Why Should I File a Case Under Chapter 13?
There are a number of reasons why debtors choose to file a Chapter 13 bankruptcy petition. Perhaps the most common is where the debtor owns a home and either the mortgage loan or property taxes are not current. You can use Chapter 13 to stop foreclosure litigation or a sale, propose a plan by which you bring the past-due payments current over a period of up to five years and rehabilitate your account while keeping your home. During this time you will need to begin making your regularly contracted post-petition payments.
Another common situation arises for “above-median income” debtors. This is a fancy way of saying that some people make too much money to file under Chapter 7, based on an examination of all of the income in your financial household received during the six complete months immediately prior to filing. That income is then compared to the median income where you live and you are judged to be either below or above that set median figure. These figures vary by jurisdiction and household size. If you are above the set figure, you will need to determine your “disposable monthly income” via another form tasked with calculating what you can reasonably afford to pay towards your creditors each month. You will need to pay this amount each month for up to 60 months in order to be eligible for a Chapter 13 discharge.
There are other reasons why a Chapter 13 may be your best option, for example, to pay off non-dischargeable debts including certain student loans, domestic support obligations or recent income tax debt. Chapter 13 allows you to spread out your payments over a period of time. It is also quite useful in modifying the auto loan payments if your vehicle and loan are old enough to qualify. Whatever the reason, the issuance of the automatic stay (a protective stay that stops most collection actions – including lawsuits - against you or your property) that comes along with the Chapter 13 filing can be critical. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even contact you to discuss your debt.
How Does a Chapter 13 Work?
A Chapter 13 bankruptcy case begins when the debtor files a voluntary petition in the local bankruptcy court. Attached to the petition (or filed shortly thereafter) are various schedules and statements which include your: (a) assets and liabilities, (b) current income and expenses; (c) executory contracts and unexpired leases, and (d) statement of financial affairs. Debtors must also complete a credit counseling course online or via telephone prior to filing. This course typically takes about one hour to complete and the providing agency delivers to you a certificate of completion. Finally, you will file a Chapter 13 plan which communicates to creditors how you plan to deal with their debt, what income you will contribute and what debt will be repaid over the next three to five years.
In order to draft these documents our office will require documentation to review, often consisting of prior income tax returns, evidence of income from employers (or a profit and loss statement for business owners), bank statements and a list of all creditors. Homeowners need to provide recorded deeds and mortgages, property tax bills and evidence of property insurance. Various other documents may be required depending on individual circumstances. The court filing fee is $310.00 consisting of a $235.00 case filing fee and a $75.00 administrative fee both of which are paid to the clerk by our office when you file.
Perhaps the most important requirement in bankruptcy is providing full disclosure to creditors and the court. As a result, debtors must provide the following information:
- A list of all creditors, including names, addresses, account numbers, a description of the debt and when it was incurred and the estimated amount owed as of the date of filing.
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's real and personal property, including values; and
- A detailed list of the debtor’s monthly living expenses (commonly rent/mortgage, utilities, food, clothing, taxes, transportation, medicine, insurance, support for dependents and other expenditures).
Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the financial position of the entire household.
The Chapter 13 Trustee and the Meeting of Creditors
Following the filing of the bankruptcy petition, a standing Chapter 13 “trustee” is appointed by the Office of the United States Trustee (a division of the United States Department of Justice) to oversee and administer the case. The Chapter 13 Trustee’s role is to evaluate your case and serve as a disbursing agent, collecting regular payments from you as part of your Chapter 13 “plan” and making distributions to creditors once the bankruptcy court approves the plan and the Trustee’s request for authorization to make disbursements. Both New Hampshire and Vermont have a single standing Trustee who has significant experience working with Chapter 13 debtors and who will serve as your appointed trustee.
Roughly one month (it can vary between three weeks and about seven weeks) after the petition is filed, the Chapter 13 Trustee presides over a “meeting of creditors” or, more commonly, a “341 meeting.” For New Hampshire clients this meeting takes place in a conference room located at the James C. Cleveland Federal Building on Pleasant Street in Concord. For Vermont clients this meeting takes place at either the bankruptcy court within the U.S. Post Office and Courthouse building on West Street in Rutland or the bankruptcy court within the Federal Building located on Elmwood Avenue in Burlington, depending on your residence.
Regardless of location, the Trustee begins the meeting by placing you under oath and on the record (usually a digital tape recorder) before asking your questions about your case. You must attend the meeting and answer the Trustee’s questions about your financial affairs and the proposed terms of the plan. Creditors are also permitted to attend the proceedings although such appearances are relatively infrequent and commonly anticipated. These interactions most often occur in the case of an ex-spouse, former business partner or another creditor seeking to obtain information to use to prevent the discharge of its debt (or, worse, all of your debt). These meetings are useful to us in opening up communication with the Trustee and/or creditors to resolve problems (objections) with the bankruptcy plan. Providing the Trustee and creditors with schedules and statements that are complete and accurate (and by consulting with the Trustee prior to the meeting) can often avoid problems in some case, although some issues cannot be circumvented.
In order to receive payments or “distributions” under your Chapter 13 case, your creditors must file their claims in writing on official forms know as “proofs of claim” by a strict deadline set 90 days after the first date set for the meeting of creditors. Certain governmental units (most commonly the Internal Revenue Service and local taxing authorities), however, have 180 days from the date the case is filed to file a proof of claim. The total payments you are required to contribute under your plan are often somewhat dependent on the claims filed by your creditors (as well as by your “disposable monthly income”).
Confirmation
Following the 341 meeting, a confirmation hearing will be held before the bankruptcy judge to determine if your plan can be entered as an order. You, your creditors and the Trustee often attend this hearing. In Vermont, your attendance at this hearing is necessary as you will be required to briefly testify regarding your understanding of your Chapter 13 plan and your ability to operate under its provisions. In New Hampshire, your attendance is far less likely to be required though you should be available should circumstances warrant. Confirmation hearings are sometimes continued to an adjourned date a month or two after the original scheduled date if the plan is not yet ready to be confirmed. Eventually, the court will want the plan either confirmed or the case dismissed. Dismissal means you are no longer receiving the protections of federal bankruptcy law from your creditors and your case is no longer pending before the court.
Debtors who are invested in a successful Chapter 13 case, often against difficult odds, are able to earn the significant benefit of a structured payment plan to pay down (or completely pay off) debt. Secured debts, like mortgages and automobile installment loans, that are delinquent can be rehabilitated by “curing” the arrears over the course of 36 to 60 months. The same is true for property taxes and federal income tax debt, two common problems leading to Chapter 13 filings. Certain vehicle loans that are not favorable can be “crammed down” requiring your lender to accept a lower monthly payment and saving you money required for other expenses. Once the confirmation order is entered by the court, it is binding on all parties with severe penalties in store for creditors who violate its terms.
Discharge
In most cases, the ultimate goal is to receive a bankruptcy discharge. In Chapter 13, once all of the proposed payments are completed the debtor has the opportunity to request that a discharge be entered relieving any responsibility for the balance of your debts. In some cases unsecured creditors are paid back at a rate of 100% of their claims but in most, these creditors receive a much smaller percentage – if anything. If you make all of your plan payments and adhere to the requirements of the bankruptcy code, the balance of what is owed at the end of your Chapter 13 case will be discharged and you will no longer be responsible for payment of those debts. Debtors who complete their payments and succeed in the difficult world of Chapter 13 bankruptcy are often the most appreciative clients and those who gain the most through the bankruptcy process.
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