Can I File Under Chapter 13?

Chapter 13 is a section of the Bankruptcy Code which allows individuals (not corporations or partnerships) who are in financial difficulty to pay their creditors over time, while under the protection of the Bankruptcy Court. As with a Chapter 7, at the moment of filing the bankruptcy petition, the Bankruptcy Court issues an order, preventing creditors from taking any action against you.

What is a Chapter 13 Bankruptcy?

The general concept of a Chapter 13 is that the debtor makes monthly payments to a Chapter 13 trustee, who, in turn, pays creditors according to their status. It is somewhat like a debt consolidation or a program offered by a debt counseling service such as Consumer Credit Counseling Service (CCCS). However, there are significant differences between what is possible in a Chapter 13 and what CCCS can offer. CCCS and other nonprofit credit counseling services perform a good service, and I often recommend that this option be explored prior to filing bankruptcy. However, many of my clients who have attempted, without success, to follow a counseling service's plan report that the monthly payment amount was so high that they literally could not maintain a minimal standard of living. By contrast, even though in a Chapter 13 you are required to devote your disposable income to the plan, monthly payments still often are less than what is required in a counseling service's plan.

Also, some clients tell me that, even though they are making payments diligently to the counseling service, the creditors keep harassing them. This harassment must stop in a Chapter 13. Finally, most unsecured creditors in a credit counseling plan do not stop charging interest. So, the time required to pay the debt may not be significantly shortened over the normal payment schedule. Typically, in a Chapter 13 all interest stops on unsecured debts. (In certain situations unsecured creditors may receive reduced interest.)

These differences are discussed more fully below.

Why Should I File Chapter 13?

Whether you should file a Chapter 13 instead of filing under another chapter, such as Chapter 7, involves detailed analysis into your financial situation, and you should consult with an experienced attorney prior to making this decision. However, some factors suggesting that a Chapter 13 should be filed are the following:

Are you faced with a foreclosure or seizure of property? If your home mortgage company has filed a foreclosure action or other property, such as a vehicle, has been seized, you have little choice, if you want to save this property. You must file a Chapter 13 proceeding. You will be able to catch up on the past due amount ("cure the arrearage") over an extended period of time under the protection of the Bankruptcy Court, and you will not lose the property.

Do you have property that would be lost in a Chapter 7? As explained in the page concerning Chapter 7, one of the duties of the Chapter 7 trustee is to "liquidate" (sell, if necessary) property, and then distribute the proceeds to creditors. If you have property which would at risk in a Chapter 7, and you do not want to lose this property, then you will want to consider a Chapter 13. For example, if a Chapter 7 debtor has a vehicle that is paid for (and the vehicle is worth enough), the Chapter 7 trustee may well sell the vehicle. In a Chapter 13 framework, the vehicle is not lost.

Are your non-dischargeable debts large in comparison with your dischargeable debts? If the bulk of your debt is non-dischargeable debt such as student loans or most taxes, and you need protection from your creditors, a Chapter 7 proceeding will not be successful in the long run. Although the automatic stay will protect you from creditor harassment up until the time that the Chapter 7 discharge is granted (normally about 90-150 days from the date that the petition is filed), after the discharge a creditor with a non-dischargeable debt is free to start up collection efforts again. The Chapter 7 discharge, then, although it will cover some debt, will leave most of the debt still owing. The answer? File a Chapter 13, if possible, to pay the debt while under the protection of the Bankruptcy Court.

Do you have debts that are nondischargeable in Chapter 7, but are dischargeable in Chapter 13? There are some debts that are not dischargeable in a Chapter 7 that are dischargeable in a Chapter 13. Some of these include the following:

  • Debts incurred by fraud or false representations, embezzlement or larceny;
  • Some income tax debts (generally, those that are over 3 years old from the date the returns were due, with the return filed more than 2 years ago, and that were assessed more than 240 days prior to the filing of the bankruptcy case);
  • Debts incurred by willful and malicious injury to another person or their property.

If, at the end of the Chapter 13 plan, you have not been able to pay all of this kind of debt, the rest will be discharged.

Who May File a Chapter 13?

Only an individual with regular income who owes less than $307,675 in unsecured debt and $922,975 in secured debt. These debts must also be non-contingent and liquidated, meaning that they must be for a certain, fixed amount and not subject to any conditions or bona fide disputes.

How Does A Chapter 13 Work?

