Posted By: Scott B. Riddle, Esq. (Ph: 404-815-0164)
Note: This is the next section in the Consumer Guide to Bankruptcy in Georgia, re-typed for the Blog. Comments and questions welcome.
GUIDE TO CONSUMER BANKRUPTCY LAW IN GEORGIA
II. Chaper 7 cases.
III. Chapter 13
Chapter 13 Bankruptcy is often referred to as “reorganization” or “wage earner’s plan,” and is initiated by filing a Chapter 13 Petition in Bankruptcy Court. The Petition may be filed by an individual or jointly by a husband and wife.
Chapter 13 differs from Chapter 7 in two primary respects. One, unlike a Chapter 7 Debtor, a Chapter 13 Debtor submits a Plan by which the Debtor will pay some or all of his debts over a period of time (at least three, usually five years). The second primary difference is that a Chapter 13 Debtor is able to retain some, if not all, non-exempt assets that would otherwise be sold by the Trustee in a Chapter 7 case. Thus, if a Debtor completes the Plan, he will likely be able to keep all of his assets and receive a discharge of most or all of the debt not paid through the plan (except debts that are secured or non-dischargeable).
Upon the filing of the Petition, a Chapter 13 Trustee will be appointed and a first meeting of creditors will be scheduled within a month of the filing. Prior to this meeting, the Debtor will be expected to submit a plan and make plan payments to the Chapter 13 Trustee even though the plan has not yet been confirmed by the Court.
The first meeting of creditors is a formal meeting (not a court hearing) conducted by the Chapter 13 Trustee and provides an opportunity for the Trustee and creditors to ask questions about the Debtor’s petition, schedules or plan. It is also an opportunity for the Trustee to identify any problems or potential objections to the plan so that they may be corrected prior to the confirmation hearing.
A confirmation hearing will be scheduled a few weeks after the first meeting of creditors. If there are no objections to the plan, or all objections are resolved prior to the hearing, the plan may be confirmed without the Debtor appearing at the hearing, depending on local practice and the facts of the case. The Debtor’s attorney will determine whether the Debtor must attend.
a. Advantages of Chapter 13
While the inability to receive an immediate discharge and the necessity of making payments for three to five years may be viewed as disadvantages for a Chapter 13, there are several advantages. These include —
- A Chapter 13 plan may allow a Debtor to make up past-due mortgage payments over several months through the plan, thereby avoiding foreclosure.
- A Debtor may keep all or most non-exempt property.
- Collection actions against co-debtors are stayed (see below).
- Some debts that are nondischargeable in a Chapter 7 are reduced in a Chapter 13.
- It allows Debtors to satisfy their desire to pay as much as the can on their debts, and “do the right thing.”
b. Who is eligible for a Chapter 13?
Much like Chapter 7 cases, the law also imposes eligibility requirements for Chapter 13 cases. First of all, a Debtor must have “regular income” so that a plan can be funded. This does not mean income must be the same from week to week, or month to month. Individuals who are self-employed, work on commission, or whose income fluctuates for other reasons are still eligible for Chapter 13. Second, unsecured debt must not exceed $307,675 ($336,900 on April 1, 2007) and secured debt must not exceed $922,975 ($1,010,650 on April 1, 2007) . If the individual’s debt exceeds these amounts, they will need to file a Chapter 7 or Chapter 11.
A separate, but related, question is who can receive a discharge in a Chapter 13 case. A discharge will not be granted to an individual who has previously received a discharge under Chapter 7, 11 or 12 within four years from the filing of the new case, or in a Chapter 13 case filed within two years prior to the filing of the new case. Note that ineligibility for a discharge does not necessarily mean that a Chapter 13 cannot be beneficial. For example, if an individual ineligible for a discharge experiences temporary financial difficulties and gets behind on mortgage payments, income taxes or other debt, he may still be able to file a Chapter 13 and pay the debt through the plan. This avoids a “race to the courthouse” by creditors who want to collect, and often leads to a better overall result for both Debtors and creditors. This is in contrast to a Chapter 7 case, where the primary, and often only, goal of filing is to receive a discharge. Whether a Debtor can file a Chapter 13 when he is ineligible for a discharge may vary by jurisdiction and depend on the facts of each case. A Bankruptcy lawyer will be able to determine whether a particular Debtor may be eligible to file a Chapter 13 case.
c. The Chapter 13 Plan
The Chapter 13 plan is normally filed with the initial Petition, or soon thereafter. The technical requirements of a Plan are beyond the scope of this Guide, and each plan will be different depending on the amount and nature of the debt, the amount of the payments made by the Debtor to fund the plan, and other factors. However, there are several general rules and guidelines that apply to all Chapter 13 plans.
