Chapter 13 bankruptcy affords debtors the opportunity to adjust their finances without losing their assets to liquidation. In Chapter 13, debts are typically paid out of future income rather than from current assets. This means that if you file Chapter 13 you'll generally be allowed to keep and use your property even if the property isn't exempt. This is in contrast to Chapter 7 bankruptcy where you usually can't keep property that isn't exempt.
In Chapter 13 bankruptcy you set up a plan to repay either some or all of your debts over a period of three to five years. You can use this plan to cure mortgage arrears, adjust payment terms on certain secured loans and, in some cases, get rid of some or all unsecured debt.
A bankruptcy trustee is typically appointed in the case. The trustee’s main responsibilities are to conduct the meeting of creditors and ensure that plan and documentation requirements are met. The trustee or creditors may object to the terms of the proposed plan.
Objections to the plan typically deal with feasibility (such as if you cannot afford to pay what is required under the plan), insufficiency of the proposed payments or failure to make timely payments under the plan. Regardless, it is up to the bankruptcy judge whether to confirm the plan, deny the plan or require amendment of the plan. These decisions are typically made during what is called a confirmation hearing. Most plans are not confirmed at the initial confirmation hearing for a number of reasons. That said, it is not uncommon for multiple confirmation hearings to be scheduled in a case.
Under current law, the court or trustee may now review your financial information and tax returns each year. If your income increases significantly, you may be forced to make higher payments each month going forward. This would be accomplished through modification of the confirmed plan. Of course the opposite is true as well. If income decreases or expenses increase, your attorney may decide to motion the court to modify the confirmed plan for payments with lesser amounts.
Upon completion of the plan's payments, you typically receive a discharge of your remaining debt obligations. The discharge is almost identical to a Chapter 7 discharge with some key exceptions.
Debt LimitsTo be eligible to file Chapter 13 bankruptcy, you can have only so much secured and unsecured debt. The current debt limits are $1,081,400 for secured debt and $360,475 for unsecured debt. If you're over either debt limit, you may not be a debtor in a Chapter 13 bankruptcy. If the case is already filed, the court will order you to convert to another chapter or your case will be dismissed. There are no debt limits in Chapter 7 and Chapter 11 bankruptcy, and that is where most debtors will end up if they are over the Chapter 13 debt limits.
One issue that comes up a lot in this area is under-secured property. For example, a hypothetical debtor's house is worth $80,000 and the balance on the mortgage is $100,000. Some courts have held that the mortgage in our example should be treated as if $80,000 is secured and $20,000 is unsecured for purposes of determining debt limits. Other courts have held that the entire mortgage is secured regardless of the value of the property. This is a tricky issue because second position liens may be treated differently than first position liens. Regardless, this issue is definitely something to look out for.
CramdownIn Chapter 13, debtors may petition the court to value an under-secured claim at the value of the property the claim is securing. This is called a "cramdown" or bifurcation of a claim. For example, if a car is worth $20,000 and there is a $30,000 lien on it, the debtor can petition the court to treat the $20,000 portion of the lien as secured and the $10,000 portion of the lien as unsecured. This, in certain cases, would allow the debtor to get rid of a large portion of the debt through the plan. It is important to note that debtors may not cramdown mortgages on a primary residence or vehicle loans made within 910 days of filing the bankruptcy case.
What is dischargeable?The discharge received in a Chapter 13 case is broader than that received in Chapter 7. It includes all debts included in the Chapter 13 plan (unless the plan says otherwise) with the following exceptions:
- Long-term debts
- Tax debts
- Debts incurred through false pretenses or fraud, if the court deems them as such
- Debts not listed in the bankruptcy if the creditor had no actual notice of the case and was prejudiced by not having notice
- Debts for fraud as a fiduciary, if the court deems them as such
- Domestic support obligations
- Most unpaid student loan obligations
- Certain drunk driving debts
- Certain criminal fines and restitution
- Debts for damages or restitution ordered in a civil action as a result of willful or malicious injury by the debtor that caused personal injury or death