HOW CHAPTER 13 BANKRUPTCY WORKS
Reorganizing Your Debt
Chapter 13 is known as a “reorganization” bankruptcy because it allows you to restructure your debt by proposing a plan to repay all or a portion of it, typically over a period of three to five years. It is for individuals with regular income, but not incorporated businesses. Chapter 13 is available to people who are employed, self-employed, or operating a sole proprietorship business. There are limitations on the amount of secured and unsecured debt in Chapter 13, which can disqualify debtors with sizable business debt.
One Monthly Payment For All Your Debt
Chapter 13 resembles a debt consolidation loan in that you make one monthly payment to a bankruptcy trustee for all debts included the plan, as opposed to separate payments to individual creditors. The length of the plan term depends primarily upon your income over the six-month period preceding your bankruptcy filing date. If your income is below the median level for a household of your size in Arizona, the required repayment period is three years; when above median, it is five years. However, even if you are only required to be in a three-year plan, it is not unusual to stretch out the payments over five years instead to reduce the monthly plan payment.
Payments Over Five Years
The amount of your monthly plan payment depends upon your monthly net income and monthly living expenses paid outside the plan. Examples of monthly expenses paid outside the plan are rent, utilities, food, insurance payments, etc. If you are married, your spouse’s income is included, even if he or she is not filing bankruptcy jointly. The difference between your net monthly income and expenses represents your “disposable income”, which is the monthly plan payment the budget shows you can afford to make. The monthly plan payment amount further depends on the type of debt being paid in the plan. For example, mortgage arrears and priority tax debts must be paid in full. Regardless of your monthly budget, the plan is not “feasible” unless the math demonstrates that you can afford to pay the debt that must be paid in full over a maximum of five years.
Why Chapter 13?
There are a variety of reasons for filing Chapter 13 over Chapter 7. First, it is the only bankruptcy option available when you do not pass the Chapter 7 means test. If your gross annual income (based on your income over the preceding six-month period) exceeds the present median income level for a household of your size in Arizona, you must pass the “long form means test” to qualify for Chapter 7. While Chapter 7 is ideal for resolving unsecured debt (i.e., credit cards, medical, and repossession deficiencies), if you do not qualify for Chapter 7 then a Chapter 13 bankruptcy can still help by consolidating debt and reducing your payments. Chapter 13 provides the added benefit of “cramming down” auto loans to the present value of the vehicle when the loan was taken out more than 910 days prior to the filing date.
Second, there are situations where Chapter 13 is the best or only option, regardless of whether you would otherwise qualify for Chapter 7. An example of this is saving your home from foreclosure. Chapter 13 allows you to cure a mortgage delinquency by paying the missed payments, called arrears, through the plan. You can prevent or stop a trustee’s sale of your house by filing a Chapter 13 petition prior to the sale date, and you will have as much as five years to get caught up on the delinquent mortgage payments.
Finally, Chapter 13 helps with priority tax obligations that are not dischargeable in Chapter 7 because you can pay them in full through the plan and discharge the interest. Another advantage that Chapter 13 has over Chapter 7 is that certain types of debts are dischargeable only in Chapter 13. For example, if you were ordered to pay certain debts in connection with a divorce decree, a Chapter 13 will discharge the “hold harmless” obligation to your ex-spouse, whereas your ex’s claim survives Chapter 7. Finally, if you have valuable assets that are not exempt and would be forfeited in Chapter 7, a Chapter 13 allows you to retain them by paying their value to your unsecured creditors in the plan.
Unlike most Chapter 7 cases, the administration of a Chapter 13 continues for years after the filing date. There is a process for getting the Chapter 13 plan “confirmed”, which usually happens by agreement with the Chapter 13 trustee and creditors, but it can also be accomplished over their objections through the court. A bankruptcy attorney will propose the most beneficial plan for your situation, work with the trustee and creditors to obtain confirmation, and resolve any problems that may arise for the duration of the plan.
ARIZONA CHAPTER 13 BANKRUPTCY PROCEDURAL TIMELINE
Every Chapter 13 proceeding is unique and develops differently. Below are the basic steps that you can expect to find in all Chapter 13 bankruptcies:
- You have an initial consultation with a bankruptcy attorney, which can be in-person, via phone, or by video. The attorney analyzes your situation, explains your options, and you decide whether to file a Chapter 13 bankruptcy.
- You complete a pre-filing credit counseling course from an approved credit counseling agency. The certificate of completion must be filed with your bankruptcy paperwork.
