CHAPTER 13 BANKRUPTCY
Consolidate and reorganize the debts you want. Reduce the debts you don’t. Chapter 13 will make your creditors play by the rules.
Bankruptcy is the surest, fastest, least expensive, and least stressful way to financial freedom
Chapter 13 Bankruptcy Overview
A strategic restructuring and reduction of debt under federal law for individuals with regular income
This means that if you have a regular source of income, you can use federal law to open a case under chapter 13 in bankruptcy court and start a process that is supervised by a federal judge to restructure and reduce your debts.
To do so, you have to propose a repayment plan (a “chapter 13 plan”) and get it approved (“confirmed”) by the bankruptcy judge.
Your creditors file claims with the bankruptcy court to participate in your chapter 13.
A person called a chapter 13 trustee, who is a court appointed officer, is appointed to your case and acts as a compliance officer and administrator of your case.
If your chapter 13 plan complies with the Bankruptcy Code and creditor objections (if any) are resolved, the judge will approve (“confirm”) the plan at a confirmation hearing.
Once you complete your chapter 13 plan any unpaid balances to general unsecured creditors will be discharged and your case will close.
Chapter 13 in Detail
The best way to understand chapter 13 is to think in terms of:
GETS WHAT AND WHEN
OVER HOW LONG
Who, gets what and when, over how long is dictated by the provisions inside chapter 13 of the Bankruptcy Code.
These provisions take into account your income, expenses, debts, and the value of assets as discussed below.
Creditors and Administrators
There are two classes of entities who you will pay through your chapter 13 plan: the creditors and the administrators.
In bankruptcy, creditors are divided into categories of importance.
The category determines how the creditors must be treated in your chapter 13 plan: i.e. how much money and when paid.
Let’s rehash the categories:
Secured creditors are the creditors who have liens on some or all of your property.
If you want to keep the property securing the debt (the “collateral”) you must continue to pay these creditors, as discussed below.
In chapter 13, the most common secured claims are car loans, mortgages, furniture loans, and title loans.
Priority creditors are unsecured creditors who receive special treatment in your chapter 13 case.
The priority class of creditors has its own internal hierarchy of importance, as discussed below.
In chapter 13, the most common priority claims are: mortgage arrears, domestic support obligations, and certain unpaid taxes.
General unsecured creditors are unsecured creditors who do not receive any special treatment in your chapter 13 case.
This means that these creditors are the last ones in line to get paid in the case.
In chapter 13, these creditors consist of everyone else not mentioned above (e.g. credit cards, medical bills, personal loans, etc.).
The administrators consist of another class of entities that must receive treatment in your chapter 13 plan.
Generally, the administrative class consists of the following two parties:
You will pay the majority of your attorney’s fees through your chapter 13 plan.
This is a good thing because it means you can file your case and get protected without having to have to come up with the attorney’s entire fee.
In turn, your attorney will be paid as an administrator in your chapter 13 case.
what and when?
Chapter 13 Plan Payments to Creditors
The chapter 13 scheme consists of you making monthly payments to the chapter 13 trustee who then disburses your payments monthly to your creditors over the duration of your chapter 13 plan.
Because everyone can’t get paid at once, the chapter 13 trustee makes disbursements according to a certain order of priority as dictated by your chapter 13 plan — which itself must be in compliance with the Bankruptcy Code.
Accordingly, disbursements to creditors consist of quantitative (“how much”) and temporal (“when paid”) elements.
Administrators and secured creditors generally receive the highest priority treatment and get paid first in the case.
Priority unsecured creditors are paid next pursuant to their own hierarchy.
The running theme in chapter 13 is the shifting of your limited income from the less important general unsecured creditors to the more important administrators, secured creditors, and priority creditors.
Administrators are paid in full. They are also at the top of the chapter 13 priority order.
The chapter 13 trustee receives a statutory percentage of all the money flowing through your chapter 13 plan.
This is referred to as the “administration fee.”
The trustee gets first dibs and deducts the administrative fee from each chapter 13 plan payment. The amount deducted is the statutory percentage in effect at the time your trustee payment is received.
