Chapter 13

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, debtors pro­pose a repay­ment plan to make install­ments to cred­i­tors over three to five years. If the debtor’s cur­rent monthly income is less than the applic­a­ble state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s cur­rent monthly income is greater than the applic­a­ble state median, the plan gen­er­ally must be for five years. In no case may a plan pro­vide for pay­ments over a period longer than five years. 11 U.S.C. §1322(d). Dur­ing this time the law for­bids cred­i­tors from start­ing or con­tin­u­ing col­lec­tion efforts.

This chap­ter dis­cusses six aspects of a chap­ter 13 pro­ceed­ing: the advan­tages of choos­ing chap­ter 13, the chap­ter 13 eli­gi­bil­ity require­ments, how a chap­ter 13 pro­ceed­ing works, mak­ing the plan work, and the spe­cial chap­ter 13 discharge.

Chap­ter 13 offers indi­vid­u­als a num­ber of advan­tages over liq­ui­da­tion under chap­ter 7. Per­haps most sig­nif­i­cantly, chap­ter 13 offers indi­vid­u­als an oppor­tu­nity to save their homes from fore­clo­sure. By fil­ing under this chap­ter, indi­vid­u­als can stop fore­clo­sure pro­ceed­ings and may cure delin­quent mort­gage pay­ments over time. Nev­er­the­less, they 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 indi­vid­u­als to resched­ule secured debts (other than a mort­gage for their 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 who are liable with the debtor on “con­sumer debts.” This pro­vi­sion may pro­tect co-signers. 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 cred­i­tors. Indi­vid­u­als will have no direct con­tact with cred­i­tors while under chap­ter 13 protection.

The bank­ruptcy law regard­ing the scope of the chap­ter 13 dis­charge is com­plex and has recently under­gone major changes. There­fore, debtors should con­sult com­pe­tent legal coun­sel prior to fil­ing regard­ing the scope of the chap­ter 13 discharge.

A chap­ter 13 debtor is enti­tled to a dis­charge upon com­ple­tion of all pay­ments under the chap­ter 13 plan so long as the debtor: (1) cer­ti­fies (if applic­a­ble) that all domes­tic sup­port oblig­a­tions that came due prior to mak­ing such cer­ti­fi­ca­tion have been paid; (2) has 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) has com­pleted an approved course in finan­cial man­age­ment (if the U.S. trustee or bank­ruptcy admin­is­tra­tor for the debtor’s dis­trict has deter­mined that such courses are avail­able to the debtor). 11 U.S.C. § 1328. The court will not enter the dis­charge, how­ever, until it deter­mines, after notice and a hear­ing, that there is no rea­son to believe there is any pend­ing pro­ceed­ing that might give rise to a lim­i­ta­tion on the debtor’s home­stead exemp­tion. 11 U.S.C. § 1328(h).

The dis­charge releases the debtor from all debts pro­vided for by the plan or dis­al­lowed (under sec­tion 502), 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 the debtor to col­lect the dis­charged obligations.

As a gen­eral rule, the dis­charge releases the debtor from all debts pro­vided for by the plan or dis­al­lowed, with the excep­tion of cer­tain debts ref­er­enced in 11 U.S.C. § 1328. 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, the debtor will still be respon­si­ble for these debts after the bank­ruptcy case has con­cluded. Debts for money or prop­erty obtained by false pre­tenses, debts for fraud or defal­ca­tion while act­ing in a fidu­ciary capac­ity, and debts for resti­tu­tion or dam­ages awarded in a civil case for will­ful or mali­cious actions by the debtor that cause per­sonal injury or death to a per­son will be dis­charged unless a cred­i­tor timely files and pre­vails in an action to have such debts declared nondis­charge­able. 11 U.S.C. §§ 1328, 523©; Fed. R. Bankr. P. 4007©.

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 nondis­charge­able tax oblig­a­tions, and debts aris­ing from prop­erty set­tle­ments in divorce or sep­a­ra­tion pro­ceed­ings. 11 U.S.C. § 1328(a).

 

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Disclaimer

None of the infor­ma­tion on this site con­sti­tutes legal advice. It is an ad for attor­ney ser­vices. The attor­neys at DeDecker & Meltzer are licensed attor­neys in the state of Cal­i­for­nia. The infor­ma­tion is intended to be gen­eral in nature as there are many laws and reg­u­la­tions not men­tioned on this site that may apply to your sit­u­a­tion.