Chapter 13 Bankruptcy

Under the Bankruptcy Code, chapter 13 is a bankruptcy option suitable for individuals who have a regular income sufficient to make payments towards reducing or eliminating their debts in accordance with a court approved repayment plan. The time frame for repayments ranges from three to five years in accordance with the court’s assessment of the debtor’s income; the higher the income the longer the repayment period. Filing a petition leads to a stay on creditors’ actions and halts foreclosures on the debtor’s property. However, property may not be able to be protected if a foreclosure sale has been completed before the bankruptcy petition is filed.

Individuals intending to file a bankruptcy petition are required to take part in debt counseling. Following counseling, the debtor must provide the court with full disclosure of documents related to debts and income and the court appointed trustee must be given full information on the debtor’s tax status. In some cases, a husband and wife may file individually or together. If an individual files alone, the spouse’s debts and incomes must be disclosed in order to ascertain full information on liabilities and income available. The repayment plan, often created during debt counseling, is either filed with the petition or within 14 days; payments to the trustee begin within thirty days of filing.

The trustee in a chapter 13 petition arranges a meeting of creditors identified by the debtor at which the debtor responds under oath to questions from creditors and the trustee to establish the debtor’s financial status and the efficacy of the repayment plan which may be adjusted during or after this meeting as a result of input from participants. Debtors may use the plan to reduce repayment on certain debts to the value of the property acting as security which can be less than the actual debt.

The trustee also distributes payments to creditors following an agreed upon hierarchy (priority, secured and unsecured). Not all creditors will receive full payment of claims. Priority claims and secured debts must be attended to in order to retain property. The issue of repayments to unsecured claims hinges on the need to ensure that such claims would receive no less than they would have been entitled to under chapter 7, a bankruptcy petition involving liquidation of the debtor’s assets.

The repayment plan is confirmed by the bankruptcy judge, although it may be declined, in which case the debtor is required to make adjustments and reapply. Any objections to the repayment plan filed by creditors tend to be related to a shortfall anticipated on their claims that would not have existed had liquidation (chapter 7) occurred. Once confirmed the debtor and creditors are bound by the plan and the debtor is obliged to adhere to the provisions.

Chapter thirteen may be seen as preferable to chapter 7 for individuals as it protects co-debtors from attempts by creditors to collect consumer debt held jointly and allows for retention of property. While hardship discharges may be made under certain circumstances, discharge under chapter 13 is complex and includes an obligation to receive financial management training. Discharge does not include familial support and tax obligations.

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