What is Chapter 13 Bankruptcy?
Wage Earner's Bankruptcy
Chapter 13 bankruptcy goes by many names.
But it all means one thing…
You can breathe again!
What more could you ask for? Well, for starters:
A Chapter 13 bankruptcy is a type of reorganization bankruptcy case that allows the adjustment of debts for people that have a regular source of income. It is sometimes called a repayment plan or a wage earner’s bankruptcy. In a Chapter 13 bankruptcy case you are filing a plan with your case that proposes a payment through your bankruptcy trustee. A business entity cannot file a Chapter 13 case so there are no corporate Chapter 13 bankruptcies.
To qualify for a Chapter 13 bankruptcy you must show the court that you have a regular source of income. This can be from work, pension, social security or any other regular money that is received. You will have to show the court that you can pay the plan payment you are proposing in the case. There must be enough money in your budget after paying your basic expenses to cover the payment into the case.
Chapter 13 Bankruptcy and Creditors
A Chapter 13 bankruptcy plan must pay certain creditors or provide for how they will be paid during the bankruptcy. Creditors are normally categorized into different groups to determine how they will be treated. Many of these groups are determined by the statutes that control Chapter 13 cases but some of them can be created by your attorney in the case.
The first group of creditors that must be paid are administrative creditors. These are claims related to the administration of your case and include the filing fee, your attorney fees, some professional expenses as well as the fee the Chapter 13 bankruptcy trustee collects to manage your case. The Chapter 13 bankruptcy trustee charges a statutory fee to manage your case. This fee can range anywhere from 0% to 10% but for most of my examples I will use 8%. When you make payments in a case it is normally to the Chapter 13 trustee and that fee is used to run their office. It is added on to everything paid through the case.
Any creditor that is a priority creditor must be accounted for and some option to cover them must be made. A common priority creditor is the Internal Revenue Service. If you have income tax debt that is less than 3 years due and owing then that debt is typically a priority claim and must be paid through the case. If you have a child support obligation it can be paid through an existing order outside the plan and must stay current during the case. In some cases you might have to pay child support arrears through plan as a priority debt.
A secured creditor must be paid during the case or the property that secures the loan must be surrendered. If you are dealing with personal property like a car you must pay the value of the property or the entire amount owed. If there is a home loan on your personal residence you must continue to pay that outside of the case directly to the lender if you are current or make the ongoing payments through the plan and make up an arrears through the plan if you are not current at the time of filing the Chapter 13 bankruptcy case.
Unsecured creditors are usually lumped together. How they are paid is really determined by your budget and the Means Test. This same test also determines the minimum and maximum amount of time you are in your bankruptcy case.
Chapter 13 Bankruptcy and Your Income
If your income averaged over the last six months is below the median income for a household of your size then you will pay your unsecured creditors whatever is left over in your budget after you have paid your basic bills and your administrative, priority, and secured claims if they were spread out over a three year period of time. These types of cases are called Below Median Chapter 13 cases and make up the majority of Chapter 13 cases filed. A shorthand used by bankruptcy professionals for these case is BMI for Below Median Income.
Planning Your Chapter 13 Bankruptcy
Here is an example of a Below Median Chapter 13 bankruptcy in Kansas. You have gross income of $4,000 per month and a household size of one then you would be below median in the state of Kansas. If you have $3,100 in attorney fees, $310 filing fee, $2,000 in priority taxes and $6,000 owed on a vehicle (including interest) then at a minimum you will have to pay $11,410 to cover those claims and if the trustee fee is 8% then you will also have to pay another $912.80 to the trustee to manage the case. If I wanted to pay those items over 36 months, which is the minimum I have to be in the case, then I divide the total $12,322.80 by 36 months. The payment for this case will be $342.30 per month over 36 months to cover the items I have to pay. We still have to figure out if there will be any money for the unsecured creditors.
After we figure out the chapter 13 bankruptcy payment for the creditors that must be paid we do a budget. We will take the monthly income in the above case and deduct out for withholding taxes, retirement contributions, insurance, food, utilities, rent or mortgage payment, gas for a vehicle, recreation, child costs, and other basic expenses. Then we will see how much is left over. If there is more than what is needed to cover the creditors we have to pay through the plan then the excess will go to the unsecured creditors. In the example above if we have $500 left over and $342.30 goes to the administrative, priority, and secured creditors then the excess $157.30 per month will go to the unsecured claims after deducting the trustee’s fee of 8%.
