Chapter 13

Frequently Asked Questions About Chapter 13

What is chapter 13 and how does it work

Chapter 13 is that part (or chapter) of the Bankruptcy Code under which a person may repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court. The Bankruptcy Code is that portion of the federal laws that deal with bankruptcy. A person who files under chapter 13 is called a debtor. In a chapter 13 case, the debtor must submit to the court a plan for the repayment of all or a portion of his or her debts. The plan must be approved by the court to become effective. If the court approves the debtor's plan, most creditors will be prohibited from collecting their claims from the debtor during the course of the case. The debtor must make regular payments to a person called the chapter 13 trustee, who collects the money paid by the debtor and disburses it to creditors in the manner called for in the plan. Upon completion of the payments called for in the plan, the debtor is released from liability for the remainder of his or her dischargeable debts.


How does chapter 13 differ from chapter 7 for a debtor?


The basic difference between chapter 7 and chapter 13 is that under chapter 7 the debtor's nonexempt property (if any exists) is liquidated to pay as much as possible of the debtor's debts, while in most chapter 13 cases a portion of the debtor's future income is used to pay as much of the debtor's debts as is feasible considering the debtor's circumstances. Under chapter 13, the debtor usually retains his or her nonexempt property, must pay off as much of his or her debts as the court deems feasible, and receives a chapter 13 discharge, which is broader than a chapter 7 discharge and releases the debtor from liability for several types of debts that are not dischargeable under chapter 7. A chapter 13 case normally lasts much longer than a chapter 7 case and is usually more expensive for the debtor.

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When is chapter 13 preferable to chapter 7 for a debtor?

Chapter 13 is usually preferable for a person who - (1) wishes to repay all or most of his or her unsecured debts and has the income with which to do so within a reasonable time, (2) has valuable nonexempt property or has valuable exempt property securing debts, either of which would be lost in a chapter 7 case, (3) is not eligible for a discharge under chapter 7, (4) has one or more substantial debts that are dischargeable under chapter 13 but not under chapter 7, or (5) has sufficient assets with which to repay most debts, but needs temporary relief from creditors in order to do so.

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How does chapter 13 differ from a private debt consolidation service?

In a chapter 13 case, the bankruptcy court can provide aid to the debtor that private debt consolidation services cannot provide. For example, the court has the authority to prohibit creditors from attaching or foreclosing on the debtor's property, to force unsecured creditors to accept a chapter 13 plan that pays only a portion of their claims, and to discharge a debtor from unpaid portions of debts. Private debt consolidation services have none of these powers.

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What is a chapter 13 discharge?

It is a court order releasing a debtor from all dischargeable debts and ordering creditors not to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. There are two types of chapter 13 discharges: (1) a full or successful plan discharge, which is granted to a debtor who completes all payments called for in the plan, and (2) a partial or unsuccessful plan discharge, which is granted to a debtor who is unable to complete the payments called for in the plan due to circumstances for which the debtor should not be held accountable. A full chapter 13 discharge is broader and discharges more debts than a chapter 7 discharge, while a partial chapter 13 discharge is similar to a chapter 7 discharge.

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What is a chapter 13 plan?

It is a written plan presented to the bankruptcy court by a debtor that states how much money or other property the debtor will pay to the chapter 13 trustee, how long the debtor's payments to the chapter 13 trustee will continue, how much will be paid to each of the debtor's creditors, which creditors will be paid outside of the plan, and certain other technical matters.

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What is a chapter 13 trustee?

A chapter 13 trustee is a person appointed by the United States trustee to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor's plan, and administer the debtor's chapter 13 case until it is closed. In some cases, the chapter 13 trustee is required to perform certain other duties, and the debtor is always required to cooperate with the chapter 13 trustee.

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How are cosigned or guaranteed debts handled under chapter 13?

If a cosigned or guaranteed consumer debt is being paid in full under a chapter 13 plan, the creditor may not collect the debt from the cosigner or guarantor. If a consumer debt is not being paid in full under the plan, the creditor may collect the unpaid portion of the debt from the cosigner or guarantor.

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Who is eligible to file under chapter 13?

Any natural person may file under chapter 13 if the person - (1) resides in, does business in, or owns property in the United States, (2) has regular income, (3) has unsecured debts of less than $307,675.00, (4) has secured debts of less than $922,975.00, (5) is not a stockbroker or a commodity broker, and (6) has not been a debtor in another bankruptcy case that was dismissed within the last 180 days on certain technical grounds. A person meeting the above requirements may file under chapter 13 regardless of when he or she last filed a bankruptcy case or received a bankruptcy discharge.  Corporations, partnerships, and limited liability companies may not file under chapter 13.

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May a husband and wife file jointly under chapter 13?

A husband and wife may file jointly under chapter 13 if each of them meets the requirements listed in the answer to the above question, except that only one of them needs to have regular income and their combined debts must meet the debt limitations described in the answer to the above question.

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How does filing under chapter 13 affect collection proceedings and foreclosures previously filed against the debtor?

The filing of a chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor's property. A few days after the case is filed, the court will mail a notice to all creditors advising them of the automatic stay. Certain creditors may be notified sooner, if necessary. Most creditors are prohibited from proceeding against the debtor during the entire course of the chapter 13 case. If the debtor is later granted a chapter 13 discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor after the case is closed.

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Is a person's employer notified when he or she files under chapter 13?

In most cases, yes. Many courts require a debtor's employer to make payments to the chapter 13 trustee on the debtor's behalf. Also, the chapter 13 trustee may contact an employer to verify the debtor's income. However, if there are compelling reasons for not informing an employer in a particular case, it may be possible to make other arrangements for the required information and payments.

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Does a person lose any legal rights by filing under chapter 13?

No. Filing under chapter 13 is a civil proceeding and not a criminal proceeding. Therefore, a person does not lose any legal or constitutional rights by filing a chapter 13 case.

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May employers or government agencies discriminate against persons who file under chapter 13?

No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under chapter 13. It is also illegal for local, state, or federal governmental agencies to discriminate against a person as to the granting of licenses, permits, student loans, and similar grants because that person has filed under chapter 13.

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What if the debtor later decides to discontinue the chapter 13 case?

The debtor has the right to dismiss a chapter 13 at any time for any reason. However, if the debtor simply stops making the required chapter 13 payments, the court may compel the debtor or the debtor's employer to make the payments and to comply with the orders of the court. Therefore, the debtor who wishes to discontinue a chapter 13 case should do so through his or her attorney.

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