If you are seeking to protect your property from being foreclosed on or have more than one property, you can consider filing for bankruptcy under Chapter 13. It is also an ideal option for individuals who do not intend to abandon their responsibilities. Chapter 13 bankruptcy can help individuals who are working full-time, have equity in their homes or other property, or are behind on their second mortgages to get back on their feet financially. We at the Los Angeles Business & Real Estate Law Firm can help you with your bankruptcy case and work hard to defend your constitutional rights.
Understanding Chapter 13 Bankruptcy
An individual reorganization known as a Chapter 13 bankruptcy is for persons with adequate discretionary income to pay their obligations and their bills. Most individuals who qualify for Chapter 13 own property and assets they want to keep and need time to return to solvency.
It offers them time to make payments for their obligations while allowing them to continue living their lives free from the interference of creditors. Additionally, it can offer borrowers potential debt reductions while ensuring that lenders get at least certain amounts – typically more than what they’d receive in Chapter 7 – from the debtors.
Chapter 13 is solely available to individuals, although it can involve an individual business debt. This type of bankruptcy filing is often made by middle-class people who need debt restructuring but still wish to retain their secured properties (such as homes or vehicles), settle their unsecured obligations, and retain their credit cards. Chapter 13 bankruptcy is also ideal for homeowners who want to stop their mortgages from going into foreclosure.
How Chapter 13 Works
Chapter 13 bankruptcy is similar to Chapter 11 in that the borrower proposes a repayment plan that settles the debts over a while. However, it differs in several ways from Chapters 7 and 11 respectively.
The automatic stay is subject to the same regulations in Chapter 13 as it is in the other bankruptcy chapters. Additionally, unlike the usual automatic stay per Section 362, Chapter 13 has a unique automatic stay clause that shields co-debtors. In a Chapter 13 case, “a lender cannot try to recoup a ‘consumer obligation’ from any person who is responsible in addition to the debtor unless the court orders so.” This would apply to people who co-sign for vehicles, credit cards, and houses, to name a few.
Chapter 13 bankruptcy also establishes creditor classes, similar to Chapter 11. As in Chapter 11, every individual in each class should be handled the same as the other members of the class. Additionally, Chapter 13s are often challenging to manage without an attorney, even though they don’t require one. The success rate for Chapter 13 bankruptcy pro se filings in the Central District of California was less than 0.04 percent.
These statistics might not be as alarming as they appear, since not all Chapter 13 cases are filed to obtain a discharge. There is often no real intention for the case to be successfully administered and discharged because many Chapter 13 filings are made to halt or delay a foreclosure. Additionally, the borrower can retain property that is not exempt under state law.
Many more measures that originally were filed under Chapter 13 bankruptcy are ultimately changed to Chapter 7. Chapter 13 bankruptcy cases account for roughly one-third of all bankruptcy cases in the United States. However, only a few of these cases are successful. The provisions of Chapter 13 require the debtor to possess the necessary financial discipline to adhere to a multi-year austerity program to settle or reduce debt. This is challenging for most people.
Declaring Chapter 13 Bankruptcy
As of 2018, any person or a married couple who has secured debts below $1,184,200 and unsecured debts below $394,725 can apply for bankruptcy under Chapter 13 of the bankruptcy code. These amounts fluctuate regularly since they are linked to the Consumer Price Index.
Persons who are self-employed or who run unincorporated businesses are also considered “individuals” for this Chapter. No incorporated firm is allowed to declare a Chapter 13 bankruptcy.
A person who files for Chapter 13 bankruptcy should be able to show the court that they have a steady source of revenue. In most instances, the revenue is wages, although any regular earnings or liquidation of the property could qualify. Individuals who do not meet the debt restrictions and income requirements can either file a Chapter 11 or Chapter 7 bankruptcy.
Similar to other Chapters of the Bankruptcy Code, filing requires the completion of credit counseling. A person can’t file for bankruptcy under Chapter 13 or any other chapter if:
- Within the previous 180 days, a previous bankruptcy claim was dropped as a result of the borrower’s deliberate failure to show up in a bankruptcy court session
- The bankruptcy filer failed to follow the directives of the court
- The filing was voluntarily rejected after creditors requested assistance from the court in recovering properties upon which they have liens
Chapter 13 bankruptcy can only be submitted by a debtor, unlike a Chapter 11 bankruptcy, which could involve competing proposals put forth by creditors.
