The purpose of filing under Chapter 13 of the U.S. Bankruptcy Code is to allow individual debtors with regular income to pay back debts with their income. Chapter 13, in general, also enables debtors to keep certain assets. Corporations and LLCs may not file petitions under Chapter 13, but sole proprietorships can.
Under Chapter 13, debtors propose a repayment plan to the court to make installment payments to creditors over three to five years, depending on whether the debtor's monthly income is less than the state median income (three years), or greater than the state median income (generally, five years). During this three to five-year period, the law forbids creditors from starting or continuing collection efforts.
So, thinking of filing for Chapter 13? Here's what you need to know.
Where and How to File Chapter 13
Your Chapter 13 petition will need to be filed in the U.S. Bankruptcy Court for the federal district in which you reside. There are 90 federal districts nationally. Bankruptcy cases cannot be filed in state court.
If you choose to file without the assistance of an attorney, visit the website of the bankruptcy court in your district for instructions, and for the forms required for filing a Chapter 13 petition. Bankruptcy petitions filed under Chapter 13 must be accompanied by the appropriate filing fees.
Credit Counseling Course
Before filing your petition with the court, you are required to take a pre-petition course (which can be taken online for as little as $25) to ensure that you’ve explored other credit solution options prior to making your filing. You will then need to file a certificate of credit counseling with the court upon filing your petition, along with a copy of any debt repayment plan developed through credit counseling.
Filing the Petition
A Chapter 13 case commences with the filing of a petition with the bankruptcy court that serves the area where the debtor has a home or residence. After the Chapter 13 petition is filed, a trustee is appointed to administer the debtor’s case. The Chapter 13 trustee evaluates the case and takes on the role of payment processor, collecting payments from the debtor and then distributing payments to creditors.
Unless a court orders otherwise, along with the Chapter 13 petition, the debtor must also file:
- A schedule of current income and expenditures
- A schedule of assets and liabilities
- A statement of financial affairs (including the source and amount of the debtor’s income)
- A schedule of executory contracts and unexpired leases
The debtor must also provide the court with a list of all creditors, which details the amount and nature of all creditors' claims. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
Last, debtors must also provide the trustee with a copy of the tax return for the most recent tax year as well as tax returns filed during the case (including tax returns for previous years not filed at the time the case commenced).
Married couples may file a joint petition or individual petitions. If only one spouse is filing for Chapter 13 protection, the non-filing spouse's income and expenses must still be collected and reported so that the court and the trustee can evaluate the overall financial position of the household.
Filing the petition under Chapter 13 automatically stays most collection actions against the debtor. Filing the petition will not have the effect of staying any of the following type of actions:
- A criminal action or proceeding
- A civil action for the establishment of paternity, for the establishment or modification of an order for domestic support obligations, or concerning child custody or visitation
- For the dissolution of a marriage, except to the extent that the proceeding seeks to determine the division of property that is property of the estate
- Actions regarding domestic violence
- Domestic support collection actions for collection of support obligations from property that is not property of the estate
- Actions regarding the withholding of debtor's income for payment of domestic support obligations
- Actions regarding the withholding, suspension or restriction of a driver’s license, a professional or occupational license, or a recreational license
- The reporting of overdue support owed by a parent
- The interception of a tax refund
- The enforcement of a medical obligation (as specified under Title IV of the Social Security Act)
In some situations, the stay may only be effective for a short time. While the stay is in effect, creditors generally may not initiate wage garnishments, lawsuits or phone calls seeking payment.
Chapter 13 also contains an automatic stay provision protecting co-debtors. Unless the bankruptcy court orders otherwise, no creditor may seek to collect "consumer debts" from any person who is liable along with the debtor. Consumer debts are those incurred primarily for a personal, family or household purpose.
The Creditors’ Meeting
Between 21 and 50 days after a Chapter 13 petition is filed, the trustee will hold a meeting of creditors. The individual filing debtor has to attend this meeting, but bankruptcy judges are prohibited from attending. The trustee conducts the meeting and may pose questions about the petition just filed. The trustee is required by law to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy. If a married couple elects to file a joint petition, each spouse is required to attend the creditors' meeting.
The Chapter 13 Plan
A key facet of the Chapter 13 process is the debtor's filing of a repayment plan. The debtor may do so either at the time of filing their petition, or within 14 days after the petition is filed (at the latest). The plan has to receive approval from the court and, substantively, must include a provision for fixed payments to the trustee according to defined periods, such as on a biweekly or a monthly basis. Upon receiving the funds every two weeks (or month), the trustee distributes the funds to creditors according to the plan terms, although the plan terms may offer creditors less than 100 cents on the dollar on the creditors' claims. The debtor, the trustee and those creditors who wish to attend will meet at a hearing in court on the repayment plan.
There are three types of claims: priority, secured and unsecured. Under 11 U.S.C. § 1325, the plan is not required to provide for payment of unsecured claims in full so long as it provides that the debtor will pay all projected "disposable income" over an "applicable commitment period," and so long as the plan provides that unsecured creditors are to receive the same or more under the plan that they would receive if the debtor’s assets had been liquidated under Chapter 7 of the Bankruptcy Code. If the debtor wishes to maintain collateral securing a claim, the plan must provide that the holder of the secured claim will receive, at minimum, the value of the collateral.
Within 30 days after filing the petition, even without approval of the repayment plan by the court, the debtor is required to begin making plan payments to the court-appointed trustee.
Within 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets confirmation standards under the Bankruptcy Code. Creditors will receive 28 days' notice of the hearing; at the hearing, creditors have the right to object to plan confirmation.
If the court confirms the plan, the Chapter 13 trustee will distribute funds received under the plan, and is required to do so on a timely basis by statute. If the court does not confirm the plan, the debtor can file a modified plan. If the court declines to confirm the modified plan for any reason and instead dismisses the case, the court may authorize that the trustee retain some funds to cover costs, but the trustee is required to return all remaining funds to the debtor.
Implementation of the Plan
Once confirmed, the plan provisions bind both the debtor and the debtor's creditors. Once confirmed, it is the debtor's responsibility to make the plan succeed. The debtor must make regular payments to the trustee. This can be accomplished either directly or, alternatively, through payroll deduction. Once the plan is confirmed, the debtor is not permitted to incur new debt without consulting the trustee.
After plan confirmation, the court may dismiss or convert the debtor's case if the debtor fails to pay child support or alimony obligations, or fails to make required tax filings.
A Chapter 13 debtor is typically entitled to a discharge upon completion of all payments under the Chapter 13 plan, subject to a certification requirement and other requirements. One such requirement is that the debtor take an approved financial management course. These typically can be taken online for as little as $25, and a debtor is permitted to take the course early on in their Chapter 13 case if desired.
The above information is not legal advice and is not a guide for filing for bankruptcy. It provides general information about the Chapter 13 bankruptcy process. There is no substitute for reference to Title 11 of the U.S. Code, as well as the Federal Rules of Bankruptcy Procedure.