The remainder of the monthly payment is disbursed to the other claimants in your case according to priority order.
Historically, the average chapter 13 trustee administrative fee in the Northern District of Illinois is around 5%.
Your chapter 13 plan must provide for this fee — which is ultimately subsidized by unsecured creditors.
The attorney, a an administrator, gets priority treatment in your chapter 13 case.
Here, in the Northern District of Illinois, the attorney’s court approved fees will be paid ahead of priority unsecured creditors and usually in line with secured creditors.
Different creditors receive different treatment under chapter 13.
In the Northern District of Illinois, unless the chapter 13 plan provides otherwise, the priority order is as follows:
- current mortgage payments (if you decide to make your mortgage payments through the plan)
- non-mortgage secured claims
- mortgage arrears
- priority unsecured claims (pursuant to the statutory priority order)
- other unsecured claims (i.e. general unsecured claims)
The different treatment is discussed below.
Secured creditors are at the top of the chapter 13 distribution scheme.
Unless the chapter 13 plan provides otherwise, secured creditors must receive equal monthly payments (with the exception of mortgage arrears) until their claims are paid in full.
The total payment amount secured creditors must receive in your case may depend on the current interest rates, the origination date of the loan, the value of the collateral, your treatment of the secured creditor’s collateral, and the temperament of the creditor — some creditors are more aggressive than others.
Generally, there are four secured creditor distribution schemes:
FIRST, if you are keeping the collateral and if you are current on your payments you can continue to make payments directly to the creditor outside of your chapter 13 pursuant to the agreement you signed with that creditor.
You can also pay the secured claim through your chapter 13 plan with the following treatment:
- in full with statutory or contract interest (the statutory interest rate can be lower than your contract rate and can save you money on interest — however, you cannot modify the interest rate on a mortgage secured by your principal residence)
- via cramdown
SECOND, If you want to keep the collateral and you are not current on your payments, and the collateral is:
- personal property (e.g. a car), you must pay the creditor through your plan and pay the claim in full with statutory or contract interest (whichever is lower) or via cramdown
- real estate, you must pay all arrears inside your chapter 13 case and stay current on your regular mortgage payments by making payments through the chapter 13 plan or directly to the creditor outside the plan.
- real estate that is not your principal residence, is eligible for a cramdown.
Third, if the collateral is real estate with a fully unsecured second mortgage or a home equity line of credit (i.e. a “junior lien”), you can strip the junior mortgage lien from your property.
FINALLY, you can surrender the collateral back to the creditor and treat the debt as a general unsecured claim.
Keep in mind that the secured creditor can object to your treatment of the its claim.
Accordingly, the amount you have to pay to your secured creditors in your chapter 13 case will vary depending on your situation and your goals.
The claims of priority creditors must be paid in full, albeit without interest, in priority order through your chapter 13 plan.
The most common priority claims in chapter 13 are mortgage arrears, domestic support obligations (e.g. child support), and certain unpaid taxes.
The claims are paid in full in the following order:
- mortgage arrears
- domestic support obligations
- certain unpaid taxes
As you make your monthly payments, the trustee will disburse the funds on a monthly basis pursuant to the priority order.
The creditor higher in the hierarchy must be paid in full before the trustee will disburse funds to the creditor lower in the hierarchy.
General unsecured creditors (GUCs) are at the bottom of the totem pole.
This means they get paid last after priority creditors are paid in full.
GUCs will usually only receive “what you can afford” to pay them through your chapter 13.
This can range anywhere between 100% of their claims with interest to as little as 10% or less (which may amount to just cents on the dollar) — your circumstances will dictate.
You can say that the GUCs are the guys that subsidize your chapter 13 plan.
But keep in mind that GUCs must receive a minimum pro rated share of the higher result of the two calculations below:
- Disposable Monthly Income. Disposable monthly income is the total amount of your household income that you must pay to general unsecured creditors after accounting for necessary and reasonable expenses, costs of administration (trustee and attorney), and secured and priority creditors.
