Chapter 13 Bankruptcy: An Overview
Bankruptcy is an overwhelming process. A debtor may wonder “What assets can I keep?” and “What is the quickest and most painless way for me to satisfy my debts?” When scouring the Internet to find answers to these questions, many self-help websites boldly proclaim, “KEEP YOUR VALUABLE PROPERTY WITH CHAPTER 13!” and “CHAPTER 13 WORKED FOR HIM & WILL WORK FOR YOU!” Lawyers have commented that Chapter 13 bankruptcy is “innovative” in its approach and “extremely attractive.”
When first enacted, Congress envisioned Chapter 13 as a method to provide “great self-satisfaction and pride to those debtors who complete them and at the same time effect a maximum return to creditors.” What is it and how does it work?
In a Chapter 13 bankruptcy plan, the debtor proposes a repayment and reorganization plan to the bankruptcy court. The repayment plan describes in detail how a debtor will make payments to a Chapter 13 trustee, who will then distribute payments to creditors over a three-to-five year period. To approve the plan, the court must find that “the plan has been proposed in good faith.” Good faith exists “when there is a reasonable likelihood that the plan will achieve a result consistent with the objectives and purposes of the Bankruptcy Code.”
The most appealing quality of a Chapter 13 bankruptcy is its flexibility. The debtor dictates the terms of the repayment plan, though the creditors are involved in the process and the plan must conform to certain standards set forth in the Bankruptcy Code. The procedure of formulating a plan and getting it approved is covered by another presentation. Once a plan is approved, the proceeding enters the repayment period phase, as the debtor makes payments called for by the approved plan.
During the repayment period, creditors are not permitted to harass the debtor to collect their debts; they are only entitled to payments under to the plan. Additionally, unlike in a Chapter 7 bankruptcy, the debtor in a Chapter 13 bankruptcy remains in possession of her assets while making payments to the creditors. In a Chapter 7, a debtor must surrender her nonexempt assets to pay off her creditors, examples of which may include a vacation home, valuable artwork and jewelry.
Along with flexibility, Chapter 13 bankruptcy allows for the discharge, or elimination, of debts, even more so than under Chapter 7. For example, debts dischargeable under Chapter 13, but not Chapter 7, include:
· Debts arising from property settlements in divorce proceedings;
· Debts incurred to pay non-dischargeable tax obligations; and
· Debts for malicious injury to property
There are several eligibility requirements for Chapter 13 bankruptcy. First, businesses are not eligible for Chapter 13 bankruptcy protection. Only individuals and those filing jointly as a husband and wife can do so. Though business owners cannot file under Chapter 13 in the name of the businesses, individual owners as sole proprietors can file for debts for which they are personally liable.
Second, the debtor’s secured debts cannot exceed $1,184,200 and her unsecured debts cannot exceed $394,725 (both numbers as of 2017). Secured debts are debts that are backed by collateral and examples are car or home loans. Most debts are unsecured, as they are not tied to any assets. Examples of unsecured debts include credit card debts, medical bills, and legal bills.
Third, a debtor must show that in the preceding 180 days, a prior bankruptcy petition was not dismissed due to failure to appear before the court or failure to comply with bankruptcy court orders.
Fourth, a debtor must submit proof that she filed federal and state income tax returns for the four years prior to the bankruptcy filing date.
Fifth, a debtor will have to fulfill a credit counseling requirement during the 180-day period before filing the bankruptcy petition. The counseling may take place over the Internet or in-person, but the debtor must receive credit counseling from an approved credit counseling agency either in an individual or group briefing and she must provide the bankruptcy court with a certificate of proof to establish that she has undergone this counseling. There are some exceptions to this credit counseling requirement, though. If there is an emergency or if the bankruptcy trustee has determined that there are an insufficient number of approved agencies to provide the required counseling, she may forego this requirement.
Though Chapter 13 has its advantages, the requirement of following through with a 5-year payment plan can sometimes be difficult. A debtor may lose her job or face unexpected medical expenses or suffer other financial difficulties. When these circumstances arise, the debtor can seek a modification to the plan (usually calling for lower payments), which can be approved by the creditors. If that doesn’t work, the debtor can see a “hardship discharge,” which is a premature discharge available to debtors who encounter significant hurdles to the approved bankruptcy repayment plan. If granted by the bankruptcy court, the debtor won’t have to pay dischargeable, unsecured, non-priority debts.
The debtor must prove three elements to be granted a hardship discharge. The first, and most critical, element is that modifications of the original plan would not help. In one bankruptcy court case, In re Harrison, the debtor lost his job as a route salesman because he was hospitalized for congestive heart failure. He had to seek another job and his salary for his new job had a gross monthly income nearly $1,000 less than what he made previously. He sought a hardship discharge, but the bankruptcy court denied it. In denying the discharge, it reasoned that though the debtor was making less money than before, he hadn’t provided any evidence that he had sought to modify the repayment plan to account for this change in salary.
Second, the debtor must have fallen behind in plan payments because of circumstances beyond her control. Some examples of these include unemployment or death of a family member. Finally, each creditors must have received at least as much as he would have received in a Chapter 7 bankruptcy.
If there is a change in financial circumstances that prevents the debtor from making payments according to her repayment plan, another option is to convert the case into a Chapter 7 bankruptcy proceeding. This occurs often, as a 1997 study commissioned by the National Bankruptcy Review Commission found that only a third of debtors filing Chapter 13 bankruptcy were able to complete repayment plans within five years and that a majority of debtors convert to Chapter 7. The debtor will go before the bankruptcy court and explain her situation to demonstrate the necessity to convert to a Chapter 7. The court must find that her reasons for doing so are genuine and unavoidable and will require her to attend a meeting with creditors and file an updated Proof of Claims to demonstrate which debts she’s paid and what remains, prior to approving the conversion.
Chapter 13 bankruptcy isn’t for everybody, but it may be a viable option for those seeking debt relief and who do not want to go through a Chapter 7 “liquidation” proceeding.
 Susan Jensen-Conklin, “Non-dischargeable Debts in Chapter 13: ‘Fresh Start’ or ‘Haven for Criminals’?,” 7 Bank. Dev. J. 517. (1990).
 S. REP. NO. 989, 95th Cong., 2d Sess. 13, reprinted in 1978 U.S. CODE CONG. & ADMIN. NEWS 5787, (1978).
 LAWRENCE P. KING, ET AL., 8 COLLIER ON BANKRUPTCY, P1300.01-.02 (15th ed. revised, 1998).
 Supra note 1.
 In re Nite Lite Inns, 17 Bankr. 367, (Bankr. S.D. Cal. 1982).
 Pa. Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, (1990).
 11 U.S.C. § 109(e).
 11 U.S.C. § 109.
 In re Harrison, 1999 Bankr. LEXIS 1830, 1999 WL 33114273
 Lawrence Ponoroff, “Rethinking Chapter 13,” 59 Ariz. L. Rev. 1, (2017).