What is chapter 13?

BASIC INFORMATION

Chapter 13 proceedings are often called “wage earner plans” but in fact Chapter 13 is a reorganization proceeding available to individuals “with regular income.” In a Chapter 13 proceeding a portion of the future income of the debtor is used to satisfy all or part of the pre-petition debt.  Typically, they will be used by a debtor for any of the following reasons:

1. To save the home from foreclosure where the mortgage in arrears;
2. Because the debtor does not qualify for a Chapter 7 due to the Means Test;
3. To make scheduled payments on non-dischargeable tax or other priority debt (sometimes without incurring continuing interest and cost);
4. To save non-exempt property which a Chapter 7 trustee would otherwise obtain and liquidate for creditors. 

Example 1: Debtor owns his home and is three months behind on his mortgage payment.  The house is in foreclosure or ready to go into foreclosure.  If the debtor has to ability to cure the arrearage in a reasonable period of time (maybe two or three years), he can file a Chapter 13 and pay the arrearage over time while maintaining his other monthly payments current.

Example 2: Debtor does not qualify of Chapter 7 because of the Means Test.  Debtor is still available for relief under Chapter 13.

Example 3: Debtor owes non-dischargeable priority tax obligations to the IRS of $10,000.  In a Chapter 13, the debtor may be able to schedule a workout of the payment over a five year period without incurring additional interest and penalties.

Example 4: Debtor owns property worth $7,000 which is not exempt and which in a Chapter 7 the trustee would liquidate.  In a Chapter 13 case, the debtor may be able to keep the non exempt property by paying the Chapter 13 trustee payments over a period of three to five years. 

ELIGIBILITY FOR CHAPTER 13 RELIEF

Chapter 13 can only be used by individuals with regular income who have unsecured debts of less than $336,900 and secured debts of less than $1,010,650.  Chapter 13 relief is not available to corporations or other entities.   

THE CHAPTER 13 PLAN

Under Chapter 13, the debtor must propose a plan to pay all or part of his debt over a period of three to five years. The payments are made to the Chapter 13 trustee who makes the payments to creditors. If the debtor’s current monthly income is greater than the applicable state median (for a household of similar size), then the debtor must make payments for a period of five years.  Otherwise, the debtor must make payments for three years.   

The source of the payments to be made to the Chapter13 trustee are normally the future earnings of the debtor – however may include other sources such as the proceeds of the sale of property. 

The amount of the payments which the debtor must make is the greater of following two calculations:

1. The amount which creditors would receive in a Chapter 7 liquidation; and
2. The debtor’s projected “disposable income” over the life of the debtor's plan.

For example, a Chapter 13 debtor has non-exempt assets which, in a Chapter 7 bankruptcy could be liquidated for an amount which, after administrative expenses, would provide total payments of $18,000 to creditors.  The debtor’s income is above the median income of the state where his lives, and therefore the debtor must propose a five year (60 month) plan.  The debtor’s projected monthly disposable income is $250.  The projected disposable Income over the 60 month life of the plan is therefore $15,000.  In this case, the debtor’s total payments under his Chapter 13 plan must be at least $18,000 – the liquidation value of his non-exempt assets.  If the liquidation value of debtor’s non-exempt assets is $12,000 – rather than $18,000 – then the total payments must be at least $15,000, i.e. the projected disposable income of the debtor over the life of the plan. 

DISCHARGE

Upon completion of the Plan, the debtor will receive a discharge of his dischargeable debts.  The discharge exceptions such as domestic support obligations, student loans, most taxes, etc. are applicable to Chapter 13 cases also.  Under certain circumstances, the debtor can receive a “hardship discharge” without completing his Plan payments.