The Chapter 13 Filing
Overview to Chapter 13
First off, it is important to note that Chapter 13 is available solely for individuals, not businesses. Moreover, those individuals must owe debts of less than approximately $250,000 (if unsecured) or $750,000 (if secured). See 11 USCS § 109(e). While these debt amounts may seem high, it is important to understand that this class of bankruptcy petitioners may also include sole proprietorships (which may mount debt in their organization), as such firms are not legally distinct from their owners.
EXAMPLE: Tony owned a small grocery store and deli. The store had accumulated mounting debt due to poor sales combined with high rent and supply costs. All of Tony’s suppliers and creditors had secured their loans to Tony against either equipment in the shop or Tony’s personal assets. Ultimately, Tony decided to file for personal bankruptcy protection under Chapter 13. His total personal debts amounted to $80,000, incurred by loans secured by his house and car and $680,000 for the store’s debts, secured by the store's inventory and equipment. As such, Tony was eligible to file under Chapter 13.
The process of a Chapter 13 filing is not unlike those we have discussed previously in the sections on Chapter 11 and Chapter 7 filings. A petition – which must be voluntary in Chapter 13 cases – is made to the court, and a trustee is appointed. See
1. Filing the Plan
A Chapter 13 filer is given a period of 5 years during which, under a plan it suggests, it will pay off either the full amount of debt owed or a lesser amount of debt agreed to by the court. See
EXAMPLE: Tony, immediately upon his filing and with the help of his attorney, prepared a plan that called for the payment of certain business debts, with each creditor receiving approximately 50% of the total amount owed over the course of three years. Once Tony submitted the plan to the court, but prior to the court’s approval of the plan, Tony began making payments under the proposed plan to demonstrate his earnestness in trying to reorganize his finances.
2. Approving the Plan
Once the plan has been filed, the court will meet with the listed creditors to determine if the plan is acceptable. See
Unsecured creditors and secured creditors not meeting the above criteria may object to the plan and call for its reformation prior to approving the plan for execution. However, if the assets in the property estate equal or exceed the total amount of the debtors’ claims or if the individual’s disposable income over the 3 year course of the plan is to be entirely committed to payments, then the objections may be overridden by the court.
EXAMPLE: After the plan was distributed, several creditors accepted the plan outright, as the 50% payment that they were to receive was higher than they thought they could expect if they forced Tony into a Chapter 7 liquidation. Several secured creditors objected to the plan. However, since the plan called for each of these creditors to receive back the machinery that secured the debts that Tony owed them, their disapproval was not fatal to the plan.
The plan may be modified at any point over its maximum of five years.
If the debtor follows the plan, completing steady payments as the plan called for over the five year period, then all debts (apart from those not included or attached to alimony or child support) are discharged. See