- Liquidation Value. Liquidation value, also know as the “best interest of creditors test,” or the “liquidation test” is a provision in chapter 13 which provides that your general unsecured creditors must receive at least as much as they would receive if you filed your case under chapter 7. In most cases, the liquidation value will be $0. Hence, payment to general creditors will be based solely on your disposable monthly income.
Any remaining balances on GUC claims will be discharged when you complete your chapter 13 plan.
The Duration of Your Chapter 13 Case
The duration of your chapter 13 case (“plan period” or “applicable commitment period”) can range between 36 months (the minimum duration if you qualify) and 60 months (the maximum duration).
Your income plays the main role in determining your plan period.
However, other factors such as your expenses, types of creditors, amount of debt, and the liquidation value of your assets, may also influence the duration if you qualify for the 36-month plan.
Eligibility for the 36-month chapter 13 plan is based solely on your household income.
If your household income is above the median, your plan period will be 60 months.
Therefore, to qualify for a plan period of less than 60 months, your income must be below the Illinois median income for your household size.
If your income qualifies you for the 36-month plan, you must still fund a “feasible” chapter 13 plan within the 36-month plan period.
Feasibility means that you have sufficient income to finish your chapter 13 plan within the proposed plan period.
Here, in the Bankruptcy Court Northern District of Illinois, this means you have to pay the costs of administration, the claims filed by your secured and priority creditors (usually in full), and (unless you have special circumstances) at least 10% of the claims filed by your general unsecured creditors.
If you qualify for the 36-month plan but your income is insufficient to pay what you need to pay in 36 months, your plan will be infeasible.
To make your plan feasible, you will have to voluntarily extend the plan period (up to 60 months) to give you more time to fund the plan.
If you cannot propose a feasible plan within the maximum 60-month period, the chapter 13 trustee will object to your case.
Most judges will not confirm your plan and your case will be dismissed.
- Types of Debts. As discussed above, if you have secured or priority debts, these debts will usually have to be paid in full. The greater number of claims filed by these creditors, the greater amount of your income will have to be directed towards these claims.
- Balances for Each Type of Debt. The higher the balances, especially on secured and priority debts, the more income resources will have to be dedicated to propose a feasible plan.
- Expenditures for Expenses. Your necessary household expenses reduce the amount of income you have available for your chapter 13 case. Accordingly, this is a factor in your ability to fund a feasible plan.
- Costs of Administration. You have to account for the chapter 13 trustee’s fees as well as your attorney’s fees and expenses because these have to be paid in full and will increase the amount of money you have to pay into the case.
Situations do exist where individuals are not able to proceed under chapter 13 because they cannot afford to propose a feasible chapter 13 plan within the maximum 60-month plan period.
to keep in mind
The C13 Discharge Eliminates More Types of Debts than the C7 Discharge
There are a few types of debts that can only be eliminated in chapter 13.
The most common are:
- parking tickets, red light camera tickets, and speed camera tickets
- other civil fines and violations payable to the government (traffic violations are criminal)
- unemployment overpayments (because the State of Illinois may not object to dischargeability of the debt in chapter 13)
- certain domestic support obligations
- damages to property arising from operating a motor vehicle while under influence of alcohol or drugs
to keep in mind
The C13 Discharge Is Granted Only After You Complete All Your Plan Payments
I want to emphasize that the chapter 13 is a long-term commitment because you will not receive your discharge until after you complete ALL your chapter 13 plan payments.
Work in Chicago?
The Basic Chapter 13 Case Timeline: From Filing to Discharge
This is how chapter 13 cases generally progress in the Bankruptcy Court for the Northern District of Illinois
For most well-advised and well-represented individuals, the process should be relatively straightforward and stress-free.
Probably the most important aspect of a chapter 13 case is your understanding of the process and communication with your attorney — because remember, chapter 13 is a long term 36 to 60 month commitment and life’s circumstances may necessitate changes to your plan.
You File Your Chapter 13: The Relief Begins
Your case is filed and things start happening instantly.
