Chapter 1 How Chapter 13 Works

• Library: Chapter 13 Bankruptcy (Nolo) (2020 Ed.)

CHAPTER 1: How Chapter 13 Works

An Overview of Chapter 13 Bankruptcy

Do You Need a Lawyer?

Filing Your Papers

Costs

The Repayment Plan

The Automatic Stay

The Meeting of Creditors

Plan Objections

The Confirmation Hearing

Possible Additional Court Appearances

Making Your Payments Under the Plan

If Something Goes Wrong

Personal Financial Management Counseling

After You Complete Your Plan

Debts Discharged in Chapter 13 Bankruptcy

Debts That Are Discharged

Debts That Are Not Discharged

Debts That Aren't Discharged If the Creditor Successfully Objects

Chapter 13 Bankruptcy and Foreclosure

The Automatic Stay Can Stop a Foreclosure

Catching Up on Mortgage Arrears Through Your Chapter 13 Plan

Getting Rid of Second Mortgages, HELOCs, and Other Junior Liens

Foreclosure Mediation Programs in Bankruptcy

Special Chapter 13 Features: Cramdowns and Lien Stripping

Cramdowns: Reducing Secured Loans to the Value of the Collateral

Lien Stripping: Getting Rid of Second Mortgages and Other Liens on Real Estate

Is Chapter 13 Right for You?

Upper-Income Filers Must Use Chapter 13

Reasons to Choose Chapter 7

Reasons to Choose Chapter 13

Alternatives to Bankruptcy

Do Nothing

Negotiate With Your Creditors

Chances are good that you've picked up this book because your debts have become overwhelming. Maybe you're facing foreclosure on your home or repossession of your car. Or perhaps you're a high-income earner whose debts have grown beyond your ability to repay them. If so, Chapter 13 can help.

If you're like many, you might prefer to file for Chapter 7 bankruptcy—the chapter individuals file most frequently. Not only is Chapter 7 over in a matter of months, but filers don't repay creditors in a repayment plan.

But, not everyone qualifies for Chapter 7. And, Chapter 13 offers benefits that Chapter 7 doesn't—some of which are so helpful that even people who qualify for Chapter 7 sometimes choose Chapter 13 instead.

For instance, Chapter 13 allows a debtor to repay obligations over time, and often at a discount. Many filers use the Chapter 13 repayment plan to catch up on back payments so that they can keep a house, car, or other property that they'd lose otherwise. Others use it to pay off debts that aren't wiped out in bankruptcy, such as back taxes or child support arrearages. These problems can't be solved using Chapter 7.

If you want to know more about how Chapter 13 works and what it can do for you, this is the book. It stops short of giving you all the forms and instructions you would need to do your own Chapter 13 bankruptcy, however. The reality is that very few people can carry out this task without attorney representation. (See "Do You Need a Lawyer?" below.)

That said, times are changing, and filing for bankruptcy is getting easier—primarily because the official forms are now simpler to use. Even so, the forms don't explain bankruptcy law or procedure. If you filed on your own, you'd be responsible for learning the process and understanding how a filing would affect your income and assets.

But we're jumping ahead. There's a lot to know before you decide whether Chapter 13 is right for you.

This first chapter gets you started by providing an overview of all aspects of Chapter 13 bankruptcy, as well as options for dealing with your debts outside of bankruptcy. It's intended to give you a taste of what filing Chapter 13 would involve, as well as all of the benefits it offers.

As you go through it, don't expect to grasp everything right away—it's a complicated area of law, so naturally, getting the hang of it involves a learning curve.

Plus, help is always at your fingertips. Each topic discussed in the first chapter is covered in more detail in the chapters that follow (we tell you where). If you're having a hard time grasping a concept but want to learn more, feel free to skip ahead.

Online Companion Page: Get Legal Updates and More at Nolo.com

You can find important legal updates to the law on the online companion page to this book at: www.nolo.com/back-of-book/CHB.html

An Overview of Chapter 13 Bankruptcy

Typically, a Chapter 13 filer has a good income and can afford to repay some amount to creditors, but perhaps not the entire balance owed. Other debtors just need time to catch up on bills without the threat of a collection lawsuit or wage garnishment looming over the debtor's head. Unlike a quick Chapter 7 case, this chapter allows a filer to restructure bills over three to five years, and in some cases, pay less than what's owed.

