Depending on a debtor’s financial circumstances and intentions, filing under Chapter 13 can make great sense, especially for debtors with substantial income and net worth. This is not true, however, for most low-income wage earners requiring immediate relief.
For most of these wage earners, their only realistic option is to file for liquidation under Chapter 7. This article focuses on debtor eligibility to file under Chapter 13, its advantages, and the process of obtaining judicial confirmation of the repayment plan.
Eligibility To File Under Chapter 13
Under Chapter 13, the debtor must be an income earner and be current on their tax filings. The debtor must also prove to the court that there will be sufficient income to meet the debtor’s proposed repayment obligations after deducting the debtor’s allowable living expenses and required repayment to the debtor’s secured creditors.
Full disclosure of debtors’ financial affairs
Upon filing the Chapter 13 petition, the debtor is required to fill out forms describing their assets, liabilities, income, and expenses.
A statement of the debtor’s financial affairs can include but is not limited to:
- A complete list of all creditors and the amounts and nature of their claims
- All sources, amounts, and frequency of the debtor’s income
- A complete list of all of the debtor’s property
- A complete and detailed list of the debtor’s monthly living expenses
Advantages of Filing Under Chapter 13
Chapter 13 allows a debtor to propose their individualized repayment plan, which is ultimately subject to the court’s approval. The proposed repayment plan, under certain circumstances, calls for certain creditors to accept less than what was owed by extending the repayment period into monthly installments over a fixed period of three-to-five years.
Filing petition stops all foreclosure proceedings
A major advantage is that upon filing the Chapter 13 petition, all foreclosure actions and proceedings must come to an immediate stop. Chapter 13 automatic stay of all proceedings offers the debtor an opportunity to save their homes from foreclosure.
The debtor can extend delinquent mortgage payments over time
Not only do all foreclosure proceedings come to an abrupt stop under Chapter 13, but the debtor will also be allowed to pay the delinquent mortgage payments over an extended period. Resulting in saving the home from the imminent threat of foreclosure.
The debtor’s repayment of debts is consolidated into a single installment plan
Under Chapter 13, debts are consolidated into a single repayment plan which is managed by a trustee who then distributes the payments to the creditors once the plan is approved. The creditors must communicate only with the trustee, leaving the debtor protected from creditors for the plan’s duration.
The Chapter 13 Process
Under bankruptcy law, upon the debtor’s filing of their Chapter 13 petition, the court will appoint a neutral trustee to administer the case. The trustee usually has between 21 and 50 days to hold the first meeting of creditors.
The evolving repayment plan toward judicial confirmation
The bankruptcy rules require that within 45 days of the conclusion of the meeting of creditors, the court must hold a repayment confirmation hearing to determine whether the debtor’s proposed repayment plan meets the legal standards for confirmation outlined in the Bankruptcy Code.
Unsecured Creditor’s Deadline to File Claims
For unsecured creditors to participate in the distribution of debtors’ bankruptcy estate, they must file their claims with the court within 90 days from the date set for the first meeting of creditors.
The time required to complete and confirm a repayment plan
Under the federal bankruptcy rules, unless the court can grant a series of extensions, which is often routinely granted, the debtor is legally obligated to file their repayment plan with the bankruptcy petition or within 14 days after the petition is filed.
In most cases, the time requiring a debtor to prepare and file their repayment plan is insufficient, especially when considering that not all Chapter 13 filings require the same degree of judicial management.
The time it takes to reach a confirmation of the repayment plan will often depend on the following factors:
- the size and scope of the debtor’s estate
- the number and classifications of creditors
- the complexity of the claims,
- the frequency and number of creditor objections to the plan
The frequency and number of creditor objections is the single most time-consuming factor responsible for delaying the process since the court must hear and consider the creditor’s objection separately and may require proof before ruling the objection. This usually requires the scheduling of a separate hearing before the court.
According to experienced bankruptcy practitioners, it is not uncommon for the repayment plan confirmation process to take five or more months. The reasons for the lengthy process can depend on many factors, including the number and frequency of creditor objections.
Most Common Creditor Objections
While the court will entertain many different types of objections, the most common include:
- The payments offered under the proposed plan are less than creditors would receive if the debtor’s assets were liquidated.
- The debtor’s proposed plan does not commit all of the debtor’s projected disposable income for the plan to be completed under the three or five-year repayment period.
- The debtor’s list of debt amounts in the proposed plan is inaccurate.
- The debtor’s proposed plan incorrectly classified a creditor’s claim as unsecured.
In such a case, the court has the right to order the objecting creditor to file a proof of claim and will schedule a formal hearing on the objection.
Final Repayment Plan Confirmation Hearing
Court approval of the repayment plan
If the court confirms the debtor’s repayment plan, the debtor will continue to make payments to the trustee according to the previously approved schedule. In the meantime, the trustee will be ordered to proceed with making payments to the creditors. Note that creditors are prohibited from charging the debtor interest or penalties during the repayment period.
Court denial of the repayment plan
Should the court decline to confirm the debtor’s repayment schedule, the debtor will set another hearing date and request the debtor to modify the plan. If, after numerous confirmation hearings, the debtor is still unwilling to modify the plan, the court can find that the debtor has not acted in good faith resulting in the possible dismissal of the petition.
Judicial dismissal of the Chapter 13 action and lifting of the automatic stay
After numerous hearings and court efforts to have the debtor cooperate with the modification process by making what the court considers reasonable compromises to the repayment plan, the court has the discretion and authority to deny the debtor’s Chapter 13 petition in its entirety, dismiss the case, lift the stay, and allow the creditors to resume their collection actions against the debtor.
Article Sum-Up:
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Chapter 13 Benefits
Filing Chapter 13 allows the debtor to propose a personalized repayment plan extending the repayment period over three-to-five years, allowing the debtor to extend overdue payments over time and consolidate all debts into a single repayment plan.
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Chapter 13 Eligibility
The debtor must have a regular income and be up-to-date on their tax filings. After accounting for living expenses and repayments to secured creditors, they must also demonstrate that they can meet their proposed repayment obligations.
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The Process
The Chapter 13 process commences with the debtor filing a petition and the court appointing a trustee to administer the case. Within 45 days of the creditors’ meeting, the court will hold a repayment confirmation hearing to decide if the proposed repayment plan. Creditors holding unsecured debts must file their claims within 90 days from the date of the first meeting of creditors.
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Objections By Creditors
Creditors may object to the proposed repayment plan for numerous reasons. The most common being the debtor’s payments would be less than the creditor would receive under a straight liquidation, inaccuracies in the amounts listed, or misclassification of a creditor’s claim. If confirmed, payments to creditors start as per the approved schedule. If the plan is denied, the debtor is asked to modify the plan. If the debtor fails to sufficiently modify the plan and is found to be acting in bad faith, the court may dismiss the debtor’s petition allowing the creditors to pursue their collection claims against the debtor.
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