- the bankruptcy estate is created and your property is legally transferred to the estate
- the automatic stay starts and foreclosures, repossessions, lawsuits, and other collections actions must stop
- a chapter 13 trustee is appointed to your case
- your chapter 13 petition becomes available to your creditors, the trustee, and the United States Trustee, for review
- deadlines and dates for meetings and hearings are set
The Bankruptcy Noticing Center sends out notices to the creditors you included in your case (by law you must include everyone you owe money to).
If you fail to include a creditor, the creditor may not get notice of the case.
If the creditor does not get notice, the creditor will not have a chance to participate in your case. And the debt you owe to that creditor will not get discharged — notice to creditors is extremely important.
Many creditors (credit cards, major banks, etc.) will receive notice of the bankruptcy case electronically within 24 hours.
The credit reporting agencies will also pick up your chapter 13 within 24 to 48 hours and your case will show up on your credit reports.
The creditors that did not get notified electronically will receive notice by mail within 7 to 10 days.
You will also receive the same notice by mail.
Crucial Junctures in Your Chapter 13
Here, I discuss the standard events in a chapter 13 case after your case has been filed.
Your first chapter 13 payment will be due within 30 days from the date of filing.
You will be making your payments to the chapter 13 trustee. This is why these payments are often referred to as “trustee payments.”
The first trustee payment is very important because it serves as evidence of your commitment to the case as well as good faith behind your filing.
You can make the trustee payments manually by sending a money order or cashier’s check to the trustee’s payment address (not recommended). You can also initiate an electronic withdrawal from your bank account online or by phone.
Or you can automate your trustee payments by having them deducted from your paycheck (recommended). This is accomplished by court order directing your employer to deduct the trustee payment from your paychecks.
Unless you are paid monthly, the employer will break down the monthly trustee payment so that a portion of the payment is deducted and sent to the trustee every pay period.
To participate in your chapter 13 case, i.e. to get a distribution from the trustee, a creditor has to file a claim with the bankruptcy court.
This document is called a “proof of claim.”
The proof of claim is filed under the penalty of perjury and must include certain information including the amount of the claim and certain supporting documents evidencing the claim.
Non-government creditors have 70 days from the date of filing of the case to file their claim, or to otherwise ask for an extension.
Government creditors have180 days after your case is opened to file their claims.
If a creditor does not timely file its proof of claim, you will have grounds to object to that claim if it makes sense for you to do so.
If your objection is sustained (i.e. successful) or if a creditor does not file a claim at all, that creditor will not receive any disbursements from the chapter 13 trustee and the entire claim may get discharged once the court enters the discharge order.
I emphasize “may” because certain claims (i.e. debts) such as most priority debts and security interests (liens) will not get discharged or eliminated in your chapter 13.
Accordingly, when it pertains to priority or secured creditors, it is sometimes beneficial to the debtor (you) if a claim is filed.
In that event, if a creditors does not file a claim by the deadline, you will have 30 days after the expiration of the deadline to file a proof of claim on behalf of the priority or secured creditor.
This way you will ensure that these claims receive a distribution from the chapter 13 trustee and your limited income is directed to pay these claims at the expense of the other less important claims of general unsecured creditors.
The confirmation hearing is one of the most important junctures in your case because this is when the bankruptcy judge approves your chapter 13 plan and it becomes binding on all parties.
To approve your plan, the bankruptcy judge will enter an order stating that your plan complies with the provisions of chapter 13 of the Bankruptcy Code.
Due to the extreme volume of cases, the judge relies on the advice of the chapter 13 trustee who acts as a compliance officer and reviews all chapter 13 plans and cases for compliance with the Bankruptcy Code.
Accordingly, if the bankruptcy judge will enter an order confirming your plan if the trustee “recommends” it for confirmation and no other party has objected to your plan or your case.
If a party or the trustee has objected to your plan or your case, and the parties have not resolved the objections, the judge may continue the confirmation hearing to another date to give the parties to reach an agreement.
Otherwise, the judge will have to rule on any objections to your plan or case to resolve the disagreements before making a ruling on your plan (judge can either confirm or deny confirming your plan).
