Chapter 13 Overview - The Chapter 13 Process
By Keith L. Rucinski, Chapter 13 Trustee
Chapter 13 is the bankruptcy chapter which allows people in financial distress to reorganize their debt under federal court supervision. The current Chapter 13 bankruptcy was enacted by the U.S. Congress in 1938 known as the Chandler Act. Over the last seventy years, subsequent legislation has made many changes to Chapter 13 involving both eligibility for who may file this type of bankruptcy and the type of debt which can be discharged. Despite these changes, the core principle of Chapter 13 is to provide a debtor with a financial fresh start while at the same time allowing creditors to be paid as much as possible. Debtors must make payments into a Chapter 13 plan for a three to five year time period. The plan is administered by a Chapter 13 Trustee who consolidates the debtor’s monthly plan payment and, pursuant to court order, distributes the funds to creditors.
A Chapter 13 Trustee is appointed by the United States Department of Justice-United States Trustee Program pursuant to 28 USC Section 586. The function of a Chapter 13 Trustee is to monitor and administer bankruptcy cases within a geographical area. The Chapter 13 Trustee in Akron, Ohio monitors and administers bankruptcy cases which are filed in Akron, Ohio for Summit, Portage, and Medina counties.
Neither the Chapter 13 Trustee nor the Trustee’s staff is permitted to give individual legal advice to either debtors or creditors. The role of the Trustee is to review all the financial information submitted by the individual seeking bankruptcy reorganization (debtor) and to review the claims filed by creditors. It is the Trustee’s fiduciary duty to review said information supplied by the debtors and the creditors to evaluate a case for confirmation (court approval of Chapter 13 plan).
If the Trustee believes that there has been honest disclosure of all the individual’s income and assets and if there are no outstanding objections to the reorganization by creditors, the Trustee will recommend the plan for confirmation. The United States Bankruptcy Court confirms or denies confirmation of a Chapter 13 bankruptcy reorganization. The Trustee’s duty is to recommend to the Court on whether or not a case should be confirmed or dismissed. The Court may accept or reject the Trustee’s recommendation.
An individual seeking Chapter 13 bankruptcy reorganization should consult with a knowledgeable and competent attorney before filing a Chapter 13 case. While an individual may represent themselves Pro Se; very few individuals acting on their own behalf are successful in a Chapter 13 Plan. Often times said individuals do themselves harm by not preparing their bankruptcy petition correctly. Said harm can include losing their home to foreclosure actions or liquidating assets(retirement accounts and other exempt assets) which the individual could keep if the bankruptcy petition were completed correctly. The Chapter 13 Trustee cannot give individual legal advice to individuals seeking reorganization so if an individual does not fill out a petition correctly, the Trustee will move for dismissal of the case, or a creditor may move for more severe action against the individual’s assets.
If the individual has decided to do a Chapter 13 bankruptcy the following is designed to illustrate the appropriate process and hopefully remove some of the confusion surrounding Chapter 13 bankruptcy. Chapter 13 can only be filed by individuals who undertake the Chapter 13 bankruptcy voluntarily. Despite some newspaper stories, it is not true that individuals are allowed to keep all of their assets while only paying a creditor a few cents on the dollar. The amount paid to creditors is actually determined by a combination of an individual’s net assets or projected disposable income, whichever is greater. State and Federal law allows debtors to exempt some property. Creditors may not attach this exempt property in order to satisfy money owned the creditor.
On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect. This Act requires individuals to undertake a credit counseling course conducted by an approved provider of consumer counseling. Firms seeking to provide approved credit counseling must submit an application to the U.S. Department of Justice – United States Trustee Program. Once a person has filed bankruptcy it will be necessary to take a second course in Financial Management Instruction. The Financial Management course must be a two hour class. Providers of Financial Management Instruction must also be approved by the U.S. Department of Justice – United States Trustee Program.
Under BAPCPA, if an individual’s income is above the median income for their state, that individual is required to commit at least five years of disposable income to the repayment of creditors. Individuals who have income below the median income for their state are only required to devote three years of disposable income to the repayment of creditors. Note: Disposable income is a person’s gross income minus necessary living expenses (food, medical needs, housing, etc.). Necessary living expenses can require court review and approval. Necessary living expenses are not always a person’s current living expenses, but what is necessary for the person to maintain an adequate lifestyle for themselves and their family, while allowing a reasonable amount to be repaid to creditors.
