About Bankruptcy Protection: Chapter 13

Chapter 13 - Background

A Chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, you propose a repayment plan that is affordable to you and then make installments to creditors over three to five years. During this time, the law forbids creditors from commencing or continuing with collection efforts against you so long as you continue to make payments and to otherwise perform under the plan.

Advantages of Chapter 13

Chapter 13 offers individuals a number of advantages versus Chapter 7. Perhaps most significantly, Chapter 13 offers you an opportunity to save your home from foreclosure. By filing under this Chapter, you can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, you must still make all mortgage payments that come due during the Chapter 13 plan on time.

Another advantage of Chapter 13 is that it allows you to reschedule secured debts (other than a mortgage for your primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties, such as co-signers, who may be liable with you on consumer debts.



Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to your creditors. You will have no direct contact with the creditors while under Chapter 13 protection.

How Chapter 13 Works

A Chapter 13 case begins by filing a petition with the bankruptcy court serving the area where you reside. The following documents must be included with your petition: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. You must also file a certificate of credit counseling and evidence of payment from employers, if any, received 60 days before filing. Additionally, after your case is filed, you must provide the Chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case.

In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must compile the following information:

• a list of all creditors and the amounts and nature of their claims;
• the source, amount, and frequency of the debtor’s income;
• a list of all of the debtor’s property; and
• a detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

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 are required so that the court, the trustee and creditors can evaluate the household’s financial position.

When an individual files a Chapter 13 petition, an impartial trustee is appointed to administer the case. The Chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.

Stopping Collection/Foreclosure

Filing the petition under Chapter 13 automatically “stays” (stops) most collection actions against you or your property. Filing the petition does not, however, stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may be effective only for a short time in some situations. We can discuss these particular actions with you, if applicable. However, as long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or make telephone calls to you demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.



Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor.

You may use a Chapter 13 proceeding to save your home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as you file the Chapter 13 petition. You may then bring the past-due payments current over a reasonable period of time. Nevertheless, you may still lose the home if the mortgage company completes the foreclosure sale (“sheriff sale”) under state law before you file the petition. It is therefore important to know when your sheriff sale is scheduled assuming the foreclosure process has begun. You may also lose your home if you fail to make the regular mortgage payments that come due after the Chapter 13 filing.

Meeting of Creditors

Approximately 30 days after you file the Chapter 13 petition, the Chapter 13 trustee will hold a meeting of creditors. During this meeting, both the trustee and creditors may ask questions of the debtor under oath. You must attend the meeting and answer questions regarding your financial affairs and the proposed terms of the plan. If a husband and wife file a joint petition, they both must attend the creditors’ meeting and answer the questions. The parties typically resolve problems with the plan either during or shortly after the creditors’ meeting. Generally, you can avoid problems by making sure that the petition and plan are complete and accurate.



In a Chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors.

The Chapter 13 Plan and Confirmation Hearing

When you file your petition, you will also file your “payment plan.” Your plan will be submitted for court approval and will provide for payment of a fixed amount that is calculated based primarily on your disposable income. Your payments will be paid directly to the trustee on a regular basis, typically monthly payments. The trustee then distributes the funds to creditors according to the terms of the plan.

There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes and attorney fees. Secured claims are those for which the creditor has the right to take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.

After your meeting with the creditors, usually 30-45 days after filing your petition and payment plan, your plan will be reviewed by the court by hearing to decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. Creditors will receive 25 days notice of the hearing and may object to confirmation. While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if your assets were liquidated or that your plan does not commit all of your projected disposable income for the three or five year applicable commitment period.

If the court confirms the plan, the Chapter 13 trustee will distribute funds received under the plan “as soon as is practicable.” If the court declines to confirm the plan, you have the option to file a modified plan. You may also convert the case to a liquidation case under Chapter 7. If the court declines to confirm the plan or the modified plan and instead dismisses the case, the court may authorize the trustee to keep some funds for costs, but the trustee must return all remaining funds to you (other than funds already disbursed or due to creditors).