This means that at the start of the case above we would be proposing a plan that would pay an additional $5662.80 into the case, with $453.02 to the trustee (8% fee) and $4,773.78 to the unsecured claims. The below median case would pay something to the unsecured creditors but at least at the start would not be required to pay them more than what we are listing here.
If in a below median case, using the same numbers as above, you did the basic budget and you had $300 a month available to make the bankruptcy plan payment you would have to lengthen the case to be able to make the payments. You would take the $12,322.80 and divide by $300 (the amount you have available to make a payment) and the length of the case would be 41 months of full payments and $22.80 due in the 42nd month. In this example because there is no extra money available in the first 36 months there is no payment to the unsecured creditors.
These are just two examples of how unsecured creditors are treated in Below Median Chapter 13 bankruptcy cases. There are numerous other issues that might come into play that can effect how much you are paying.
If your income averaged out over 6 months is above the median for a household of your size then how your unsecured claims get paid will be calculated differently to some extent. In an Above Median Chapter 13 bankruptcy case there is a presumption that you will have some money to be able to pay your unsecured creditors. You have to fill out the Means Test to determine if that is correct.
The Means Test
The Means Test in a Chapter 13 bankruptcy limits some of your expenses based on guidelines published by Internal Revenue Service. Those limited expenses include rent, food, clothing, utilities, vehicle operation, car insurance, recreation, and home maintenance. Some expenses such as your mortgage, payment of secured debts, priority debts, health insurance, ongoing medical expenses, child care, charitable contributions, and contributions to retirement accounts are not limited and you use the actual expenses.
The Above Median Chapter 13 bankruptcy will run for five years. That is the minimum commitment period. You will have to pay the amount that the Means Test says you have left over to your unsecured creditors. It is possible to file an Above Median Chapter 13 case and still not pay anything to the unsecured creditors and it happens all the time. It is also possible to deviate from the Above Median Means Test to reduce the payment to your unsecured creditors based on a change of circumstances or some other item that is unusual but reasonable in your case.
A Chapter 13 Bankruptcy Example
As an example let’s assume that you live alone and make $5,200 at your job monthly before deductions for taxes or any other items coming out of your check. You would be above the median income in Kansas and need to fill out the Means Test to determine what you have left over for your creditors. You can deduct your actual monthly expenses for tax withholding ($1200), health insurance ($380), disability insurance ($40), ongoing medical expenses ($200), car payment over the lifetime of your plan ($300), payment on tax debts over the lifetime of the plan ($200), contributions to retirement ($330). The total for these items is $2650. You have $2,550 left over.
Now you deduct the fixed allowable expenses under the Means Test. You get food and clothing ($715), rent ($805), utilities and rental insurance ($494), vehicle operation ($188), and vehicle ownership ($221). The total comes to $2,423. If your numbers worked out the same way there would be a presumption that you would pay an additional $127 per month over the lifetime of the plan to your unsecured creditors. This number is also called your Projected Disposable Income.
If the total payment to cover administrative costs (attorney and filing fee), secured car loan and tax debt is $550 per month then you add $127 to that to get a total payment of $677 per month over 60 months. The payment to the unsecured creditors in this example is called the Unsecured Pool.
If you owed $30,000 in credit card debt, $10,000 in personal loans and another $10,000 in medical debt in the example above you would only have to pay into the Unsecured Pool $127 x 60 months = $7,620. We would also call this number your Projected Disposable Income. The $50,000 of unsecured creditors would split up this money pro rata (based on how much each of them is owed).
In a Chapter 13 bankruptcy there is a Chapter 13 trustee assigned to the case when it is filed. The Chapter 13 trustee is responsible for managing the payments that are made into your case and making sure the terms of your plan are being fulfilled. If the Chapter 13 trustee does not agree with the plan you have proposed they can object and have the case brought before the Bankruptcy Judge to make sure things are appropriate. The Bankruptcy Judge will decide who is correct in these matters.