When Chapter 13 bankruptcy is filed, a bankruptcy trustee is assigned to the case. This is similar to Chapter 7 but unlike Chapter 11. However, in Chapter 13, the trustee’s function is a key factor in its success. A Chapter 13 bankruptcy trustee’s role is different from those of other bankruptcy trustees (in some cases, bankruptcy administrators’ responsibilities). Chapter 13 bankruptcy trustees serve as “standing trustees” according to the provisions of the Bankruptcy Code and they are actively engaged in the proceedings. The trustee serves as an independent contractor, not an employee of the government, and is paid a salary that depends on a portion of the money distributed to lenders under the Chapter 13 arrangements in that region.
The bankruptcy trustee has many specific responsibilities under the Code, and these can be added by the courts in each jurisdiction. The Chapter 13 bankruptcy trustee is usually trusted by the court to analyze, reach an agreement, and administer the terms of the plan. The bankruptcy trustee is in charge of collecting repayments from the borrower, distributing them, attending hearings, and handling objections to the arrangement.
However, the bankruptcy trustee has no involvement in any of the borrower’s operations. In a Chapter 11 bankruptcy, a business will be managed under the bankruptcy plan by the plan administrator. However, ongoing business is not covered by Chapter 13. The trustee won’t take over the management of any businesses that the debtors control or run since Chapter 13 serves individuals only. The debtor would still operate the business.
Repayment Plans
A repayment schedule should be filed alongside the application or within fourteen days of presenting it to the bankruptcy court to approve it. The plan has to incorporate regular, usually biweekly or monthly, installments of specified sums to the bankruptcy trustee. The payments usually come from a predetermined source of income, such as a salary.
However, they could come from any source provided that the bankruptcy court is confident that they would remain consistent and sustainable. The payback amounts are deducted from the debtor’s “disposable income.” Most debtors often have their payments processed through payroll deductions.
There are three main types of claims:
- Secured
- Unsecured
- Priority
These three types are usually treated in a similar way as Chapter 11 bankruptcy. The plan should include either the full repayment of the obligation or the market value of the collateral, based on the type of secured debt involved. For example, a $20,000 car with a $13000 lien should have at least $13000 available for payment.
A secured loan, like a home mortgage, is often paid on the same date as the initial mortgage (for example, on the thirtieth of every month), in addition to another sum to cover any arrearages. Although unsecured lenders have fewer rights, the plan should ideally treat them equally to how they would be during a Chapter 7 proceeding. They are required to provide proof of claim much like in a Chapter 11 bankruptcy.
Even though the court has not yet given its approval, the debtor is required to start paying payments as part of the repayment arrangement within the first thirty days after the petition has been filed. Any payments that are due during those thirty days need to be made to the lender directly.
Creditors’ Meeting
The trustee will convene a creditors’ meeting with the borrower (and their counsel) to go over the plan at some point between 21 to 60 days following the filing of the petition. The debtor must be present.
Usually, before the meeting, the debtor meets the trustee and their legal counsel to ensure that the repayment plan has been put in order. Problems with this plan are usually ironed out beforehand, during, or right after the meeting, allowing the plan to move forward.
During this session, the trustee will administer an oath to the debtor, and the creditors and trustee will have the opportunity to ask the bankrupt questions regarding their current financial situation as well as the factors that have been offered for the repayment plan. In the case of joint petitions, the couples are required to be present during the meeting to respond to the questions. This meeting is not open to bankruptcy judges.
An unsecured creditor has 70 days from the first date scheduled for the creditors’ meeting to file the proof of claim.
Time Limits
Although the periods for Chapters 7 and 11 are undefined, a Chapter 13 filing has an established limit. In nearly all circumstances, Chapter 13 is fixed to a specific period of either 3 or 5 years. The precise period depends on where the borrower’s income lies in the state’s income scale at the point when the bankruptcy petition is filed.
Unless the judge allows for a longer repayment period, the plan will typically last for three years if the debtor earns less than 50% of the state’s median income. Most often, this choice is open to those who are eligible for Chapter 7 but opt for Chapter 13 to retain their homes or vehicles.
