About Chapter 13 Bankruptcy
A Chapter 13 case is a reorganization of the debtor’s financial affairs which allows debtors with regular incomes to make affordable, often reduced, payments on their obligations. Such payments are made for a specified period of time, usually not less than 3 years and not more than 5 years. The payments are made according to a court-confirmed (approved) plan. The plan is proposed to the court by the debtor and/or the debtor and the debtor’s attorney. The plan is reviewed by the trustee, who either recommends confirmation or objects to the confirmation.
A Chapter 13 plan must satisfy certain requirements in order to be confirmed or approved by the court. The plan, among other things, must provide for payment to the trustee of all of the debtor’s disposable income. It must provide for payment of secured creditors. It must provide for payment in full of all priority claims. The plan must also provide that unsecured creditors get (over time) as much from the Chapter 13 as they would have received from a Chapter 7 liquidation. Therefore, it is not necessary that all creditors be paid all that is owed to them.
A Chapter 13 is particularly attractive when foreclosure is threatened or even filed, or when there are unfiled tax returns or other tax concerns. A Chapter 13 may also be a good alternative when non-dischargeable debts such as those incurred by fraud, child support or others are a concern. Additionally, a Chapter 13 may be a good alternative when the debt owed to a secured creditor (i.e. on a vehicle), is much greater than the value of the collateral. A Chapter 13 may also be beneficial to a sole proprietor who wishes to continue operation of a business without interference by the court or by creditors.
In a Chapter 13 monthly payments are made to the trustee. The trustee will then take the payments and distribute the money among creditors according to the plan. Generally, the payments are first paid to administrative claims such as the trustee’s fees, second to secured creditors (such as mortgage arrearage, vehicle payments, payments on furniture and the like), third to priority creditors (such as support claims and taxes), and last (if at all) to unsecured creditors (such as credit cards, medical bills, etc.).
In a Chapter 13 case the discharge of debts does not occur until all payments under the plan have been completed. That means for at least 3 years and up to 5 years the case remains open. If a debtor fails to follow the plan, by failing to make payments for example, the case can be dismissed and no discharge granted. If, however, all payments are made under the approved plan, the court will, at the end of the plan, enter a discharge of all dischargeable debts — thereby giving the debtor the fresh start desired.