What Is Chapter 13 Bankruptcy?
WHAT IS CHAPTER 13 BANKRUPTCY?
“Chapter 13 bankruptcy.”
“You just don’t qualify to file Chapter 7.”
The words hung in the air, as the air went out of the room.
Jim and Mary had been through so much already.
The past due bills. The collection calls. The foreclosure notice.
The websites urging them to file Chapter 7 bankruptcy.
Finally, the bittersweet meeting with the bankruptcy lawyer.
And they had failed the means test. Totally.
How could they have too much income to file bankruptcy, but not enough money to pay their bills?
Then Mary said the words back to the lawyer. More as a question this time.
“What is Chapter 13 bankruptcy?” How is that different than Chapter 7?
And the lawyer started to explain.
Under a Chapter 13 bankruptcy, their disposable income would be paid to a Chapter 13 Trustee each month. The Chapter 13 Trustee would disburse those payments to creditors under a court-approved repayment plan (the “Chapter 13 Plan”).
Their disposable income would be determined after considering allowances for living expenses. They should pay just what they could afford.
Since Jim and Mary’s income was over the limits of the means test, their Chapter 13 Plan would be in effect for 5 years. If their income had been less, their Chapter 13 Plan could have been for 3 years.
The Chapter 13 Plan payments could also be used to pay part of their attorney’s fees, so that helped.
And although their disposable income would only pay a small percentage of their debt during the Chapter 13 Plan, the balance of their dischargeable debt would be eliminated. Just like Chapter 7.
The lawyer continued to explain the benefits of Chapter 13 bankruptcy vs. Chapter 7 bankruptcy, one at a time.
1. Chapter 13 Bankruptcy Can Save A Home From Foreclosure.
A Chapter 13 bankruptcy filing creates an automatic stay of collection actions, including foreclosures. The plan payments could be used to bring the past due payments current on their home loan, and avoid foreclosure or repossession.
At the end of the Chapter 13 Plan, the monthly payments would continue as though no payments had been missed. All mortgage payments that became due during the Chapter 13 Plan would need to be made on time.
2. Chapter 13 Bankruptcy Can Eliminate A Second Mortgage.
Since the value of Jim and Mary’s residence was less than their first mortgage, Chapter 13 could eliminate their second mortgage. The second mortgage debt would then be paid in the same percentage as other unsecured debts under the plan.
3. Chapter 13 Bankruptcy Can Save A Vehicle From Repossession.
A Chapter 13 bankruptcy filing stops repossession of a vehicle, just like it stops a foreclosure. Past due car payments can be brought current over the term of the plan.
Unlike mortgage payments, car payments become part of the Chapter 13 plan payment. If the vehicle loan is over 910 days old, and the vehicle is worth less than the loan balance, the secured loan can be reduced to the value of the vehicle, and the balance can be treated as unsecured debt.
4. Chapter 13 Bankruptcy Can Protect A Co-Signer Or Guarantor.
Chapter 13 has a special provision that protects co-signers on their guarantee of debt that incurred primarily for a personal, family, or household purpose.
Unless the bankruptcy court authorizes otherwise, a creditor is prohibited from enforcing a guarantee against a co-signer or guarantor. As long as plan payments are made when due, their guarantors would be protected.
5. Chapter 13 Bankruptcy Can Allow Tax Debt To Be Paid Over Time.
Tax debts are typically not discharged under Chapter 7, with few exceptions. Tax agencies will pursue collection of non-dischargeable tax debt even after a Chapter 7 discharge is entered.
A Chapter 13 bankruptcy allows for the payment of tax debt over three to five years, and typically prohibits the assessment of additional penalties and interest on the amount of the tax.
6. Chapter 13 Bankruptcy Can Protect Individuals That Can’t File Chapter 7.
Not everyone is eligible to file Chapter 7. Perhaps they have excess disposable income and fail the means test. Or they risk losing assets that can’t be protected in a Chapter 7 bankruptcy.
Even if a Chapter 7 can’t be filed, protection under Chapter 13 is almost always available if individuals have a regular source of income, and their total unsecured debts are less than $394,725, and their non-contingent, liquidated, secured debts are less than $1,184,200.