- After filling out a client questionnaire and gathering necessary documents, you meet with the bankruptcy attorney to review the information together. The bankruptcy attorney will let you know if there is anything missing.
- Once you have supplied all necessary information and documents, the attorney prepares the bankruptcy petition, schedules, statements, and Chapter 13 plan. (In emergency situations, a Chapter 13 petition can be filed quickly as a “skeletal petition”, followed by the schedules, statements, and plan due within the next two weeks.) You meet with the bankruptcy attorney to review and sign the bankruptcy documents under penalty of perjury. The bankruptcy attorney then electronically files the documents with the Bankruptcy Court.
- Shortly after filing, a Chapter 13 bankruptcy trustee is assigned to your case and a date is set for your 341 Meeting of Creditors. The 341 Meeting, held approximately 30 days after your bankruptcy filing date, is a mandatory hearing where the bankruptcy trustee verifies your identity and asks you questions under oath. One of the questions asked by Chapter 13 bankruptcy trustees is “what is the physical address for your place of employment?”, so you will want to be prepared with that information.
- Prior to the 341 Meeting date, you will receive a questionnaire and request for documents from your trustee in the mail. The questionnaire and documents must be returned by the deadline given by the trustee, and well in advance of the 341 Meeting, so the bankruptcy trustee has an opportunity to review them beforehand.
- The location of the 341 Meeting depends upon where you live. If you reside in Maricopa County, Arizona, it takes place at the U.S. Courthouse and Federal Building in downtown Phoenix, on the first floor. The bankruptcy attorney will meet you in the waiting area outside the hearing rooms. It is very important for you to remember to bring a government-issued photo I.D. (driver’s license, passport, military I.D., etc.) and your social security card to the 341 Meeting.
- The first plan payment comes due 30 days after your case is filed, and in most cases, before the date of the 341 Meeting. You should timely make the first payment to the trustee, either by mailing a cashier’s check or electronically through TFS bill pay (tfsbillpay.com). If you’re employed, the subsequent payments will be automatically deducted from your paychecks through a wage order, and the monthly payment will be divided up between the number of paychecks each month. The trustee uses payments received from you to pay administrative expenses and make distributions to your creditors. Additionally, all necessary tax returns due for the last four years not already filed must be filed prior to the 341 Meeting.
- There is a second counseling course that you must take after the bankruptcy is filed called the “debtor education course”. It can typically be taken through the same agency as the pre-filing course; however, the Chapter 13 bankruptcy trustee will give you information on how to take it free of charge at the 341 Meeting. Although you have until the end of the Chapter 13 plan term to take the debtor education course, you should consider completing it shortly after the 341 Meeting.
- Any creditors who wish to object to your plan must file an objection within 14 days after the 341 meeting or 28 days after service of the plan, whichever is later. Failing to file an objection is considered acceptance of the plan. If a creditor objects to your plan, the bankruptcy attorney will work with that creditor to resolve the objection, or the bankruptcy judge may decide the issue if necessary.
- The Chapter 13 trustee must file a recommendation or objection to the plan within 35 calendar days after the 341 meeting, or 50 days after service of the plan, whichever is later. If you have not made any plan payments at this point, the trustee can ask the court to dismiss your case. The trustee’s recommendation/objection raises issues that, in the trustee’s opinion, need to be resolved before he or she will agree to the terms of the plan. The bankruptcy attorney will work with the trustee to resolve any such issues, and in most cases, can get the plan “confirmed” by the court through an agreement with the trustee and any objecting creditors.
- Once the Chapter 13 plan is confirmed, the property you owned on the bankruptcy filing date, and which became property of the bankruptcy estate, revests in you. This is an important event for certain assets like your house. After confirmation, you may do things like finance the purchase of a car, if necessary, but only with the trustee’s permission. In Maricopa County, Arizona, you must turn over all tax refunds received during the term of the Chapter 13 plan, as this is a standard provision in the order confirming the plan. If necessary, your plan can be modified after confirmation. For example, should you experience a reduction of income, or increased living expenses, the plan can be changed to lower the monthly payments, assuming it continues to meet the funding requirements.
- Upon making all required payments, the plan is completed, and the Bankruptcy Court will enter a discharge if you are eligible for one. Prior to the entry of the discharge, creditors have an opportunity to object to the discharge of certain debts; for example, when there are allegations of fraud or misrepresentation. Objections to discharge are a rare occurrence.
- The trustee, after paying all administrative expenses and making distributions to creditors who have filed allowed proofs of claim, files a final report with the Bankruptcy Court and your Chapter 13 case is subsequently closed.