Bankruptcy Information:
BANKRUPTCY CHAPTER 13 explained
by the U.S. Bankruptcy Court:
Chapter 13 is designed for individuals
with regular income who desire to pay
their debts but are currently unable to
do so. The purpose of chapter 13 is to
enable financially distressed individual
debtors, under court supervision and
protection, to propose and carry out a
repayment plan under which creditors
are paid over an extended period of
time. Under this chapter, debtors are
permitted to repay creditors, in full or
in part, in installments over a threeyear
period, during which time creditors
are prohibited from starting or
continuing collection efforts. A plan
providing for payments over more
than three years must be “for cause”
and be approved by the court. In no
case may a plan provide for payments
over a period longer than five years.
11 U.S.C. § 1322(d).
Any individual, even if self-employed
or operating an unincorporated business,
is eligible for chapter 13 relief as
long as the individual’s unsecured debts
are less than $290,525 and secured
debts are less than $871,550. 11 U.S.C.
§ 109(e). A corporation or partnership
may not be a chapter 13 debtor. Id.
An individual cannot file under chapter
13 or any other chapter if, during
the preceding 180 days, a prior bankruptcy
petition was dismissed due to
the debtor’s willful failure to appear
before the court or comply with orders
United States Bankruptcy
Code is frequently referred
to as a “wage earner”
chapter, although it is
available to individuals
with regular income
from any source, not
just wages.
INDIVIDUAL DEBT ADJUSTMENT • 19
of the court or was voluntarily dismissed
after creditors sought relief
from the bankruptcy court to recover
property upon which they hold liens.
11 U.S.C. §§ 109(g), 362(d) and (e).
HOW CHAPTER 13 WORKS
A chapter 13 case begins with the filing
of a petition with the bankruptcy court
serving the area where the debtor has a
domicile or residence. Unless the court
orders otherwise, the debtor also shall
file with the court (1) schedules of
assets and liabilities, (2) a schedule of
current income and expenditures, (3) a
schedule of executory contracts and
unexpired leases, and (4) a statement of
financial affairs. Bankruptcy Rule
1007(b). A husband and wife may file a
joint petition or individual petitions.
11 U.S.C. § 302(a). (Official Bankruptcy
Forms can be purchased at a
legal stationery store. They are not
available from the court.)
Currently, the courts are required to
charge a $155 case filing fee and a $39
miscellaneous administrative fee. The
fees should be paid to the clerk of the
court upon filing or may, with the
court’s permission, be paid in installments.
28 U.S.C. § 1930(a); Bankruptcy
Rule 1006(b); Bankruptcy Court
Miscellaneous Fee Schedule, Item 8.
Rule 1006(b) limits to four the number
of installments for the filing fee. The
final installment shall be payable not
later than 120 days after filing the petition.
For cause shown, the court may
extend the time of any installment,
provided that the last installment is
paid not later than 180 days after the
filing of the petition. Bankruptcy Rule
1006(b). If a joint petition is filed, only
one filing fee and one administrative
fee are charged.
In order to complete the Official
Bankruptcy Forms which make up the
petition, statement of financial affairs,
and schedules, the debtor will need to
compile the following information:
1. A list of all creditors and the
amounts and nature of their claims;
2. The source, amount, and frequency
of the debtor’s income;
3. A list of all of the debtor’s property;
and
4. A detailed list of the debtor’s monthly
living expenses, i.e., food, clothing,
shelter, utilities, taxes, transportation,
medicine, etc.
When a husband and wife file a joint
petition or each spouse files an individual
petition, the above detailed data
must be gathered for both spouses. So
that financial responsibilities can be
accurately assessed when only one
spouse files, the income and expenses
of the non-filing spouse should be
included in the debtor’s schedules and
statement of financial affairs.
Upon the filing of the petition, an
impartial trustee is appointed to administer
the case. 11 U.S.C. § 1302. If the
number of cases so warrants, the
United States trustee may appoint a
standing trustee to serve in all chapter
13 cases in a district. 28 U.S.C.
§ 586(b). A primary role of the chapter
13 trustee is to serve as a disbursing
agent, collecting payments from
debtors and making distributions to
creditors. 11 U.S.C. § 1302.
The filing of the petition under chapter
13 “automatically stays” most collection
actions against the debtor or
20 • INDIVIDUAL DEBT ADJUSTMENT
the debtor’s property. 11 U.S.C. § 362.
As long as the “stay” is in effect, creditors
generally cannot initiate or continue
any lawsuits, wage garnishment,
or even telephone calls demanding
payments. Creditors receive notice of
the filing of the petition from the clerk
or the trustee. Further, chapter 13 contains
a special automatic stay provision
applicable to creditors. Specifically,
after the commencement of a chapter
13 case, unless the bankruptcy court
authorizes otherwise, a creditor may
not seek to collect a “consumer debt”
from any individual who is liable with
the debtor. 11 U.S.C. § 1301. Consumer
debts are those incurred for consumer,
as opposed to business, needs.
