Debtors' Rights Under Chapter 13

• What Is Chapter 13?
  
• Who Is Eligible?
  
• What Are The Benefits?
  
• What Are The Drawbacks?
  

What Is Chapter 13?

Chapter 13 is a bankruptcy proceeding that allows you to reorganize your debts and repay all or a portion of your debts over a three to five year time period.

If you file a Chapter 13, you will make regular monthly payments to a Trustee. The Trustee uses those payments to pay your debts. Creditors may receive all or a portion of their claims, depending primarily on the payments you can afford to make.

In a typical Chapter 13 Plan, secured creditors (those creditors who have a lien on your property) are entitled to full payment of the fair market value of their collateral, plus interest at a reasonable rate. The remainder of the debt obligation is treated as an unsecured creditor. Unsecured creditors are paid a percentage of the total debt without interest. The percentage may be 100% or as little as 1%, usually dependant upon your income and property.

Once a Plan is completed, the remaining balance of the "unsecured debts" provided for under the Plan are discharged. A discharge extinguishes your legal obligation to pay the debt. Long-term debts, such as a home mortgage, will be "current" and you will continue to make your mortgage payments directly to the mortgage company.

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Who Is Eligible?

Debt Limits: Any individual or small business proprietor with less than $307,000 unsecured and $923,000 secured debts is eligible. There is no minimum amount of debts required to be eligible for a Chapter 13.

Entities: Chapter 13 is available to any individual or small business proprietor (excluding corporations, LLC's or Partnerships) with regular income. Income can come from a variety of sources including wages, unemployment benefits, social security, pensions or social services benefits.

Reasonable Payments: Payments to the Chapter 13 Trustee are based primarily upon your disposable income after consideration of your reasonable and necessary monthly living expenses. Payments are based on what you can afford to pay, rather than the original payments owed to a creditor. In some cases, the "Means Test" may determine the amounts you pay, and the Length of your plan, which is generally 3-5 years.

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What Are The Benefits?

Stops Mortgage Foreclosures: If filed before a foreclosure sale occurs, a Chapter 13 will stop foreclosure proceedings and allow you to porpose a payment plan to cure the delinquent amount.

Stops Land Contract Foreclosures: If your case is filed prior to a forfeiture judgment, then arrearages can be paid through your Chapter 13 Plan. If a judgment has been obtained, you may be allowed an additional 60 days to satisfy the judgment.

Stops Garnishment: Except for child support or alimony garnishments, Chapter 13 stops garnishments as of the date of the Chapter 13 filing.

Stops Interest on Unsecured Debts: Generally, interest on credit cards, signature loans and any other unsecured debts (those without collateral) stops accruing on the date of the Chapter 13 filing. Other fees which stop immediately include future service charge, late fees, collection charges and attorney fees.

Stops Creditor Harassment: Once you file for Chapter 13 relief, creditors are prohibited from contacting you.

Stops Credit Union Deductions: All credit union deductions to pay pre-petition debts can be stopped upon filing.

Prevents Repossessions: Chapter 13 prevents repossession of collateral, such as automobiles. Under some circumstances, repossessed property can be recovered if the Chapter 13 is filed before the property is sold by the creditor.

Protects Property and Assets: A Chapter 13 Plan is designed to allow you to remain in possession of all of your property. Unless the Plan proposes otherwise, you will keep all savings, home equity, stocks and bonds and personal property.

Protects Co-Signers: Under some circumstances, a Chapter 13 can protect co-signers by restraining the creditor's collection efforts against them.

Allows Wage Deduction: The payments required under the Chapter 13 Plan can be made by automatic payroll deductions through your employer.

Student Loans and Taxes: Special rules apply to student loans and taxes. Your attorney should evaluate these debts and advise you regardign how they should be treated in your Chapter 13 Plan. Some taxes may be treated as an unsecured debt. Even taxes which may be non-dischargeable can be paid without additional penalty or interest.

Attorney Fees: Attorney fees are court-controlled. Generally, most of your attorney fees can be paid through your Chapter 13 Plan.

Who Proposes the Plan?: The Debtor proposes the plan which is designed through their attorney. Objections to the plan are strictly limited to certain statutory grounds.

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What Are The Drawbacks?

Credit Record: A Chapter 13 proceeding will likely be placed on your credit record. The fact a bankruptcy action is on your credit record does not mean you cannot obtain future credit, but is information future creditors may take into account. Conversely, the positive step in getting your finances in order may also be taken into account by future creditors.

Credit While In Your Plan: Permission must be obtained from the Court for additional consumer credit in excess of $1,000. Credit permission for necessities such as transportation is often granted.

Limitations On Your Expenditures: You are limited to a budget for your reasonable and necessary expenses for a period of three years and additional disposable income during that time is dedicated to your repayment Plan.

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