Chapter 13: Adjustment of Debts
Topics on this page:
- What is Chapter 13 Bankruptcy?
- Chapter 13 Bankruptcy Process
- What Can I Expect After Filing Chapter 13 Bankruptcy?
- Credit Counseling and Debtor Education Courses
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy provides for adjustment of debts of an individual with regular income. Also called a wage earner's plan, Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts. Under Chapter 13, you work with the court on a repayment plan to make installments to creditors over 3 to 5 years. Chapter 13 is often preferable to Chapter 7 because it enables you to keep an asset, such as a house, as you repay you debts over time.
You may file a Chapter 13 bankruptcy petition if you:
- reside, have a domicile, a place of business, or property in the United States, or a municipality,
- have a source of regular income; and
- on the date the petition is filed you owe less than $2,750,000 in total secured and unsecured debts. (Secured debts are debts where you signed an agreement to allow the creditor to recover the property if you fail to make payments -usually a car or house).
Corporations and partnerships may not file a Chapter 13 bankruptcy petition.
Unlike Chapter 7, you do not receive an immediate discharge of debts. You must complete the payments required under the plan before the discharge is received. You are protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.
Read the law: U.S. Code, Title 11, Chapter 13
Chapter 13 Bankruptcy Process
Federal courts have exclusive jurisdiction over bankruptcy cases. This means that a bankruptcy case cannot be filed in a state court. Bankruptcy cases in Maryland are filed in the United States Bankruptcy Court for the District of Maryland.
Chapter 13 Petition
A Chapter 13 case begins when you file a petition with the bankruptcy court. In addition to the petition, you must also file with the court:
- schedules of assets and liabilities
- schedule of current income and expenditures
- schedule of executory contracts and unexpired leases
- a statement of financial affairs
- certificate of credit counseling
- copy of any debt repayment plan developed through credit counseling
- evidence of payment from employers, if any, received 60 days before filing
- statement of monthly net income and any anticipated increase in income or expenses after filing
- record of any interest the debtor has in federal or state qualified education or tuition accounts.
You must also provide to the trustee assigned by the Court a copy of you most recent tax return, as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).
Married individuals must gather financial information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee and creditors can evaluate the household's financial position.
Learn more about filing for bankruptcy.
Meeting of Creditors
Between 21 and 50 days after the petition is filed, the trustee assigned by the court will hold a meeting of creditors. During this meeting, the trustee will put you under oath, and both the trustee and your creditors may ask you questions. You must attend the meeting and answer questions regarding your financial affairs and property. If you have filed a joint petition, both you and your spouse must attend the creditors' meeting and answer questions. Within 10 days of the creditors' meeting, the trustee will report to the court.
Chapter 13 Plan and Confirmation Hearing
Unless the court grants an extension, you must file a repayment plan with your petition or within 14 days after the petition is filed. A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. The trustee will distribute the funds to creditors according to the terms of the plan.
Within 30 days after filing the bankruptcy case, even if your repayment plan has not yet been approved by the court, you must start making plan payments to the trustee. If any secured loan payments or lease payments come due before your repayment plan is confirmed (typically home and automobile payments), you must make payments directly to the lender. These amounts can be deducted from the amount that you pay to the trustee.
No later than 45 days after the meeting of creditors, the bankruptcy judge will hold a confirmation hearing to decide whether your repayment plan is feasible. Creditors will be notified of the hearing and may object to the judge’s confirmation of your repayment plan. Most frequently, creditors object that payments offered under the plan are less than they would receive if your assets were liquidated.
Chapter 13 Discharge
You are entitled to a discharge upon completion of all payments under the Chapter 13 plan so long as you:
- certify (if applicable) that all child support obligations you have been paid,
- have not received a discharge in a prior case filed within a certain time frame (2 years for prior chapter 13 cases and 4 years for prior Chapter 7, 11 and 12 cases); and
- have completed an approved course in financial management.
The discharge releases you from all debts provided for by the plan or disallowed, with limited exceptions. Creditors who received payments under the repayment plan may no longer initiate or continue any legal or other action against you to collect the discharged debts.
Chapter 13 Hardship Discharge
After confirmation of a plan, circumstances may arise that prevent you from completing the plan. In such situations, you may ask the court to grant a "hardship discharge." Such a discharge is available only if:
- your failure to complete plan payments is due to circumstances beyond your control and through no fault of your own;
- creditors have received at least as much as they would have received in a chapter 7 liquidation case; and
- modification of the plan is not possible.
For example, if you are injured or sufficiently ill that you are unable to work enough to make money to pay a portion of the amount you owe, the court may determine you are eligible for a hardship discharge. A hardship discharge is more limited than the discharge described above.
Fees
Fees for filing a bankruptcy petition include a case filing fee, an administrative fee, and a trustee surcharge. Normally, the fees must be paid to the clerk of the court upon filing. With the court's permission, however, individual debtors may pay in installments. Learn more about fees.
What can I expect after filing Chapter 13 bankruptcy?
You will be assigned a bankruptcy trustee
The court will appoint a person called a "trustee." The trustee will take legal control of your debts and your property (except the exempt property that you get to control and keep). The trustee will evaluate your case and serves as a disbursing agent, collecting payments from you and making payments to your creditors.
An automatic stay will go into effect.
The court will send out a notice to all your creditors. The notice will tell the creditor that you have filed for a Chapter 13 Bankruptcy and that the creditor is under court order (a "stay") to immediately stop all efforts that they have been making to collect the debts you owe to them.
You will attend a meeting of creditors.
About 4-6 weeks after you file, you will need to attend a hearing called a "meeting of creditors". At this hearing the trustee will look at your papers and ask you questions about your finances. This meeting is informally called a "341 meeting" because section 341 of the Bankruptcy Code requires that you attend this meeting so that the people or businesses to whom you owe money (creditors) can question you about your debts and property.
A second hearing will be held before a bankruptcy judge.
The judge will decide if you can go ahead with your repayment plan. Once your plan is approved, you will again be able to control your property, except for the portion of your wages that may be deducted for repayment.
You will have a repayment plan.
The court must approve the plan before it goes into effect. The plan will show how you will pay your monthly living expenses and use your additional income to pay back some of the debts you owe over a 3-5 year period. If you want to keep your house or car, your plan must show that you will be able to keep up the monthly payments and pay the back money that you owe.
Deductions may be made to your wages
If you have regular employment, the court will probably order deductions from your wages in order to make the payments scheduled under your plan.
You will take a personal financial management course
You will be required to complete a personal financial management course before you receive your discharge. This course is in addition to the credit counseling you took before filing your petition.
You will receive a discharge
Finally, you will receive your discharge. You are entitled to a your discharge once you have completed all the payment required under your repayment plan. You discharge gives you a fresh start and removes the legal obligation for you to repay any of the discharged debt.
Credit Counseling and Debtor Education Courses
All individual bankruptcy filers are required to complete pre-bankruptcy credit counseling and pre-discharge debtor education. These may not be provided at the same time. Credit counseling must take place before you file for bankruptcy; debtor education must take place after you file.
Certificate of completion for both credit counseling and debtor education are required but before the filer’s debts can be discharged. Only credit counseling organizations and debtor education course providers that have been approved by the U.S. Trustee Program may issue these certificates. Find an approved credit counseling agency or debtor education provider.