In the vast majority of chapter 13 cases, the parties resolve their disagreements so the judge does not have to make a ruling — which is time consuming and expensive — and the bankruptcy judge ends up confirming the chapter 13 plan.
If the court confirms your chapter 13 plan, your main responsibility is to continue to make your plan payments to the trustee for the duration of the case and to otherwise comply with your chapter 13 plan until you complete your payments.
The Final Tasks to Chapter 13 Discharge
Once you make all your plan payments the chapter 13 trustee will file a “notice of completion of payments” with the bankruptcy court.
At this point, you will have to complete a couple final tasks.
First, if you haven’t done so already, you have to take the second credit counseling course (also referred to as the financial management course or the debtor education course) and file the certificate of completion with the court.
Second, you will have to complete a declaration through which you will attest that you are either current on your domestic support obligations or do not have any.
You will also have to file the declaration with the court.
You will have to complete these two requirements within a short period of time (less that 30 days) or the court will close your case without a discharge.
Once these two final tasks are completed, the court will enter your chapter 13 discharge within a day or two.
The discharge order will be mailed to you and all your creditors.
Your Case is Closed
The court will close your case after the trustee files a final accounting.
It may take the trustee anywhere from less than one month to several months to file the accounting.
for Chapter 13
Are You Eligible to File Under Chapter 13?
Eligibility criteria to file a case under chapter 13
There are 3 requirements to file under chapter 13.
First, your debts cannot exceed the debt limits. Next, you need to have regular and consistent income. Finally, you must file your case in good faith.
Each requirement is discussed below.
Your Debts Cannot Exceed the Chapter 13 Debt Limits
For the 3-year period starting April 1, 2019, the debt limits have been increased, as follows:
- secured debts cannot exceed $1,257,850 and
- unsecured debts cannot exceed $419,175
Most chapter 13 debtors do not come close to exceeding the debt limit.
You Must Have Sufficient Income to Fund Your Chapter 13 Plan
You must have a steady and regular income.
Your income may be earned (e.g. employment or business income) or unearned (government benefits or family contributions) or a combination of both.
You will have to provide evidence of your income in the form of tax returns and paycheck stubs or other payment advices such as benefit eligibility or award letters.
The “liquidation test”, or the “best interest of creditors test,” means that your general unsecured creditors must receive at least as much in your chapter 13 case as they would receive if you filed a chapter 7 and the chapter 7 trustee liquidated your estate.
Liquidating your estate means selling your assets as well as undoing any fraudulent or preferential transfers.
Thus, to determine if you pass this test, we must first perform what’s called a “hypothetical liquidation analysis” to determine the distribution, if any, to general unsecured creditors in a hypothetical chapter 7 liquidation.
Then, we must make sure your total chapter 13 plan payments to general unsecured creditors are at least as much as the amount of the hypothetical distribution.
If they are, you pass the liquidation test. If they are not, the chapter 13 trustee will object to your case, the judge will not confirm your chapter 13 plan, and your case will be dismissed.
Your chapter 13 plan must be feasible.
This means that you have to pay enough money into your chapter 13 plan so your creditors receive the distributions they are entitled to under the provisions of chapter 13.
Remember, certain creditors must have their claims paid in full (i.e. priority creditors and some secured creditors). Other secured creditors, must receive payments they would otherwise be entitled to outside the bankruptcy case (e.g. monthly car or mortgage payments).
If your income is insufficient to pay your creditors the amount they are entitled to over the maximum duration (60 months) of your chapter 13 plan, the chapter 13 trustee will object to your plan, the court will not confirm it, and your case will be dismissed.
One good example of a plan that is not feasible involves curing a very large mortgage default to stop a foreclosure.
For example: You are $50,000.00 behind on mortgage payments and you want to file chapter 13 to stop the foreclosure of your home. You have no other debts, so the only purpose in filing chapter 13 is to force the bank to accept payments to cure the $50,000 default.
The Bankruptcy Code requires mortgage arrears to be paid in full, but free of interest, inside your chapter 13 case — the maximum duration of which is 60 months (5 years).
