A Chapter 13 bankruptcy, also known as reorganization, is a federal court-ordered and supervised procedure in which a debtor obtains a discharge of some debts while retaining many of his assets. A debtor under a Chapter 13 bankruptcy uses his disposable income over a period of three to five years to satisfy some or all of his debt.
Wage earners who have regular income and whose total debts, secured and unsecured, do not exceed certain financial thresholds are eligible for Chapter 13 bankruptcy. A debtor is prohibited from bringing a bankruptcy petition more than once every eight years.
Benefits of Chapter 13
Many debtors choose to use Chapter 13 bankruptcy over Chapter 7 because they usually are able to retain more assets, such as a mortgaged home. Co-debtors also enjoy the benefits of a bankruptcy action, such as the automatic stay. Upon conclusion of a repayment plan, any remaining eligible debts are discharged.
A debtor is required to complete credit counseling from a certified counseling agency prior to filing a Chapter 13 bankruptcy. Failure to do so may result in dismissal of the bankruptcy petition.
Bankruptcy Petition Fees and Requirements
The payment of filing fees, waivable with court permission, is required to initiate a bankruptcy case. A bankruptcy petition must outline the debtor's income, expenses, assets, liabilities, and executory leases and contracts. A recent income tax return and documentation of a debt repayment plan must also be filed.
Court-Assigned Case Trustee
Upon filing, the court assigns a trustee to evaluate and manage the case. The trustee collects payments from the debtor and distributes them to the creditors according to the debtor's repayment plan.
A plan that outlines the way in which the creditors are to be repaid must be filed with the bankruptcy petition. The court evaluates the plan's feasibility and approves it in a confirmation hearing. Payments must begin within thirty days of the plan's filing.
Types of Claims
There are three types of claims covered in a repayment plan: priority, secured, and unsecured. Taxes, domestic support orders, and bankruptcy case costs are examples of priority claims and must be paid first. Next, secured claimholders receive payment. A secured claim is one that is "secured" by property, or collateral. Unsecured claims have no associated collateral and are paid last.
If a debtor wants to keep a secured asset, he must pay any past due amounts and keep current on payments. A debtor need not repay an unsecured claim in full as long as he complies with the repayment plan and the creditor gets at least as much payment as it would have received under a Chapter 7 bankruptcy.
The Automatic Stay and Creditors' Meeting
Upon filing, creditor lawsuits, wage garnishments and contact with the debtor must cease. This is known as the "automatic stay" since no judicial action is required for the prohibition to arise.
The trustee holds a creditors' meeting within twenty to forty days after filing. At this time, the debtor is questioned under oath regarding his financial affairs and the repayment plan. A creditor may contest discharge if a debt was obtained through fraud or arose from malicious or willful personal injury.
If the debtor is unable to complete his repayment plan, the court may still discharge his debts under a hardship discharge. A hardship discharge is usually granted upon the debtor proving a serious medical condition that prevents him from working or when circumstances beyond the debtor's control prevent repayment.