A plan spanning five years will be used if your earnings are higher than the state’s median. Chapter 13 will never last more than five years. Most Chapter 13 plans are for five years. The length of bankruptcy under Chapter 13 can be reduced if the unsecured loans have been settled in full. If so, the bankruptcy proceeding can be closed once those debts have been settled.
Confirmation and Discharge
A confirmation session will be held before the court with the trustee, debtor, and any interested creditors in no more than forty-five days following the creditors’ meeting. Creditors are given 28 days advance notice of the meeting and have the option to contest the verdict.
The plan can be approved, or rejected, and a revised plan requested, or the matter can be dismissed, depending on the court’s decision. The borrower can even change it to Chapter 7. If the lawsuit is dismissed and the borrower’s funds are held by the trustee, they have to be given back to the borrower. The payments must begin “as quickly as possible” after the matter is confirmed.
Following confirmation, the plan moves forward since the Code on Bankruptcy ties both creditors and debtors together. But as the matter develops, there could be built-in discretion. After the plan has been confirmed, the trustee, the debtor, or the unsecured lender can propose changes to the plan if they believe they’re essential. However, the borrower is not permitted to take out fresh debt without first consulting with the trustee.
The court is going to determine how to move forward if the borrower doesn’t make the required payments as specified in the plan. The bankruptcy court will then have the option of dismissing the case or turning it into a liquidation under Chapter 7. In addition, if the borrower does not pay the post-filing domestic maintenance obligations or provide income taxes, the case could be dismissed.
In contrast to Chapter 11 or 7 respectively, the discharge of debts under Chapter 13 does not occur until the repayment plan is fully implemented, which typically takes three to five years following confirmation. Any outstanding debts are then discharged.
However, just as in Chapter 7, some debts can’t be discharged by filing for bankruptcy. A long and complicated list of obligations cannot be discharged under Chapter 13 of bankruptcy. When the repayment plan ends, any remaining debt that is not dischargeable must be paid.
For instance, if the payment of a mortgage or child support obligations is not entirely satisfied throughout the matter, legal action could still be brought to recover the remaining sum. Although certain additional obligations are eligible for discharge, the creditor may nevertheless object to the discharge of such debts. These comprise fraudulently acquired debts as well as monetary awards made in civil cases where the debtor’s acts resulted in someone’s death or serious harm.
Some debts that cannot be discharged under Chapter 7 can be discharged under Chapter 13 bankruptcy. These include debt acquired to satisfy non-dischargeable taxes, debts obtained to cover deliberate and malicious damage to property (in contrast to harm caused to an individual), and debts resulting from property agreements in separation or divorce cases.
Hardship Discharges
Circumstances could arise after the plan has been confirmed and before release that impedes its implementation or modification. Examples consist of medical problems, accidents, job loss, as well as other disastrous occurrences that are out of the debtor’s control. These could render the plan’s repayment requirements challenging or impossible. Chapter 13 provides for “hardship discharges” in such instances. Hardship releases are rare, but when they’re granted, they work like Chapter 7 discharges.
Foreclosures
The main purpose of Chapter 13 is often to prevent a mortgage on a borrower’s main residence from going into foreclosure. When a person files under Chapter 13, an automatic stay halts the foreclosure process. By making additional monthly installments on mortgages throughout the bankruptcy, the creditor can later catch up on the overdue payments.
However, when the mortgage firm finishes the foreclosure auction as required by the state’s laws before the borrower submits the petition, they can still lose the property. Sometimes, this will lead to a “race to the courthouse” under Chapter 13 bankruptcy before the process of foreclosure is finalized. Naturally, the stay could be lifted and the homeowner could end up losing the house if they are unable to fulfill the terms of the agreement by making the required mortgage payments.
Find a Bankruptcy Attorney Near Me
If you are having trouble paying off your debts but have a consistent income, filing for bankruptcy under Chapter 13 might be the best option for you. Our attorneys at the Los Angeles Business & Real Estate Law Firm can assist you in navigating the Chapter 13 intricacies and help you receive your discharge so you can move forward with a clean slate. Call us today at 310-796-7794.