You are also required to pay the costs of administration which will include $3,000.00 for attorney’s fees (we are assuming you paid $1,000 to up front to your attorney) and a 5% (on average) chapter 13 fee on all funds disbursed by the trustee.
This gives us an approximate total of $55,788.00 (or $930.00 monthly) that you would have to pay into your chapter 13 case over the maximum period of 60 months to propose a feasible chapter 13 plan (this includes an estimated trustee fee of $2,788).
If you are unable to afford that $930.00 monthly trustee payment, you cannot propose a feasible plan and move forward with the chapter 13 because your case will be dismissed.
You Must File Your Case in Good Faith
This test considers your intent in seeking relief under chapter 13.
In other words, are you filing chapter 13 for the right reasons and not for any improper purpose such as to delay or prejudice your creditors.
A good example of a bad faith filing would be if you file your case to stop your bank from continuing the foreclosure against your home even though you cannot propose a feasible plan (see example above).
The Reasons Why Individuals File Under Chapter 13
There are 4 main reasons why individuals file under chapter 13
The first reason is high income. If your income is too high, you may not qualify to file under chapter 7.
The second reason is valuable property. If you have certain valuable property, it may get liquidated if you file under chapter 7.
Third, chapter 7 will not accomplish your goals. Chapter 13 serves a different purpose and it just might be the relief you are seeking and chapter 7 can’t provide.
Fourth, you already filed under chapter 7 and you don’t qualify for another discharge.
All reasons are discussed below.
Income Is Too High For Chapter 7
You have to pass the Means Test to be eligible for chapter 7 relief.
The Means Test is based on your household income.
If your household income is too high, you will not qualify for chapter 7.
You can still take advantage of the Bankruptcy Code by filing under chapter 13 and paying only what you can afford to your unsecured creditors.
Chapter 13 is the ultimate debt consolidation plan.
You Want to Keep Property You Would Lose In a Chapter 7 Liquidation
You will lose your unencumbered and unexempt valuable property in chapter 7.
Chapter 13 allows you to keep you property and still get relief from creditors and debts if you can pass the liquidation test.
Chapter 7 Will Not Accomplish Your Goals
Chapter 13 with more benefits than chapter 7.
Some of the most common benefits are:
- discharge debts that are not dischargeable under chapter 7
- restructure your secured personal property loans
- force your bank to stop foreclosure and accept payments so you could catch-up on your mortgage
- get your repossessed vehicle back
There are more situation specific benefits to chapter 13.
Chapter 13 rocks.
You Are Not Eligible for a Chapter 7 Discharge
If you filed under chapter 7 and received a discharge, you have to wait 8 years before you are eligible for another chapter 7 discharge.
However, if you need bankruptcy relief sooner, you’re in luck.
You can file chapter 13 as soon as 4 years after filing your chapter 7 and receive a discharge under chapter 13.
A TIMELINE OF A CHAPTER 13 CASE
Putting it all together
- Automatic stay starts immediately.
- The bankruptcy estate is created.
- Deadlines are set, including the trustee meeting.
First Payment Due
Your first trustee payment is due within 30 days from filing.
3 to 5 Weeks After Filing
You attend the initial trustee meeting which usually takes place 3 to 5 weeks after filing.
2 to 3 Weeks After Trustee Meeting
Your attorney attends the confirmation hearing. This is the first opportunity for the judge to approve your plan.
Proof of Claim Deadline #1
Non-government creditor deadline to file claims with the bankruptcy court.
Proof of Claim Deadline #2
Government entity (e.g. IRS, City of Chicago, State of Illinois) claims filing deadline.
36 to 60 months
Last Plan Payment
You make your last plan payment. The trustee files a Notice of Completion of Payments.
Within 30 Days
Complete Final Tasks
You must take the online financial management course and complete the declaration of domestic support obligations.
Within a Few Days
Court Enters Discharge
The court will enter your discharge a day or two after you complete your final two requirements.
Within 30 to 90 Days
The trustee will file the final accounting of your case with the bankruptcy court.
Within a Few Days
The court will close the case within a day or two after the trustee files the final accounting.