Chapter 13 filers also keep all of their property regardless of its value (although this comes at a price—more about it later). In Chapter 7, filers are entitled to things necessary to work and live only, such as a modest car, some equity in a home, household furnishings, and a retirement account. All other property gets sold for the benefit of creditors.

Chapter 13 has other valuable benefits, too (discussed below in "Reasons to Choose Chapter 13"), but, as mentioned above, the most powerful is that it can help you save your home. Chapter 13 bankruptcy allows you to catch up on mortgage payments through your plan and avoid foreclosure. (See Ch. 8.) And if you have a second mortgage that is no longer secured by the equity in your property because your home's value has decreased (your home is significantly "underwater"), you can eliminate it.

Do You Need a Lawyer?

For the vast majority of Chapter 13 filers, the answer is "yes." In fact, most bankruptcy courts strongly suggest that filers retain counsel.

It's not that people can't understand how Chapter 13 bankruptcy works. And most people can fill out the petition and accompanying schedules and forms. The problem is that Chapter 13 law can be tricky, and most people don't understand what will happen to their assets, how much they'll have to repay creditors, and other complicated Chapter 13 repayment plan requirements. Calculating plan payments is especially difficult without the assistance of computer software, which is expensive and generally requires bankruptcy knowledge to complete correctly. It is also not uncommon for the trustee or creditors to challenge or object to various aspects of your plan. You might have to argue against objections, negotiate with creditors, or modify your plan. In fact, most Chapter 13 plans need at least one modification before receiving court approval, even when prepared by an attorney.

Experienced Chapter 13 bankruptcy lawyers have software to prepare your Chapter 13 plan and the expertise to handle objections and to modify your plan as needed.

Overall, we believe that most Chapter 13 filers benefit from legal representation. Having said that, it's still important to understand the Chapter 13 process, including options for dealing with debts and property, the possibility of reducing loan amounts (called a cramdown), and what you can expect to pay in your Chapter 13 plan. This book also helps you identify various tricky issues that might arise in your bankruptcy case. Armed with this knowledge, you'll be in a better position to help your attorney represent you.

It's also helpful to run some preliminary numbers yourself to determine if Chapter 7 is an option for you. You can also identify whether one of the mechanisms exclusive to Chapter 13 will help improve your financial situation, and if so, whether you have enough income to fund a Chapter 13 plan. Chs. 4 and 5 take you through the means test (to see if you qualify for Chapter 7 bankruptcy) and provide step-by-step instructions on figuring out if you can fund a Chapter 13 plan.

To learn more about hiring and working with a bankruptcy lawyer, see Ch. 15.

Filing Your Papers

To begin a Chapter 13 bankruptcy, you disclose all aspects of your financial situation, including your income, property, debts, and your financial transactions for the years immediately before your filing on the official bankruptcy forms provided by the bankruptcy court. Many Chapter 13 forms are the same as those used in Chapter 7. However, you'll need to prepare additional documents, as well.

For instance, you'll complete two forms to see whether your income is more or less than the median income in your state. The calculation determines how long your repayment plan must last. If your income is more than the state median, your plan, with a few exceptions, must last five years. If your income is less than the median, you can propose a three-year plan.

You'll also prepare a Chapter 13 repayment plan for court approval. Your plan shows how you propose to pay certain mandatory debts (child support, tax arrearages, and so on), secured debts (debts guaranteed with collateral) on property you intend to keep, and, if you have sufficient income, at least a portion of your other unsecured debts over the three- to five- year period. (See Ch. 8.)

Other things you'll need to do will include:

• filing a certificate showing you participated in a credit counseling program during the 180 days before filing (this requirement is explained in Ch. 9), and
• completing a certificate regarding child support obligations and your residence (not all filers have to do this).

All filers must submit documents verifying the figures in the bankruptcy paperwork. You'll file them with the court or provide them to the bankruptcy trustee appointed to oversee your case, depending on the rules of your local jurisdiction.

Such documents can include:

• pay stubs from the 60 days before you file, along with a cover sheet
• proof that you've filed your federal and state income tax returns for the previous four years
• a copy of your most recent IRS income tax return (or a transcript of that return), and
• if you're a sole proprietor, profit and loss statements.

Chs. 7 through 9 discuss in detail the bankruptcy forms, repayment plan, and filing process.

Costs

Like everyone who files for Chapter 13 bankruptcy, you have to pay the filing fee of $310. You'll also have to pay a fee—typically less than $60...