You can propose to pay money into your case to retain property that would otherwise be liquidated if you had filed a Chapter 7 bankruptcy. In a Chapter 7 case the trustee routinely seizes and sells non-exempt or unprotected property for the benefit of your creditors. In a Chapter 13 case, whether it is a Below Median or Above Median case you can pay in money to retain those items.
For example if you had a boat that was worth $3,000 and you filed a Chapter 7 case the trustee could seize and sell it for your creditors. In a Chapter 13 case you can keep the boat by paying over the same amount of money to your unsecured creditors that they would have received in a Chapter 7 case. In a Chapter 7 case the trustee would have paid an auctioneer and then paid fees to themselves after the sale. This might mean that only 60% of the funds would have gone to unsecured creditors. In a Chapter 13 case you can pay that 60% ($1,800) over the lifetime of the case and retain the boat.
Chapter 13 Bankruptcy Filing Requirements
Before you can file a Chapter 13 bankruptcy you will have to provide six months of paystubs to your attorney so they can determine if you have a Below Median or an Above Median case. You will also need to provide a photo id, your social security card, your last two years of tax returns and any bills for your debts. We pull a credit report for you and check the local courthouse online for any lawsuits.
When you file a Chapter 13 bankruptcy you must disclose all of your assets, your income and your debts. You must not leave anything out and the rules about disclosure are very important. You will also have to answer certain questions about your income and transactions over the last few years.
The documents that are filed in a Chapter 13 bankruptcy case include a petition, schedules with your assets, creditors, income and expenses, a statement of financial affairs, mailing matrix, means test, declaration of electronic filing, paystub declaration, disclosure forms and of course a plan. You should also sign a written service agreement with your attorney.
You will also need to do a Credit Counseling course before you can file the bankruptcy case. Your attorney should have a vendor you can use and these classes are often in person, online, and over the phone. These classes typically take about an hour of your time and they are very basic.
What Happens After Filing a Chapter 13 Bankruptcy
When the case is filed a notice will go out to all of your creditors. It will tell them to stop taking any action to collect their debt and come to the bankruptcy court. The notice is often called the Order for Relief and it imposes an Automatic Stay that stops your creditors.
The notice will contain two hearing dates. The first is know as the meeting of creditors. You must attend this with your attorney but creditors normally do not appear. The second hearing is a confirmation hearing. You do not have to attend this hearing normally. There are other dates on the notice that tell your creditors how long they have to file a claim in your case but you do not have to worry about that.
The Chapter 13 trustee will conduct the first meeting of creditors and examine your case and your plan. The first payment under the plan is due within 30 days of the case being filed. You must make the payments for the case to succeed. If the payments are being made and there are no objections to the plan then the case will be confirmed (approved) by the court. If there are objections they must be resolved before the plan can be confirmed. Most objections are resolved by amending the plan or an agreement with the Chapter 13 trustee or the creditors.
Once the case is confirmed the plan will run without additional alterations until there is some change of circumstances. If you fail to make payments or your income goes up or down then there will need to be some kind of amendment to the case to make sure things stay on track. The entire time you are in the bankruptcy case the Automatic Stay applies to prevent creditors from taking your income or acting against you while you are in the case. This includes creditors that arise after the case is filed such as new medical debts.
In some cases you may be off work or temporarily have additional expenses that eat up your income. When that happens you can usually file a motion to turn off the bankruptcy payments for a few months to deal with it. The is called a Plan Modification or an Abatement.
Once you complete all the payments required under the case you can file a Motion for Entry of Discharge. The discharge is the final court order in the case that wipes out the creditors. You must complete a Debtor Education course before that can be done. Your attorney will normally provide you with a course they want you to use so they can track it.
After the discharge is issued your creditors are barred from trying to collect on the debts listed in the case. There are creditors that will survive the discharge including (but not limited to) student loans, criminal fines, and some tax obligations that are old but were not filed on time.
A Chapter 13 Bankruptcy is a complex process that requires care and attention. We have done thousands of these cases and understand all the ins and outs that apply to them. We can help you stop garnishments, save property, and get back on your feet. If you reach out to us we can help you get started today. Please contact us and we will give you a free consultation. We look forward to hearing from you.