Why Chapter 13?

Chapter 13 is a form of bankruptcy in which the debtor proposes a repayment plan. During the term of the plan and as long as the debtor complies with the terms of the plan, creditors are prevented from collection activity and the debtor can keep non-exempt property. When the plan payments have been completed, in three to five years, the debtor is discharged. The discharge in Chapter 13 covers some debts that cannot be discharged in Chapter 7. Chapter 13 provides a way for debtors to retain some control of their financial recovery, because the debtor can propose the prepayment terms.

These are some reasons that debtors choose to file under Chapter 13;

• they have non-exempt assets that they wish to keep, such as significant equity in their home or car
  
• they want to keep their home or car but are behind on their payments
  
• they owe debts which are not dischargeable in Chapter 7 ( such as taxes, child support, fraud judgments)
  
• the secured debt is higher than the value of the collateral, or
  
• they have high interest rates on secured loans

Chapter 13 Procedure

Who makes the plan?

The case is started by filing a petition with the Bankruptcy Court. The petition includes schedules showing all your assets, your debt, your income and your expenses. The debtor proposes a payment plan, which is filed with the schedules commencing the case.

The Plan Requirements

In order for the Bankruptcy Court to confirm the proposed plan, it must meet the following requirements:

• The plan must pay unsecured creditors at least as much on their claim as they would have received if the debtor had filed Chapter 7  and
  
• The debtor must pay into the plan all disposable income (the amount left after payment of reasonable, current expenses) for at least 3 years.
  
• The debtor must be able to propose a plan which is feasible, meaning that both of the above requirements will be met.

Advantages of Chapter 13

If you have fallen behind on your mortgage payments, your bank may not be willing to accept anything less than payment in full of the arrears. In Chapter 13, the mortgage bank is forced to accept payment of the arrears over time, with interest, as long as the plan is confirmed and you are able to make your regular mortgage payments on time.

In a Chapter 13 case, the debtor may be able to restructure secured loans other than the home mortgage. Sometimes very high interest rates can be lowered to reasonable rates.

• Example: You borrowed  $22,500 at 15% interest, to buy a truck for work. You have made 12 payments on a 5 year loan. The monthly payment is $535.27. Under the plan you would only have to pay off the value of the truck say, $12,500 at just 8% interest. It is possible that  your plan payment, which would include your truck payment,  would be the same or less than the truck payment.

If you owe back taxes, you can propose a plan to pay them back over time. If you owe income taxes or employment taxes, you may not have to pay interest. Although taxes have to be paid in full,  the debtor may dictate the repayment terms,  within the timeframe of your plan.

Creditors Rights in Chapter 13

Creditors have limited grounds to object to the debtor's Chapter 13 plan. They may only object to the plan, if it  does not meet one of the tests discussed above. Generally, if the plan is defective or questionable, it is the Chapter 13 Trustee who will make that charge.

The Chapter 13 Trustee

The Chapter 13 Trustee has several roles. First, the trustee will preside at the first meeting of the creditors. At that meeting, the trustee will go over the debtor's petition and the Chapter 13 plan and discuss any problems. The trustee will also verify the debtors actual intentions for the plan. Some trustees will ask the debtors if they would like to have their plan payments paid by voluntary wage execution.

The Trustee's second role is to represent the interests of the unsecured creditors by verifying that the debtor's propose plan is proper. If the Trustee recommends that the plan be confirmed, the plan will be confirmed in most cases. If the trustee has objections to the plan, then the plan will rarely be confirmed until those objections have been remedied. If the trustee and the debtor can't agree on the terms of the plan, a judge will decide if the plan can be confirmed.

Finally, the trustee acts as the disbursing agent for payments made into the plan. All plan payments are made to the trustee who in turn distributes the money to the creditors. If the debtor falls behind on plan payments, the trustee may seek to dismiss the case.

The Confirmed Plan

After the plan has been confirmed by the court, its terms are binding on all parties. The creditors must accept the terms of the plan. Creditors will only receive the payments as set forth in the plan. The values of collateral will be fixed and interest rates for those creditors who will be paid interest will be set. The plan may also provide that the debtor has certain obligations other than plan payments. These typically include remaining current with secured lenders, maintaining insurance on collateral and keeping current with tax payment.

Restrictions of the Chapter 13 Debtor

• Once the plan has been confirmed, the debtor must make the plan payments and any payments which are "outside the plan"
  
• The debtor may not incur any new debt, except with court approval
  
• The debtor may not sell valuable assets, except with court approval