Under BAPCPA, the hypothetical liquidation test pursuant to 11 USC Section 1325(a)(4) was not changed by the amendments to the Bankruptcy Code. Creditors in a Chapter 13 Plan must receive no less than said creditors would receive in a liquidation of the debtor’s assets in a Chapter 7 bankruptcy liquidation.
The income test under BAPCPA has become more complicated. Pursuant to 11 USC Section 1325(b)(1), debtors must pay their projected disposable income into their Chapter 13 Plan for either a 36 month or 60 month applicable commitment period.
Pursuant to Federal Rules of Bankruptcy Procedure, Rule Number 1007(b)(6), debtors in a Chapter 13 Plan are required to complete Form B22C known as the Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (the “ Means Test”). The Means Test is the starting point in determining the debtor’s projected disposable income. The Means Test is a historical calculation of the debtor’s average monthly income based on the debtor’s income for the 6 months prior to the bankruptcy petition filing date. If the debtor’s annualized average income is higher than the state median income, the applicable commitment period is 60 months. If the debtor’s annualized average income is lower than the state median income, the applicable commitment period is 36 months. Once Form B22C is completed to show a combination of actual and standard expenses, the final number on the form is multiplied by the number of months in the applicable commitment period to determine the dollar amount that debtors may be able to pay in a Chapter 13 Plan. That dollar amount is then divided by the total unsecured debt on Petition Schedule F to calculate an unsecured dividend percentage.
The applicable commitment period imposes a minimum plan length of 60 months for the above-median-income debtors. Baud v. Carroll, 2011 U.S. App. LEXIS 2182 (6th Cir. Mich. 2011). Where a Chapter 13 plan does not propose to pay unsecured creditors in full and an objection to confirmation is filed, a debtor with positive projected disposable income must propose a plan which extends for the applicable commitment period. A debtor who might be able to satisfy the projected disposable income requirement under the plan by using non-disposable income will not be able to shorten the applicable commitment period. So the temporal requirement of 11 U.S.C. Section 1325(b) controls over the monetary amount needed to satisfy the projected disposable income requirement. The calculation of projected disposable income must exclude income which is not included from the definition of current monthly income (such as Social Security benefits), and must deduct expenses permitted to above-median income debtors under the definition of projected disposable income. Finally, the applicable commitment period provided by 11 U.S.C. Section 1325(b) applies to Chapter 13 plans for debtors who have zero or negative projected disposable income as well as those with positive projected disposable income.
When a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation. Hamilton v. Lanning, 2010 U.S. LEXIS 4568 (2010). In other words, rather than mechanically applying the calculation of “current monthly income,” which looks at the Debtor’s income for the 6 calendar months before the filing of the petition, the court can take into consideration changes in income that have occurred or are known or virtually certain to occur at the time of confirmation.
Under BAPCPA, for confirmation, the debtor would be required to propose a Chapter 13 Plan which provides an unsecured dividend based on the greater of the liquidation value of the debtor’s assets or the debtor’s projected disposable income.
To be eligible for Chapter 13 bankruptcy, the individual must have a regular source of monthly income. Said income can include wages, self employment income, social security, pension or other sources of income which are regular in nature (including assistance from family members).
Once a bankruptcy case is filed, pursuant to 11 USC Section 362 (“automatic stay”), creditors are not allowed to seek collection from the debtor, or repossession of assets in the debtor’s possession, without receiving permission of the U.S. Bankruptcy Court. Creditors who violate the automatic stay can be fined by the Court. Please note that the automatic stay does not stop a criminal proceeding against the debtor or the collection of support payments by a state agency.
If an individual has decided to seek bankruptcy reorganization but does not know whether to file a Chapter 7 or Chapter 13 Plan, said individual is encouraged to speak with an attorney knowledgeable in bankruptcy law. Some individuals and firms hold themselves out to be “Bankruptcy Petition Preparers”. Often, these Bankruptcy Petition Preparers are not attorneys, cannot provide legal assistance, and are a “scam” which can cost a person hundreds of dollars for no results. An honest person seeking to save their home from foreclosure and reorganize their debt should avoid Bankruptcy Petition Preparers.
