Chapter 12: Wage Earner Reorganizations under Chapter 13
Individual debtors can technically file under either Chapter 11 or Chapter 13 (and Chapter
12 if they are small farmers or fisherman), but Chapter 11 is appropriate only for individual debtors
who have substantial property and business holdings. Chapter 11 is expensive and complicated,
and is suitable only for operating businesses that need more flexibility than Chapter 13 can provide
(or for entities or larger businesses that are not eligible for Chapter 13). Chapter 13 is a simplified
reorganization procedure for individuals (entities are not eligible) designed to be cost effective.
This chapter will therefore focus on consumer reorganizations under Chapter 13 – with an
emphasis on how Chapter 13 works, and who should consider Chapter 13 over Chapter 7. The next
chapter will focus on business reorganization under Chapter 11.
12.2. Reasons for Filing under Chapter 13
There are three main benefits of Chapter 13 over Chapter 7.
Restructuring Secured Debts. First, debtors in Chapter 13 may restructure secured debts.
In Chapter 7, debtors can only restructure secured debts with the creditor’s agreement. In Chapter
7, the debtor must either surrender the collateral, redeem consumer goods by paying the secured
claim in full, or live with the existing terms by reaffirmation or ride-through. With the exception
of home mortgages and certain purchase money security interests, secured debts in Chapter 13 can
be stripped down, the maturity date can be changed to coincide with the plan term, and the interest
rate can be modified.
Keeping Non-Exempt Property. Second, debtors in Chapter 13 may keep their non-
exempt property. In Chapter 7, the debtor must turn over non-exempt property to the trustee for
liquidation and distribution to creditors. But debtors must pay a price for keeping all of their non-
exempt property – debtors must pay unsecured creditors more than they would receive in a
hypothetical Chapter 7 liquidation, and must pay unsecured creditors all of their “projected
disposable income” during the term of the plan. The “projected disposable income” test is
complicated by rules incorporating the dreaded Chapter 7 means test into the calculation.
Eligibility for a Discharge. Some debtors who would not qualify for Chapter 7 or a
Chapter 7 discharge (due to the means test or the longer applicable period between discharges)
may qualify for Chapter 13 and a Chapter 13 discharge.
12.3. The Chapter 13 Process
The process of Chapter 13 is very similar to the Chapter 7 process, except that the debtor’s
non-exempt property is not liquidated by a trustee. The debtor must file a petition and schedules
containing the same basic information as required in Chapter 7. In addition, the debtor must file a
plan of reorganization in compliance with Chapter 13’s requirements. The plan must describe the
treatment of secured and unsecured claims during the plan period. Most jurisdictions require the
use of a form plan of reorganization, making it easy for experienced local practitioners to locate
the relevant terms added by the particular debtor.
The Court must hold a hearing to confirm the plan of reorganization. These hearings are
often unopposed and perfunctory. Once the plan of reorganization is confirmed, the debtor will
make the required play payments to the trustee, who will distribute the payments to the creditors
who have timely filed proofs of claim . In some jurisdictions, the regular post-petition payments
owing on secured claims are paid directly by the debtor to creditors outside of the plan (and thereby
avoid being “taxed” by the Chapter 13 trustee’s administrative fees). In other jurisdictions all
payments to creditors during the plan flow through the trustee. Jurisdictions that impose trustee
fees on all payments have a lower payment rate, which may actually benefit unsecured creditors.
In all jurisdictions, if secured claims are restructured by the plan, the cure or restructured plan
payments will go through the Chapter 13 trustee.
The debtor receives a discharge only after completing the payments required under the plan
(or in some cases after failing to complete the plan if the requirements for a “hardship discharge”
are met). What is discharged is the difference between the original debt and the payments called
for by the plan during the term of the plan. In most cases, debtors who fail to complete the plan
will either convert their cases to Chapter 7 or end up without a discharge.
12.4. The Chapter 13 Plan Term (and “Commitment Period”).
The permitted plan “commitment period” is between 3 and 5 years, unless the debtor can
pay all claims in full in less than 3 years. See 11 U.S.C. § 1325(b)(4)(B). Technically, below
median debtors must ask the court for permission to propose a plan longer than 3 years, but this
request is perfunctory and routinely granted. 11 U.S.C. § 1322(d)(2). Above median debtors must
propose a five year plan. 11 U.S.C. § 1325(b)(4)(A)(ii).
12.5. Restructuring Secured Claims in a Chapter 13 Plan
Chapter 13 has different rules for restructuring different kinds of secured claims.
Restructuring home mortgages is the most restrictive, followed by purchase money security
interests in personal use property that was purchased within certain periods before bankruptcy. We
will start with the general rules for restructuring secured claims and then look at the restrictions.
(a) General Restructuring Rules.
The basic rules for restructuring secured claims in Chapter 13 are set forth in Section
1325(a)(5) of the Bankruptcy Code. Unless the secured creditor consents (and of course anything
can be done to the secured creditor with the secured creditor’s consent), the debtor has three
Pay the “value as of the effective date of the plan” of the “allowed secured claim” in equal
monthly installments, in full, over the plan term (11 U.S.C. § 1325(a)(5)(B)). Here, the section
506(a) split takes on real meaning. The restructuring option allows the debtor to strip down an
undersecured creditor’s claim to the value of the collateral.
The Supreme Court in Till v. SCS Credit, reprinted below, determined that the “value as of
the effective date of the plan” language in the statute requires the debtor to pay post-confirmation