CHAPTER 13 :  Chapter 13 is often called a reorganization because the debtor pays his way out of bankruptcy keeping property not surrendered to the trustee, and paying debts over time.  Chapter 13 is for individuals with regular income, fixed unsecured debts less than $360,475 (after April 1, 2010) and fixed secured debts less than $1,081,400 (after April 1, 2010).  (Note debt limits are adjusted every 3 years on April 1st, beginning April 1, 1998.)  The debtor has a monthly disposable income requirement- must have current monthly income less amounts reasonably necessary for maintenance or support.  Thus Chapter 11 may be the only possible bankruptcy for wealthy with high debts.

The Payment Plan:

    The key to Chapter 13 is to be able to develop a feasible payment plan to pay the creditors. The plan must be confirmed by the court.  If a feasible plan based on your income and debts cannot be developed, the case must be dismissed or converted to a Chapter 7.  The payment under the plan may fluctuate because the budget is fluid, and some bills vary monthly or over time.  If the expenses vary tremendously, the plan may need to be adjusted.  Good advice is if there is a 10% increase in expenses or income for 3 or more months, then the plan needs to be reviewed to see if it needs an adjustment. Under section 1329, the trustee, debtor, or one of the unsecured creditors can request an order to change the Plan payment anytime during the life of the case. Additionally, if an asset is surrendered or a new asset acquired (such as a car), then the plan should be reviewed as the expenses change.

    The plan provides for one payment to the trustee which is divided among the creditors.  The amount paid under the plan is determined under a complex four part test.  The first test is the Means Test.  The second test is the Chapter 7 Liquidation Analysis Test.  The debtor must pay as much to the unsecured creditors as he would have in a Chapter 7.  The third test is the Disposable Income Test (I minus J Test).  The debtor must take his net income, subtract allowable expenses and if the number is positive, must pay the creditors that amount.  The fourth test is the Required Payments Test.  You must pay the administrative expenses of the Chapter 13 plan, the priority debt, and any amounts to cure mortgage and car arrearages.  Adding up these costs, is the minimum to be paid under the plan.  The payment under the plan is the maximum amount indicated under the four tests.

    The first payment under the plan is due no later than 30 days after the date of filing of the plan or the order for relief (usually the payment is due on the first of the month after you file the case.)  This is normally before your meeting of the creditors which is your first "court" appearance. If payment is not made, the case can be dismissed or you may be required to make 2 payments together.

Chapter 13 versus Chapter 7:

    If the debtor's income is below the median state income, Chapter 7 may be better since it can be discharged sooner, the debtor makes less payments in Chapter 7, and must commit disposable income in a Chapter 13.
     The debtor may be able to modify secured loans in Chapter 13 (except for home loans).
     Priority claims must be paid in Chapter 13 (unlike in Chapter 7 where they are paid if there is money from assets available).

     The discharge is broader in Chapter 13 since there are not as many exceptions as in Chapter 7. In Chapter 13, but not in Chapter 7 the following are dischargeable:  
            a.  Willfull and malicious torts, if not reduced to judgment.
            b.  Marital property settlement debt not in the nature of support.
            c.  Debts from a prior Chapter 7 case in which a discharge was denied.
            d.  Restitution, unless convicted of a crime; and
            e.  Debts incurred to pay nondischargeable income taxes.

    If fraud, embezzlement, or larceny are involved, Chapter 13 is normally adviseable, even though section 523(a)(4) removes these issues from the scope of the chapter 13 discharge, but only so long as a complaint is timely filed by the creditor seeking a nondischargeability ruling.  Rule 4007(c) establishes the deadline for such complaints as 60 days from the date first established for a meeting of creditors.  Often, creditors fail to file such complaints and the debtor could find relief in chapter 13.

    One difficulty with Chapter 13 is that certain payments could be considered excessive.  For example, $16,000 for an automobile could be considered excessive by the court and violate the good faith requirement of section 1325(a)(3).

    Chapter 13 can be useful in handling mortgages.  If you are behind in payments, a payment plan can be developed to make the regular payment plus a catch-up payment.  Thus, Chapter 13 can avoid foreclosure if it is hanging over the debtor.

    Certain mortgages may be able to be modified under Chapter 13, although most mortgages cannot be modified. If the lien is totally unsecured (house worth less than the mortgages which come ahead of the lien that you want to eliminate), then the mortgage might be treated as if an unsecured debt.  The mortgage may also be able to be modified, if the loan can be broken into 2 parts, such as not only securing your home, but another property, or maybe even a tax escrow.  A second unsecured mortgage lien can also be stripped even if it is a joint mortgage with the other spouse not filing for bankruptcy.  To strip a second mortgage, an adversary proceeding suing the second mortgage company must be filed to prove that the second mortgage lien is unsecured.  Although section 1325 allows the debtor to surrender a home in bankruptcy, a debtor cannot force the creditor to take ownerhship or possession. Thus the owner remains liable for postpetition taxes and hazards on property until the credior accepts the property by deed or foreclosure. 

    Car loans may be "crammed down" in a Chapter 13 to reduce the loan to the value of the car.  This is important if you are upside down on the car loan.  This option is available if you file a Chapter 13 910 days or more after purchasing your car.  Filing sooner than 910 days, means that you will have to pay the full loan balance.  Additionally, the debtor may get more time to pay the loan (reducing the payments).  Expect a fight from the creditor on the value of the car.