As mentioned above, in a Chapter 13 plan, the debtor makes monthly payments to a trustee, who pays creditors. To make these monthly payments, you must have some source of income that is regular, such as employment income or rental income. You are required to pay all of your "disposable income." (see below) to the Trustee for 36 months or more (again, see below). The Trustee will pay some creditors in full. These include secured creditors and creditors who hold "priority debts", such as most tax debt. Other, unsecured debt, will also be paid by the Trustee, but, depending on various factors (see below), you may not be required to pay these debts in full. If, at the end of the plan, there remains a balance on the unsecured debt, the balance is discharged, and you will not owe it any more. (There are some exceptions, for example, student loans). You do not lose any property in a Chapter 13, unless your plan proposes surrender of this property.

How Much Do I Pay Per Month And For How Long?

You are required to pay your "disposable income", which is defined as income that is not reasonably necessary for the maintenance and support of you or your dependents, during the "applicable commitment period" The calculations for this can require involved and detailed analysis, and determining the amount you will pay in a Chapter 13 plan can be very difficult, and this is one of the reasons you need an experienced attorney.

How long does a Chapter 13 plan last? Typically, a Chapter 13 plan lasts from between 36 months to 60 months. The length of the plan depends on several factors: the amount of your average monthly gross income calculated over the six month period prior to the month of filing, the monthly amount of your disposable income, the amount and kind of debt that you have, and the value of your nonexempt property. If the historical average monthly gross income is over the state median you will be forced into a 60 month plan, unless you can pay 100% of your unsecured debt within a shorter period of time.

Beyond this, let me give you some examples:

  • Assume you are facing a foreclosure of your home, and the amount necessary to "reinstate" the mortgage (the total of the past due amounts, plus attorney's fees, court costs, etc.) is $5,000. The interest rate on your loan is 8%. You have a recent car loan, and you are two payments ($720) behind. The interest rate on this loan is 12%. Additionally, you owe the IRS $1,000 for last year's tax. Finally, you have $10,000 in credit card debt. You have little or no equity in your home or car, and have property worth $400 that is not exempt. You and your attorney have agreed that $750 of the fee will be paid in your Chapter 13 plan. Your Chapter 13 plan must pay the $5,000 reinstatement amount on your mortgage, but without interest. Also, the amount past due, with interest, on your car loan will be paid in your plan. Finally, the plan must pay the IRS the full amount owed (but with no interest), because it is "priority" debt, and therefore must be paid in full.

    If you have "disposable income" of $525 per month, you will be able to pay all of this amount within 36 months. This is the best possible situation. Now, if your disposable income is only $250 per month, you will still be able to "cure the arrearage" (pay the past due amount) on the home mortgage and car loan, and you will be able to pay the IRS the full amount owed, but you cannot pay the credit card debt in full. If your plan remains at 36 months, you will pay a little over 3% of the credit card debt. This is acceptable, however. At the completion of the plan payments, you will receive a discharge from the remaining 97% of the credit card debt you were unable to pay.
  • Now assume that you are current with home mortgage payments, and that you have the same $10,000 in credit card debt. The value of your home is $225,000, and the balance on your mortgage is $100,000. In this situation, your plan must provide to pay all of the unsecured debt. Why? Because of a rule that creditors in a Chapter 13 must be paid at least as they would be paid if the debtor filed a Chapter 7. Here, even after deduction of the Maine homestead exemption of $47,500 to $95,000 and other deductions, such as the fictitious costs of selling the property, the nonexempt equity in your home easily exceeds the $10,000 in credit card. If you filed a Chapter 7, your home would be liquidated (sold) by the Chapter 7 Trustee. Your mortgage lender would be paid, administrative expenses (such as the Trustee's fee and a real estate commission) would be paid, and you would receive up to $95,000, which is the amount of your homestead exemption. The amount remaining most probably would be enough to pay your unsecured creditors. This being so, you must pay them in full in the Chapter 13 plan. Not only that, but you probably would have to pay those unsecured creditors interest, which is contrary to the usual rule that unsecured creditors do not receive interest through a Chapter 13 plan. The good news? You have managed to pay your debt at favorable rates, and you have saved your home from being lost.

What Are The Disadvantages of Chapter 13?

Except for the disadvantage of having to file the Chapter 13 in the first place, there are no real "disadvantages" to a Chapter 13. There are some restrictions, however. If you miss payments that are due under your Plan, your case will be dismissed by the Court. This will put you back in the same condition as you were in prior to filing. You will lose the protection of the Court, and your creditors will again be free to pursue collections, foreclosure, etc. While in a Chapter 13 plan, you cannot borrow money (incur new debt) without first obtaining court approval. This can be somewhat of a problem if, for example, your car lease expires and you need to get a new car during this period.

What is the cost of filing Chapter 13?

