Chapter 13 Bankruptcy Basics

Writing a check
Chapter 13 bankruptcy requires a monthly payment plan. Getty Images

When most people think of "bankruptcy", chances are they are thinking about Chapter 7 straight bankruptcy, the type that eliminates their obligation to pay most debts. There is another kind of bankruptcy that serves other purposes and can be very useful for people who are behind on car or house payments and need a way to get caught up. This second type of bankruptcy is called Chapter 13 repayment plan bankruptcy.

The hallmark of the Chapter 13 case is its repayment plan. Together, in 2015 according to bankruptcy court statistics, 819,240 non-business Chapter 7 and Chapter 13 cases were filed in the United States. Just over one-third of those were Chapter 13 cases. 

A Chapter 7 case is arguably the easier, quicker and less expensive as compared to Chapter 13, but a Chapter 7 does not provide any way for the filer to handle those past due payments. In a Chapter 7, it would be up to the filer to work out arrangements on her own. When you're facing foreclosure or repossession, that can be extremely difficult and stressful. In addition, the Chapter 13 repayment plan provides a way for people to get caught up on taxes and domestic support obligations like child support. 

When you file a bankruptcy case, we call you the “debtor.” The goal of most debtors in Chapter 13 is to save their important assets and obtain a discharge, which is an order from the court that tells the debtor’s creditors that the debtor has fulfilled all the requirements for filing the Chapter 13 case, and that in exchange, the debtor no longer has any obligation to pay certain debts.

(Not all debts are dischargeable, however. See below.)

To get to that point, like with any worthwhile endeavor, you will have a lot of work to do before you file your Chapter 13 case.

Credit Counseling

One of the first steps on the road to financial freedom is a credit counseling session. Before you can file any type of bankruptcy case, you must take part in a special credit counseling session during which a credit counselor will review your budget to determine if you might have available other avenues for gaining control over your finances.

These credit counseling sessions are offered by private, government-approved companies, usually last about an hour and usually cost about $25. The session can easily be accomplished online (plus a short telephone check-in with a live counselor), and telephone and face-to-face options are also available. The session can easily be accomplished online (plus a short telephone check-in with a live counselor), and telephone and face-to-face options are also available.

Means Test

In 2005, Congress passed some new laws that decided to cut down on abuses of the bankruptcy system by people who should be able to afford to pay back their debts. Thus, the means test was born. The means test is a calculation that compares your income to your reasonable and necessary expenses, also taking into consideration your family size and the median (midpoint) income for your state. The means test tells us whether you could pay your debts in part and would be presumed to be abusing the system if you filed a Chapter 7 case. If you cannot "pass" the means test to file a Chapter 7 case, the means test can also calculate how much you should be able to afford to pay back each month (at least according to Congress) to satisfy some of your debts.

Schedules

All bankruptcy cases are filed in special federal bankruptcy courts. To start a Chapter 13 case, you will file documents that list all your income, expenses, debts, and assets. These are called the petition, schedules and statement of financial affairs. The schedules can be 60 pages or more of information. All of the information must be complete, true and correct to the best of your knowledge, and you will sign them under “penalty of perjury,” similar to swearing an oath in court.

Repayment Plan

The Chapter 13 repayment plan will usually last at least three years, but no more than five years. At the beginning of the case, you will propose a plan to pay all the creditors that must be paid (not all creditors have to be paid through Chapter 13). Your debts are classified according to whether they are unsecured (no collateral) or secured (with collateral).

The bankruptcy code also assigns a priority to each type of debt. Debts for taxes and child support, for instance, have a higher priority than credit cards. Your monthly payment under the plan depends on many different factors, including the how much you owe in mortgage arrearages, whether you pay your car payment through the plan, how much priority debt you have, your income, and your reasonable and necessary expenses. Often, you will not have to pay back all that you owe. If you have enough income to pay back your priority debt like taxes, but not enough to pay back you credit cards, you may not have to pay those credit cards after all. 

Judge and Trustee

When your case is filed, it is assigned to a bankruptcy judge and to a trustee. Chances are very good that you will go through your entire case without ever appearing in a courtroom before the judge. The trustee is appointed to oversee the case. You will make your plan payments to the trustee, who makes sure the money gets to the right creditors.

Meeting of Creditors

About a month after your case is filed, you and your attorney will meet with the trustee at what is called a meeting of creditors or a Section 341 meeting. Ironically, creditors rarely attend the meeting of creditors but it does give the trustee a chance to clarify any questions about your assets and your financial picture. In a Chapter 13 case, the trustee will also examine the terms of your payment plan to make sure that the plan is feasible (you can afford the payments) Although the meeting is not held in court, it is conducted under oath.

Creditor Claims 

After the meeting, the creditors have a certain amount of time in which to file a claim with the court. Creditors must file claim forms with the court before they can be paid anything from your Chapter 13 plan. The claim form will state how much the creditor thinks is owed and will offer documentation to support the claim. If the trustee or the debtor disagrees with the claim in any way, either or both can file an objection to the claim. Any objections not resolved by the parties can be taken to the bankruptcy judge for a decision. 

Confirmation of the Plan

While the claims are being filed, the trustee will also be looking at the plan to make sure it is workable, or feasible. The trustee will know from the schedules you filed approximately how much the claims are going to be. The trustee also knows your income and your expenses. If it appears that you are just not making enough money to pay the debts that absolutely have to be paid through the plan, the plan is not feasible and the trustee will object to it. Otherwise, as long as you provide for all the claims that have to be paid, and you make enough money to cover them, your plan will likely be confirmed by the court.  

Debtor Education Requirement

In addition to the credit counseling you take before the case is filed, you will also have to take a financial management course before your debts can be discharged. This course, which usually lasts about two hours, will be available from the same company that offers the credit counseling session for about $25.

Other Requirements

While you're making your Chapter 13 plan payments to the trustee, you are also required to keep up other payments, including your house payments, car payments, and child support and alimony payments. You must also file your tax returns each year and make sure that your taxes are timely paid. 

When Things Go Wrong

Five years is a long time to be in a Chapter 13 case. Many things can happen to upset the flow of payments. Unemployment, medical issues, divorce, are not uncommon. If you find yourself unable to make Chapter 13 plan payments, house payments or any other payments you are required to make, there may be ways to modify your plan or catch up the payments you missed. It is vital that you contact your attorney immediately when this happens so that you can discuss your alternatives. The longer you wait, the harder it will be to fix issues. Your only alternative at that point may be to dismiss your case, refile and start all over again.

Getting Credit During a Chapter 13 Case

Is it possible to get credit during a Chapter 13 case? Yes, it is, but you cannot just apply for a new credit card. You have to ask the bankruptcy court for permission, and the credit has to be for something necessary, like a car to get to work. Many people have refinanced or worked out loan modifications with their mortgage lenders. These are also treated like new debt. You have to file a motion with the court explaining the transaction. You will probably have to testify before the bankruptcy judge to explain why you need to take on this additional obligation and how you will be able to afford the payment. 

Discharge

Once all your payments have been made under your plan, and the court is satisfied that your domestic support obligations like child support are current, the court will issue the discharge order. What an accomplishment! At that point, your house will be up to date, your car will likely be paid off, and other priority debts have been paid in full. Any remaining unsecured debt will be discharged, with the exception of certain non-dischargeable debts like most student loans