7. Chapter 13 Bankruptcy Can Minimize Credit Damage.
Any bankruptcy filing will result in a hit to the filer’s credit score, and a blot on their retail credit report. A Chapter 7 bankruptcy filing is the most damaging, with the bankruptcy case reported for 10 years after filing.
A Chapter 13 bankruptcy has less impact, with the bankruptcy case reported for 7 years after filing.
8. Chapter 13 Bankruptcy Can Protect Non-Exempt Property.
If property is not exempt under federal or state law, a Chapter 7 bankruptcy trustee is obligated to recover its value for the benefit of creditors.
In a Chapter 13 case, non-exempt property can be retained as long as plan payments offset the value of that property.
Creditors still receive the same value that they would have received under Chapter 7. For example, in the case of a single person filing in Washington, our state law exemptions will protect one car with equity of not more than $3,250.
If a single person had a second car with equity of $2,000, it would exceed the exemption and not be protected. Under Chapter 13, as long as long as plan payments totaled at least $2,000, the car could be retained, although it was not exempt.
9. Chapter 13 Bankruptcy Will Allow You To Keep Your Options Open.
Dismissal can be a good option if an individual no longer needs bankruptcy protection due to a change in circumstances, such as an increase in earnings, an unexpected inheritance, or some other reason to terminate the further involvement of the Bankruptcy Court.
A Chapter 13 filing, like most Chapter 7 filings, is purely voluntary. But unlike a Chapter 7 case, a Chapter 13 bankruptcy can almost always be dismissed upon request.
10. Chapter 13 Bankruptcy Can Be Used To Get Back Your Driver’s License.
In many states, a driver’s license will be revoked if the driver has unpaid parking tickets, or was at fault in a collision and failed to pay for damages.
The Department of Motor Vehicles will reinstate a driver’s license upon confirmation of a plan under Chapter 13, and sometimes upon filing.
WHAT IS A CHAPTER 13 TRUSTEE?
The Chapter 13 Trustee is a “standing trustee” appointed and supervised by the United States Trustee.
For Seattle Chapter 13 bankruptcy cases, and for the entire Western District of Washington, the Chapter 13 Trustee is K. Michael Fitzgerald, with offices at 2200 One Union Square, 600 University Street, Suite 1300, Seattle, Washington 98101-4100.
For Spokane Chapter 13 bankruptcy cases, and for the entire Eastern District of Washington, the Chapter 13 Trustee for the Eastern District of Washington is Dan Brunner, with offices at the SRBC Building, 801 W Riverside Avenue, Suite 515, Spokane Washington 99201.
The standing trustee has a fiduciary responsibility to the bankruptcy estate, and owes duties to debtors, creditors, other parties in interest, as well as to the United States Trustee.
These duties include the obligations to:
- Be accountable for all property received.
- Ensure that the debtor performs the debtor’s intention with respect to the retention or surrender of property
- Investigate the financial affairs of the debtor
- If a purpose would be served, examine and object to improper proofs of claims
- If advisable, oppose the discharge of the debtor
- Unless the court orders otherwise, furnish information concerning the estate and the estate’s administration if requested by a party in interest
- Make a final report and file a final account of the administration of the estate with the United States Trustee and the Bankruptcy Court
The Chapter 13 Trustee must also appear and be heard at any hearing that concerns the value of property subject to a lien; the confirmation of a Chapter plan; or the modification of a Chapter 13 plan after confirmation.
The Chapter 13 Trustee must also:
- Advise and assist debtors in performance of their Chapter 13 plans, other than by providing legal advice
- Ensure that the debtor commences making payments to the Chapter 13 Trustee within 30 days of filing Chapter 13 bankruptcy
- Provide the notice to the holders of any claim for domestic support obligation, and to child support enforcement agencies
If the debtor is engaged in business, the Chapter 13 Trustee must also:
- Investigate the acts, conduct, assets, liabilities, and financial condition of the debtor
- Investigate the operation of the debtor’s business and the desirability of the continuance of such business, and
- Investigate any other matter relevant to the case or to the formulation of a Chapter 13 plan; and
- File a statement of the investigation once the investigation is completed.
All in all, the Chapter 13 Trustee is a key participant that will balance their duties to debtors and creditors during the administration of every Chapter 13 bankruptcy case.