The primary requirement for a plan is that a Debtor must apply “all projected disposable income” to unsecured creditors under the plan. Payments are made on a regular basis to the Chapter 13 Trustee and the Trustee distributes the funds to the creditors as provided by the plan.
Projected disposable income is a term of art, and is calculated by deducting from the Debtor’s projected monthly income the projected monthly expenditures of the Debtor. The monthly expenditures are limited by law, and cannot, for example, include padded expenses for food, entertainment or a newly-discovered desire to tithe (note that most courts have traditionally allowed reasonable tithing if the Debtor has a history of doing so).
The plan must also be feasible, meaning that there is a significant likelihood that the Debtor will actually be able to maintain the payments over the life of the plan. It must also be proposed in good faith. This factor is analyzed on a case-by-case basis, and may include a review of the Debtor’s pre-petition or post-petition conduct, the nature of the debt, or the income or assets of the Debtor. For example, a plan that proposes to pay 100% of nondischargeable student loan debt while paying only 10% of general unsecured debts may be deemed filed in bad faith. Similarly, if a Debtor owns vacation property or other significant non-exempt assets and the plan does not propose to pay 100% of unsecured debt, the Chapter 13 Trustee or creditors my object to the plan based upon the lack of good faith or the fact that creditors are receiving less than they would if the Debtor had filed a Chapter 7 case in which the Trustee would liquidate the non-exempt assets.
Note that some secured debts, such as mortgage payments, are often made outside of the plan and directly to the creditor. Other secured debts, such as car payments, may be included in the plan. If payments are made outside of the plan, it is imperative that all payments are made timely and that a Debtor is able to provide proof of payment when requested. A Chapter 13 Trustee may seek dismissal or conversion to Chapter 7 when a Debtor is behind on secured debts, even if payments under the Chapter 13 plan are current. Further, Debtors are required to maintain insurance on homes, cars and other secured property and failure to do so may lead to the creditor requesting that they be allowed to foreclose or repossess the collateral.
Finally, aside from the contents of the plan, two other matters are important. One is self-evident – the Debtor must actually make the payments due under the plan, even the payments that are due prior to the Court’s confirmation of the plan. Second, many courts, including the Northern District of Georgia, require that Debtors submit an Employee Deduction Order to their employer (unless self-employed) that requires the employer to submit a portion of the Debtor’s wages directly to the Chapter 13 Trustee. The Debtor’s employer will, therefore, get knowledge of the Bankruptcy filing.
These are but a few basic principles that govern Chapter 13 Plan. A Bankruptcy lawyer will be able to explain the many additional requirements of a plan after reviewing the specific facts and circumstances of a particular individual or couple.
d. The co-debtor stay
Unlike Chapter 7 cases, Chapter 13 provides for a co-debtor stay, which prohibits a creditor from attempting to collect a consumer debt from a co-debtor. The most common situation is where a husband and wife are jointly liable on a debt and only one spouse files for Bankruptcy, but could apply to other co-debtors. The purpose is to allow the Debtor sufficient time to propose a plan and pay the debt through the plan. However, a creditor can request that the Court lift the co-debtor stay and allow it to proceed against the co-debtor under certain circumstances.
e. What happens if my plan is confirmed but I lose my job or cannot maintain the payments?
Unfortunately, many Debtors find that they cannot maintain their Chapter 13 payments over the life of the plan. This could be for many reasons, from an inability to stay within budget to the loss of a job.
In most cases where payments are not timely made, and the Debtor cannot promptly make up the payments, the Chapter 13 Trustee will seek a dismissal of the case or conversion to Chapter 7. In some cases where the circumstances are beyond the Debtor’s control, and the payments to creditors allowed them to receive more than they would have received if the Debtor had initially filed a Chapter 7, the court may grant a “hardship discharge.” Whether a Debtor will qualify for such a discharge will be determined based upon the unique circumstances of the case.
Important Note: This Guide if general information only, and should not be relied upon as legal advice. Contact a qualified lawyer if you have specific questions about your circumstances.
Scott B. Riddle, Esq.