By virtue of the automatic stay, an
individual debtor faced with a threatened
foreclosure of the mortgage on his
or her principal residence can prevent
an immediate foreclosure by filing a
chapter 13 petition. Chapter 13 then
affords the debtor a right to cure
defaults on long-term home mortgage
debts by bringing the payments current
over a reasonable period of time. The
debtor is permitted to cure a default
with respect to a lien on the debtor’s
principal residence up until the completion
of a foreclosure sale under state
law. 11 U.S.C. § 1322(c).
The debtor must file a plan of repayment
with the petition or within fifteen
days thereafter, unless extended by the
court for cause. Bankruptcy Rule 3015.
The chapter 13 plan must provide for
the full payment of all claims entitled to
priority under section 5071 (unless the
holder of a particular claim agrees to
different treatment of the claim); if the
plan classifies claims, provide the same
treatment for each claim within each
class; and provide for the submission of
such portion of the debtor’s future
income to the supervision of the trustee
as is necessary for the execution of the
plan. 11 U.S.C. § 1322. Other plan
provisions are permissive. Id. Plans,
which must be approved by the court,
provide for payments of fixed amounts
to the trustee on a regular basis, typically
biweekly or monthly. The trustee
then distributes the funds to creditors
according to the terms of the plan,
which may offer creditors less than full
payment on their claims. If the trustee
or a creditor with an unsecured claim2
objects to confirmation of the plan, the
debtor is obligated to pay the amount
of the claim or commit to the proposed
plan all projected “disposable income”
during the period in which the plan is
in effect. 11 U.S.C. § 1325(b). Disposable
income is defined as income not
reasonably necessary for the maintenance
or support of the debtor or
dependents. If the debtor operates a
business, disposable income is defined
as excluding those amounts which
are necessary for the payment of ordinary
operating expenses. 11 U.S.C.
§ 1325(b)(2)(A) and (B).
A meeting of creditors is held in
every case, during which the debtor is
examined under oath. It is usually held
20 to 50 days after the petition is filed.
If the United States trustee or bankruptcy
administrator3 designates a
place for the meeting which is not regularly
staffed by the United States
trustee or bankruptcy administrator,
the meeting may be held no more than
60 days after the order for relief.
Bankruptcy Rule 2003(a). The debtor
must attend the meeting, at which creditors
may appear and ask questions
regarding the debtor’s financial affairs
and the proposed terms of the plan.
INDIVIDUAL DEBT ADJUSTMENT • 21
11 U.S.C. § 343. If a husband and wife
have filed a joint petition, they both
must attend the creditors’ meeting. The
trustee will also attend the meeting and
question the debtor on the same matters.
In order to preserve their independent
judgment, bankruptcy judges are
prohibited from attending. 11 U.S.C.
§ 341(c). If there are problems with the
plan, they are typically resolved during
or shortly after the creditors’ meeting.
Generally, problems may be avoided if
the petition and plan are complete and
accurate and the trustee has been consulted
prior to the meeting.
In a chapter 13 case, unsecured creditors
who have claims against the
debtor must file their claims with the
court within 90 days after the first date
set for the meeting of creditors.
Bankruptcy Rule 3002(c). A governmental
unit, however, may file a proof
of claim until the expiration of 180
days from the date the case is filed.
11 U.S.C. § 502(b)(9).
After the meeting of creditors is concluded,
the bankruptcy judge must
determine at a confirmation hearing
whether the plan is feasible and meets
the standards for confirmation set forth
in the Bankruptcy Code. 11 U.S.C.
§§ 1324 and 1325. Creditors, who will
receive 25 days’ notice of the hearing,
may object to confirmation. While a
variety of objections may be made, the
most frequent ones are that payments
offered under the plan are less than
creditors would receive if the debtor’s
assets were liquidated or that the
debtor’s plan does not commit all of the
debtor’s projected disposable income
for the three-year period of the plan.
Within thirty days after the filing of
the plan, even if the plan has not yet
been approved by the court, the debtor
must start making payments to the
trustee. 11 U.S.C. § 1326(a)(1). If the
plan is confirmed by the bankruptcy
judge, the chapter 13 trustee commences
distribution of the funds received in
accordance with the plan “as soon as
practicable.” 11 U.S.C. § 1326(a)(2). If
the plan is not confirmed, the debtor has
a right to file a modified plan. 11 U.S.C.
§ 1323. The debtor also has a right to
convert the case to a liquidation case
under chapter 7. 11 U.S.C. § 1307. If
the plan or modified plan is not confirmed
and the case is dismissed, the
court may authorize the trustee to retain
a specified amount for costs, but all
other funds paid to the trustee are
returned to the debtor. 11 U.S.C.
§ 1326(a)(2).