Occasionally, a change in circumstances may compromise your ability to make plan payments. For example, a creditor may object or threaten to object to a plan, or you may inadvertently have failed to list all creditors. In such instances, the plan may be modified either before or after confirmation.

The Chapter 13 Discharge

A Chapter 13 debtor is generally entitled to a discharge upon completion of all payments under the Chapter 13 plan so long as you

1. certify that all domestic support obligations (child support, alimony) that came due prior to making such certification have been paid;

2. have not received a discharge in a prior case filed within a certain time frame (two years for prior Chapter 13 cases and four years for prior Chapter 7, 11 and 12 cases); and

3. have completed an approved course in financial management.

The discharge releases you from all debts provided for by the plan with limited exceptions. Creditors provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal or other action against you to collect the discharged obligations. Debts not discharged in Chapter 13 include certain long term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime. To the extent that they are not fully paid under the Chapter 13 plan, you will still be responsible for these debts after the bankruptcy case has concluded.

The discharge in a Chapter 13 case is somewhat broader than in a Chapter 7 case. Debts dischargeable in a Chapter 13, but not in Chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay non dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.

The Chapter 13 Hardship Discharge

After confirmation of a plan, circumstances may arise that prevent you from completing the plan. In such situations, you may ask the court to grant a “hardship discharge.” Generally, such a discharge is available only if: (1) your failure to complete plan payments is due to circumstances beyond your control and through no fault of your own; (2) creditors have received at least as much as they would have received in a Chapter 7 liquidation case; and (3) modification of the plan is not possible. Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge.

Definitions of Bankruptcy Terms

Chapter 7 — straight bankruptcy — A proceeding designed to liquidate the debtor’s property, pay off his or her creditors, and discharge the debtor from his or her debts. For more information see Chapter 7 section of this site.

Chapter 11 — business reorganizations — When a debtor business entity, or in some cases person, realizes that it will become insolvent or will be unable to pay its debts as they mature, it can petition for reorganization under Chapter 11 of the Bankruptcy Code. The debtor business normally is permitted to continue its operations under court supervision until some plan of reorganization is approved by two-thirds of its creditors. If the business is insolvent at the time a petition for reorganization is filed, a majority of the shareholders must also approve the plan. If agreement cannot be reached, then the court will supervise liquidation proceedings for the business as in any other situation of bankruptcy. For more information see Chapter 11 section of this site.

Chapter 13  — wage earner’s plan — Under Chapter 13 of the Bankruptcy Code, any insolvent debtor who is a wage earner (earns wages, salary, or commissions) can formulate and file a plan with the court that provides the debtor with additional time to pay-off unsecured creditors. The debtor’s plan must provide that future earnings will be subject to the supervision and control of the trustee until these debts are satisfied or the plan is fulfilled. A plan made in good faith and acceptable to the unsecured creditors will be confirmed by the court. Should the wage earner ultimately be unable to pay the debts, Chapter 7 liquidation is still an available alternative. For more information see Chapter 13 section of this site.

Creditor — Any person or business entity to whom the debtor owes an enforceable debt or obligation.

Debtor — Person owing a legally enforceable debt or financial obligation to another (the creditor). Debtor is the person seeking bankruptcy protection under the Bankruptcy Code.

Meeting of Creditors — A meeting between the debtor and trustee at a federal courthouse at which the debtor is questioned under oath. This meeting is called a creditors meeting because creditors have the option to appear, although their appearance is rare in a typical consumer bankruptcy proceeding.

Stay (and Automatic Stay) — A temporary suspension of proceedings or actions against the debtor.

Trustee — Person appointed by Bankruptcy Court to take charge of the debtor’s estate, to collect assets, to bring suit on the debtor’s claims, to defend actions against it, and otherwise administer the debtor’s estate; he has power to examine the debtor, to initiate actions to set aside preferences.