When making an appointment to see an attorney, it will be necessary for the individual to compile all of their financial information so that the attorney can advise the individual on their bankruptcy options. Financial information will include current pay stubs, most recent tax returns, a copy of the individual’s current credit report, bank statements, and a complete list of all the individual’s outstanding financial obligations.
Most law firms which do bankruptcy work will provide the individual a worksheet prior to the initial consultation so that the appropriate information is supplied to the attorney to evaluate the individual’s financial position.
Individuals who are self-employed will need to supply a balance sheet and income statements for the business in order for the attorney to evaluate their financial options. The Trustee will require that balance sheets, income statements, and business tax returns be supplied to the Trustee so that the Trustee may do an independent evaluation of the debtor’s financial information and determine whether or not the individual’s bankruptcy reorganization is practical given the individual’s financial resources.
Some individuals, prior to filing bankruptcy, may try to make payments to certain creditors or to pay back loans which the individual has received from family members. Said repayment of loans prior to filing bankruptcy can be deemed a preference and the individuals receiving said funds may be required to return the funds to the Trustee so that the funds may be used for all creditors under the individual’s bankruptcy reorganization. Unsecured creditors in a Chapter 13 plan must be treated equally. It is in the individual’s best interest to consult with their attorney before making any preference payments to creditors.
After filing a bankruptcy, the individual will be required to attend what is called a “341 Meeting”. It is called a “341 Meeting” because the meeting is required pursuant to section 341 of the bankruptcy code. A 341 Meeting is an opportunity for the bankruptcy trustee and the individual’s creditors to ask questions concerning the individual’s assets and income disclosed on the bankruptcy petition. The individual is required to be honest and truthful in answering said questions. The individual will be placed under oath at the 341 Meeting so any willful misleading or false statements made by the individual can result in appropriate sanctions which could include a referral to the United States Department of Justice-United States Trustee Program, dismissal of the Chapter 13 Plan, or both.
The 341 Meeting will also be an opportunity for the individual to ask questions of the Trustee. Additional education material will be supplied by the Trustee during the 341 Meeting. If the individual is confused about any of the information received from the Trustee or has questions about the 341 process, the individual is encouraged to ask questions of the Trustee concerning the bankruptcy process. It is imperative and required that individuals attend the 341 Meeting and that said individuals must bring proof of identification (drivers license or other state issued photo identification) and proof of social security number.
Creditors will have ninety days from the 341 Meeting to file proofs of claim (claims of governmental entities will have 180 days to file a claim). Once a year, the Chapter 13 Trustee will supply the individual a ledger which will reflect all of the individual’s payments into the Chapter 13 Plan and all of the payments made by the Chapter 13 Trustee on the individual’s behalf. If at any time an individual feels that all of their payments have not been recorded on the Trustees’ records the individual should bring that issue to the Trustee’s attention. Furthermore, the individual is encouraged to review the list of creditors who have filed a claim in the bankruptcy case. If it appears that a creditor has filed a claim for the wrong amount or if a creditor has filed a claim but the individual has never had contact with said creditor, then an objection should be filed to the claim. An objection can be filed to the claim by the individual immediately contacting their attorney and explaining that a creditor has filed a claim which the individual believes should not be paid on their Chapter 13 reorganization. If the individual remains silent, the claim will be paid by the Trustee as filed.
After the 341 Meeting, the Trustee will evaluate all the financial information supplied by the individual. The Trustee may have further questions and request further documentation from the individual. At the conclusion of the 341 Meeting, after the Trustee has completed reviewing the financial information, and absent any objection to the plan of reorganization by creditors, the Trustee will recommend confirmation of the Plan. Confirmation is a term which means the Trustee will recommend approval of the individual’s bankruptcy reorganization. The United States Bankruptcy Court will consider the Trustee’s recommendation. It is the United States Bankruptcy Court which confirms or denies confirmation of a bankruptcy case and the United States Bankruptcy Court may accept or reject the Trustee’s recommendation.