On occasion, changed circumstances
will affect a debtor’s ability to make
plan payments, a creditor may object
or threaten to object to a plan, or a
debtor may inadvertently have failed
If the number of
cases so warrants,
the United States
trustee may appoint
a standing trustee
to serve in all
chapter 13 cases
in a district.
22 • INDIVIDUAL DEBT ADJUSTMENT
to list all creditors. In such instances,
the plan may be modified either before
or after confirmation. 11 U.S.C.
§§ 1323 & 1329. Modification after
confirmation is not limited to an initiative
by the debtor, but may be at the
request of the trustee or an unsecured
creditor. 11 U.S.C. § 1329(a).
MAKING THE PLAN WORK
The provisions of a confirmed plan are
binding on the debtor and each creditor.
11 U.S.C. § 1327. Once the court
confirms the plan, it is the responsibility
of the debtor to make the plan succeed.
The debtor must make regular
payments to the trustee, which will
require adjustment to living on a fixed
budget for a prolonged period. Alternatively,
the debtor’s employer can
withhold the amount of the payment
from the debtor’s paycheck and transmit
it to the chapter 13 trustee.
Furthermore, while confirmation of the
plan entitles the debtor to retain property
as long as payments are made, the
debtor may not incur any significant
new credit obligations without consulting
the trustee, as such credit obligations
may have an impact upon the
execution of the plan. 11 U.S.C.
§§ 1305(c), 1322(a)(1) & 1327.
A debtor may consent to the deduction
of the plan payments from the
debtor’s paycheck. Experience has
shown that this practice increases the
likelihood that payments will be made
on time and that the plan will be completed.
In any event, failure to make the
payments in accordance with the confirmed
plan may result in dismissal of
the case or its conversion to a liquidation
case under chapter 7 of the
Bankruptcy Code. 11 U.S.C. § 1307(c).
THE CHAPTER 13
DISCHARGE
The bankruptcy law regarding the
scope of the chapter 13 discharge is
complex and has recently undergone
major changes. Therefore, debtors
should consult competent legal counsel
prior to filing regarding the scope of
the chapter 13 discharge.
The chapter 13 debtor is entitled to a
discharge upon successful completion
of all payments under the chapter 13
plan. 11 U.S.C. § 1328(a). The discharge
has the effect of releasing the
debtor from all debts provided for by
Once the court
confirms the plan,
it is the responsibility
of the debtor to
make the plan
succeed. The debtor
must make regular
payments to the
trustee, which will
require adjustment
to living on a fixed
budget for a
prolonged period.
INDIVIDUAL DEBT ADJUSTMENT • 23
the plan or disallowed (under section
502), with limited exceptions. Those
creditors who were provided for in full
or in part under the chapter 13 plan
may no longer initiate or continue any
legal or other action against the debtor
to collect the discharged obligations.
In return for the willingness of the
chapter 13 debtor to undergo the discipline
of a repayment plan for three to
five years, a broader discharge is available
under chapter 13 than in a chapter
7 case. As a general rule, the debtor is
discharged from all debts provided for
by the plan or disallowed, except certain
long term obligations (such as a
home mortgage), debts for alimony or
child support, debts for most government
funded or guaranteed educational
loans or benefit overpayments, debts
arising from death or personal injury
caused by driving while intoxicated or
under the influence of drugs, and debts
for restitution or a criminal fine included
in a sentence on the debtor’s conviction
of a crime.11 U.S.C. § 1328(a).To
the extent that these types of debts are
not fully paid pursuant to the chapter
13 plan, the debtor will still be responsible
for these debts after the bankruptcy
case has concluded.
THE CHAPTER 13
HARDSHIP DISCHARGE
After confirmation of a plan, there are
limited circumstances under which the
debtor may request the court to grant a
“hardship discharge” even though the
debtor has failed to complete plan payments.
11 U.S.C. § 1328(b). Generally,
such a discharge is available only to a
debtor whose failure to complete plan
payments is due to circumstances
beyond the debtor’s control and
through no fault of the debtor, after
creditors have received at least as much
as they would have received in a chapter
7 liquidation case and when modification
of the plan is not possible. Injury
or illness that precludes employment
sufficient to fund even a modified plan
may serve as the basis for a hardship
discharge. The hardship discharge is
more limited than the discharge
described above and does not apply to
any debts that are nondischargeable in
a chapter 7 case. 11 U.S.C. § 523.
NOTES
1. Section 507 sets forth nine categories
of unsecured claims which
Congress has, for public policy reasons,
given priority of distribution over other
unsecured claims.
2. Unsecured debts generally may be
defined as those for which the extension
of credit was based purely upon an
evaluation by the creditor of the
debtor’s ability to pay. In contrast,
secured debts are those for which the
extension of credit was based upon not
only the creditor’s evaluation of the
debtor’s ability to pay, but upon the
creditor’s right to seize pledged property
on default.
3. Bankruptcy Administrators, rather
than U.S. trustees, serve in the judicial
districts in the states of Alabama and
North Carolina.
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