Court costs for a Chapter 13 are $274 (slightly less than the $299 for a Chapter 7). In the District of Maine, the Bankruptcy Court considers $2,800 as the attorney's usual fee. This is the fee that I charge, along with most other bankruptcy attorneys. This is a lot of money for most people, and it would be difficult, if not impossible, to pay this amount plus court costs at the time of filing.

Fortunately, the Court allows for payment of the fee through the plan. Usually, some portion of the fee is paid at the time of filing, together with the court costs. A workable amount of the fee paid at the time of filing often is $1,000 (in addition to the court costs); however, this is subject to discussion and negotiation.

How do I pay the fees and costs?

In a Chapter 13 situation, it may be important or essential to file at the earliest possible time (for example, in order to stop a foreclosure of your home or seizure of your car), which would not allow the luxury of paying the initial fees and costs over a period of time. In this situation, it may be necessary to ask someone else, such as a friend or relative, to help you with the cost. If that person does not have all of the amount available, it is possible for him or her (not you) to use a credit card. Cash advances are a possibility. I pride myself on providing a very high quality of service for my clients. I have also set up my practice to minimize expenses and pass those along to my clients in the form of the lowest possible attorney's fees. I will work with you to arrive at a payment plan that fits with your personal situation.

What are you getting for your money?

The fee of $2,800 will be the only fee normally that you will pay throughout the course of your plan. There are situations that develop over the 3 to 5 years that your plan will be in existence that involve additional charges. For example, sometimes because of a temporary loss of income, it is necessary to ask the Court to approve a suspension of plan payments for several months. Usually, there is a separate charge for this. Any such additional charges must be approved by the Court. In some cases, the extra charges can be paid through your plan. Because the fee that I charge for handling a Chapter 13 is the same as that charged by most other attorneys, the amount of the fee is really not a factor in your decision of which attorney to retain. The most important factor should be how competent and experienced the attorney is. The truth is that all attorneys are not equally competent. There are good attorneys and hopelessly bad attorneys. Even more than Chapter 7 cases, the preparation and handling of a Chapter 13 case offers many complexities. Your property and financial future are at risk in a Chapter 13. Make sure that your attorney knows what he or she is doing. From time to time I receive calls from people who have filed a Chapter 13 bankruptcy with an incompetent attorney, and their case is in jeopardy. Sometimes this is due to the proposed Chapter 13 Plan not being workable, and the case is set for dismissal. Sometimes, something has gone wrong after the plan has been confirmed by the Court, and the attorney is not being responsive to the situation. When selecting an attorney, you need to ask several important questions:

  1. Am I comfortable with this attorney? Does the attorney sincerely care for me and my legal problem, or am I just another case?
  2. Does this attorney have the experience and expertise to handle the problems that may arise in my case? Ask the attorney how many Chapter 13 bankruptcy cases he or she has handled.
  3. Is the attorney personally handling the main portions of my case, or instead, delegating the work to secretaries or paralegals? Of course, there is nothing wrong with an attorney using support staff to assist in the preparation of your case. However, you should guard against the situation where most of the preparation with you is done by a paralegal.
  4. What am I getting for my fees? This question deserves some attention. I see all kinds of advertisements by attorneys offering bankruptcies at ungodly low attorneys fees with the disclaimer that says "fees starting at...". I would be most curious to find out if the attorneys actually take any cases at that amount. I sincerely doubt it. If you check with these attorneys, you should ask if there are any "additional" charges for photocopying, file charges, etc.
  5. Does the attorney provide a retainer agreement or services contract outlining specifically what is covered for your fees and outlines the responsibilities of both you and the attorney? The retainer agreement is not required, but should be given by any attorney. You should demand it so that there is no question about what you are paying for.

Do I Need An Attorney At All?

Yes!! What I have said concerning the need for an attorney in a Chapter 7 bankruptcy is doubly true in a Chapter 13.

What Debts Can Be Discharged In Chapter 13?

First of all, any debt that you can discharge in a Chapter 7 will also be dischargeable in a Chapter 13. Further, there are other debts that, while they cannot be discharged in a Chapter 7, can be discharged in Chapter 13 (see above).

What About My Credit?

What I have said about this topic in the Chapter 7 page applies here, as well. Call for a consultation. Before you do so, however, please visit the page What Information Do I Need? If you can have the information discussed there available at the time of our consultation, I can better advise you.

Nothing contained herein should be construed to constitute advice for your personal situation. Furthermore, this is intended as a peripheral glance at the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws. Whether or not you should file a Chapter 7 bankruptcy, or any bankruptcy, will vary depending on your personal situation. This decision should only be undertaken after careful consideration and analysis, and after consultation with a professional.