-file, e-file all documents on debtors behalf.
- Analyze eligibility for discharge.
- Prepare and file required documents, including, but not limited to, the schedules and statement of affairs and Form B22 C, Statement of Current Monthly Income, and other information required to be filed by section 521(a) of the Code.
- Assist the debtor(s) in formulating a budget and Chapter 13 plan.
- Respond to creditor inquires.
- Timely supply requested information to the Chapter 13 Trustee.
- Advise the debtor(s) with regard to the automatic stay.
- Take appropriate action with respect to the automatic stay.
- Appear at and represent the debtor(s) at the § 341 meeting of creditors.
- Review claims filed by the final hearing on confirmation and account for them in the plan.
- Represent the debtor(s) in negotiations with the Chapter 13 Trustee.
- Prepare and file any necessary amendments to schedules, statements and proposed plans.
- Where Debtor(s) own real estate or has lawsuits, obtain a lien search and if applicable, prepare and file motions for avoidance of liens.
- Represent the debtor(s) at any Rule 2004 examination.
- File or object to proofs of claim, as necessary.
- If appropriate, prepare and file responses to motions and appear at any hearings.
- Represent debtors in plan confirmation process and attend hearing if necessary on objections to confirmation.
- Prepare all proposed orders and give all notices as required.
- Comply with T.L.B.R. 1017 and 3015, 11 U.S.C. §§ 521 and 1308
Do Judgments go away when I File Bankruptcy?
Filing bankruptcy prevents creditors who have received a judgment from collecting on the judgment. Filing bankruptcy does not make the judgment disappear from your public records. The fact that a creditor received a judgment against you will remain on your credit. If you own a home and have a judgment on your record, you should seek legal counsel regarding removing the judgment lien against your home after filing bankruptcy.
How will filing bankruptcy affect my credit?
If you have good credit, your credit score will drop substantially. However, if you already have bad credit, it will go up shortly after filing. Filing bankruptcy reduces your debt to income ratio so your credit score will eventually go up depending on how you manage it after filing. The effect of filing bankruptcy on your credit score will last for approximately 2 years. It is not unreasonable to anticipate a credit score in the high 600s after 2 years of getting a bankruptcy discharge. The credit score is just one of many factors a creditor will weigh in lending credit. Some creditors may not grant credit for several years after the bankruptcy discharge even though the individual may have a good credit score.
Will my friends, family or employer find out?
It is not likely, unless they search your public records on PACER which most people will not have reason to do.
It is rare for a trustee to contact your employer unless there is a reason to do so.
Will potential employers discriminate against me for filing bankruptcy?
It is unlawful for an employer and government agencies to make any eligibility determinations based on the fact that you filed bankruptcy.
Can I expect to lose property in a chapter 7?
It is rare for a person to turn over significant property in a chapter 7 because in such cases it is usually better to file a chapter 13 which is not a liquidation. Most individuals who file bankruptcy have nothing left except their exempted assets. Your attorney will go over your asset schedules and advise you on what to except.
Which property can I keep?
You will keep the vast majority of your property is most cases. Property which is exempted from levy by State law is also protected in a chapter 7 bankruptcy. Therefore, the laws of your State (not bankruptcy law) determines which property is exempted. In Colorado your belongings are protected up to a certain value. Some property is not entitled to any protection such as: recreational vehicles and expensive sport’s equipment, fire arms, stocks, bonds, cds. If you have significant valuable assets (expensive art for example) you may not want to file bankruptcy. Bankruptcy is intended as a last resort. See Colorado Revised Statute section 13-54-102 for a complete list of exempt property in Colorado.
Is there a court meeting?
You do not have to appear before a judge except in very rare cases. You will be warned well in advance of that. In a chapter 7 case, the only appearance you can expect to appear for is the 341(a) meeting of creditors. It is rare for creditors to appear for these meetings. The trustee assigned to your case will conduct the meeting. This person is not a judge. The trustee is a private individual (similar to a private contractor) to the U.S. Trustee’s office. The trustee is paid a fee to administer your case and ask questions during the meeting. The trustee collects a percentage of any assets received.