The Chapter 13 Filing

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Disposable Income: 
While not necessarily a legal term, “disposable income” refers to money which an individual has after the payment of all of his or her regular debts and expenses. Thus, disposable income represents the free cash that an individual has, beyond her costs of living. In the context of bankruptcy, some courts have defined disposable income as all amounts of free income over and above the individual’s needs for supporting herself and dependents or above those costs reasonably incurred and necessary for continuing an existing business.

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

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 11 USCS § 1302. Some liquidation cases may also be converted into Chapter 13 “repayment” cases, but this will only occur in a situation where the debtor agrees to the conversion. See 11 USCS § 706. Moreover, it is important to note that, while people who own sole proprietorships may file for Chapter 13 protection, no business debts of the petitioner will be discharged or reorganized under the filing.

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 11 USCS § 1322. Immediately after the filing and appointment of a trustee, the debtor must begin making payments under the terms of the plan as it was presented. See 11 USCS § 1326. While the plan may ultimately be turned down by the court, these payments, which must begin no later than 30 days after the date of the filing of the plan or order for relief, are treated as a showing of good faith on the part of the debtor to abide by the plan.

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 11 USCS § 1324. If any secured creditor accepts the plan, then the plan is approved as to that creditor. Moreover, if a secured creditor is to receive either the full amount of its property, or to have the secured property itself returned to it under the plan, then that creditor is automatically considered to have approved the plan. See 11 USCS § 1325.

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. 

3. Modification
The plan may be modified at any point over its maximum of five years. 11 USCS § 1329. This may include a possible extension of the period of the plan by a court, but only up to a total of five years. Any modifications not objected to by the debtor or any interested party are automatically deemed accepted. See 11 USCS § 1327

4. Discharge
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 11 USCS § 1328. Note, that under some circumstances, a “hardship discharge” may be allowed by the court if payment was made impossible by the debtor’s circumstances. See Roberts v. Boyajian (In re Roberts), 279 F.3d 91 (1st Cir. 2002).

EXAMPLE: Over the next two years, Tony made consistent payments as per the plan and it looked like he was headed for a discharge, in which case he would be free of all creditors’ claims despite only having paid them a fraction of what he originally owed them. However, in the final year, Tony was injured at work when a shelf full of tomato paste fell on him and injured him severely. Because of the fact that the court recognized Tony’s good intentions and given his disabling injury, the court granted Tony a hardship discharge and discharged his debts early.

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