    Reasons to file Chapter 13 instead of Chapter 7 include:
            a.  Flexibility:  can dismiss case or convert to Chapter 7.  Can modify plan if income changes.  Can refinance or sell home during plan.
            b.  House can be saved from foreclosure as long as you make payments.
            c.  Strip wholly unsecured second mortgage, or value car if you've had the car more than 910 days.
            d.  Won't lose non-exempt property in Chapter 13
            e.  Stretch out payments for secured debts such as cars
            f.  Challenge costs added to mortgage by lender
            g.  Trustees want plan to succeed and work with you for confirmation
            h.  More debts can be discharged (see above)
            i.  Chapter 13 doesn't allow income challenges as does a Chapter 7
            j. Attorney's fees can be spread out (make payments)
           k.  Can keep a car without having to reaffirm it.
            l.  More advantages to having one spouse file Chapter 13.
            m.  Cure a tax problem or Domestic Support Obligation over 60 months.
     In Chapter 13, the debtor keeps collateral, unlike in Chapter 7 where the debtor loses property unless he reaffirms. In Chapter 13 then, the debtor may be able to save his house, car, property, or business. In particular, education IRAs are often included in the estate of the Chapter 7 and may be taken by the trustee. Inheritances received within 6 months of the filing are also considered assets of the estate in Chapter 7.
     Chapter 13 is voluntary only, unlike Chapter 7 in which creditors can force a debtor into Chapter 7.
     At the end of Chapter 13, a creditor's rights pick up again if the debt was not dischargeable.
     Chapter 13 includes assets accumulated after filing until the case is discharged.  Discharge occurs when payments are completed (3-5 years).

    A Qualified Domestic Relations Order (QDRO) may possibly be discharged in a bankruptcy depending upon timing. A QDRO divides up a pension following a divorce. Once the QDRO is finalized (signed by all parties, approved by the family law judge, and processed by the pension administrator), then the QDRO is not dischargeable. Before the finalization, it may possibly be discharged in a Chapter 13 since it could be argued to be a property division (but not in Chapter 7).

Problems with Payments under Chapter 13:

    If the debtor cannot continue making payments under Chapter 13, there are several choices.  One choice is to file for a hardship discharge under section 1328(b).  This type of discharge wipes out all debt that would have been discharged if the filer would have filed under Chapter 7.  Creditors must have been paid as much as they would have been paid under Chapter 7 (Best Interests of Creditors Test). Also the reason for not completing the plan must be beyond the filer's control such as death, ill health, job loss, or other catastrophe.  

Converting a Chapter 13 to Chapter 7 

   Another choice is to convert the Chapter 13 to Chapter 7.      Under 11 U.S.C. section 1307, a Chapter 13 can be turned into a Chapter 7 at any time. This can be an advantage when you can no longer make the Chapter 13 payments, but still want a significant discharge of debts (realize though that Chapter 13 has a greater capability to discharge debts and that a Chapter 7 may involve the loss of nonexempt assets.)  

    The advantage of of hardship discharge, though, is that the debtor could file another Chapter 13 case immediately with no wait, as in a Chapter 7 discharge. Also some debt might not be dischargeable under Chapter 7, but another Chapter 13 can be filed  to finish paying the debts when the circumstances change. Conversion to Chapter 7 would allow new debt incurred while the case was pending to be discharged under the Chapter 7 since the debt is treated as if it arose before you originally filed the Chapter 13 case.  11 U.S.C. § 348(f).  Conversion also has the advantage of not allowing the case to be dismissed for failure to make payments with no discharge, refiling with another filing fee, new paperwork, and new attorney fees. Conversion also might make since if the debtor has decided not to cure the default on a mortgage or property tax debts since the debtor could walk away from the house under Chapter 7. However, the debtor may lose the advantage of catching up on mortgage or car payments and keeping the asset.  Stripping off junior unsecured liens would no longer be available under Chapter 7.

   One problem with conversion is whether or not the means test applies to the Chapter 7.  If the Means Test did not allow a Chapter 7 to begin with and the debtor filed a Chapter 13, some courts have ruled that the original Means Test applies to the conversion Chapter 7.  Thus the trustee would file to dismiss the Chapter 7 since it does not conform to the Code.  Other courts have ruled that a new Means Test at the time of the Chapter 7 applies.  This will be decided in the 8th Circuit in In re Chapman/Cruse, Nos. 10-6046, 10-6047 (8th Cir. BAP), which heard oral arguments on February 1, 2011. If the original Means Test applies, it may be better not to convert, but to allow the Chapter 13 to be dismissed and then file a new petition for Chapter 7.

Selling Your Home Under Chapter 13

    To sell your home while under Chapter 13, the debtor would need to file a Motion to Sell Property to get permission from the judge, so a hearing would be required. You will need to do your research on property and determine pay off values, probable sale price and whether you will need to payoff certain debts concerning the property such as taxes and liens and include this information in the motion.  Do not sign a contract with a realtor until the judge grants permission. If the fair market sale price pays off the mortgage and debts on the property, permission will probably be granted.

Meeting of the Creditors:

    Chapter 13 also has a meeting of the creditors as does the Chapter 7 process, but the emphasis of the trustee is different.  Many of the same questions will be asked in a Chapter 13 meeting of the creditors, but the trustee's focus is on the debtor's monthly income and expenses to determine a feasible monthly plan payment.  The debtor should also bring a document with his/her social security number and an unexpired photo ID.  For a Chapter 13 debtor read the petition and the payment plan.  Bring money in a money order, certified check, or cashier's check.  At the end of the meeting, the trustee will announce whether he intends to recommend confirmation of your plan, or if not, then what he needs to give his recommendation.

Discharge

A debtor must request discharge in bankruptcies with payment plans.  A motion for discharge must state that the debtor has completed plan payments and the following: Trustee has filed Report of Plan Completion; Domestic Support obligations paid or not required; 11 USC 522(q)(1) not applicable; no pending felony proceedings as described in 522(1)(1)(A) or liable for debts of kind in 522(1)(1)(B); eligible to receive discharge under 11 USC 1328; completed personal financial managment course and Form 23 filed with the court.