After the Plan has been confirmed by the United States Bankruptcy Court, the individual is required to make Chapter 13 Plan payments monthly into the Chapter 13 Plan. If the individual is regularly employed, the individual must make their Chapter 13 payments by way of payroll deduction. If at any time during the Chapter 13 Plan, which can last up to five years, the individual believes that they cannot make their Chapter 13 payment or if unexpected expenses arise (unexpected car repair, unexpected medical expense) the individual can seek a suspension of their Chapter 13 payments. Said suspension can be obtained by having the individual contact their attorney so that an appropriate order of suspension may be entered by the United States Bankruptcy Court. A suspension of payments will hold the Chapter 13 Plan in abeyance but will extend the conclusion of the Plan. If the individual simply stops making payments and does not ask for a suspension of a Chapter 13 Plan, the Trustee may move for dismissal of the Plan.
If the Chapter 13 Plan is dismissed, the individual’s creditors may return to state court and enforce foreclosure and collection actions against the individual’s assets and income pursuant to applicable state law. Furthermore, dismissal of the case has the legal effect of voiding a bankruptcy Plan. When a Chapter 13 bankruptcy Plan is filed, unsecured creditors (credit card companies) must stop charging interest on their claims. However, if the Plan is dismissed, the credit card companies may post all of the money paid through the Chapter 13 Plan to interest and still try to collect the full principal amount from the individual pursuant to applicable state law. Dismissal is a very serious consequence of a Chapter 13 Plan, especially for an individual who has paid in significant sums of money in an attempt to reorganize their debt. It is imperative that said individual keep in contact with their attorney should a situation arise in which the individual needs a payment suspension.
Please note that BAPCPA greatly discourages serial filings. This means a person who has not been successful in one Chapter 13 case should not simply file a second Chapter 13 case when the mortgage holder begins a new foreclosure action. Every effort should be made to be successful in the first Chapter 13 case as procedural issues can result in foreclosure going forward even if a person has filed a second Chapter 13 plan.
At the conclusion of a Chapter 13 case, the individual will earn a discharge of their Plan. A discharge will have the legal effect of discharging all debt which was provided for under the Chapter 13 Plan of reorganization. Creditors may not seek collection actions against the individual for debt which has been discharged in the Plan. To earn a discharge, it is imperative that all creditors be listed. For instance, if the individual forgets to list the ABC Company in said Plan, ABC Company’s debt may not be discharge upon conclusion of the Chapter 13 case.
At the conclusion of a Chapter 13 Plan, the Chapter 13 Trustee will prepare appropriate orders to stop the employer deduction and request that the United States Bankruptcy Court issue a discharge to the individual who has successfully completed their Chapter 13 Plan.
It often takes 60-90 days for a Plan to completely discharge and for the Trustee to complete administration. If employer deductions continue to come to the Trustee after the individual has earned a discharge, said funds will be returned to the individual.
At the conclusion of the case, the Trustee will issue a final accounting to the individual so the individual can see all funds that were paid into the Plan and how said funds were disbursed to the individual’s creditors. Separately, the United States Bankruptcy Court will issue the individual an order of discharge. It is advisable that individuals keep their Trustee’s Final Accounting and Discharge orders in a secure place (safety deposit box). Said documents may be necessary for the individual to apply for credit in the future. It can be costly and time consuming to obtain copies of said reports if the individual does not retain the original copies sent by the Chapter 13 Trustee and the United States Bankruptcy Court.
While in a Chapter 13 Plan, individuals are required to maintain proper insurance on their home and automobile. In addition, all taxes (federal, state, local, property) and domestic support obligations (alimony, child support) must be kept current. Failure to pay taxes and domestic support obligations timely can result in denial of the discharge.
If a debtor has earned a discharge in a Chapter 13 plan, all debt paid through the plan is deemed satisfied and creditors may not seek further payment on the discharged debt. Creditors who seek to collect on discharged debt can face monetary sanctions. If a case is dismissed, the debt is not discharged and debtors remain liable for any unpaid principle, penalty and interest. Certain debt, including some taxes, domestic support obligations, and student loans can never be discharged in bankruptcy.
For a debtor who has tried a Chapter 13 plan but could not make the monthly payments, it is possible that the case could be converted to a Chapter 7 proceeding if the debtor is eligible for Chapter 7. Before converting a case from a Chapter 13 to a Chapter 7, a debtor should review this option with an attorney to determine if conversion of the case is in the debtor’s best interest as a Chapter 7 case involves a liquidation of the debtor’s assets.