The Chapter 13 Bankruptcy Process

The chapter 13 bankruptcy (reorganization) process is a bit longer than the chapter 7 process, but still simple and straightforward. Like all court proceedings, it begins with a petition and ends with a final order (the discharge order). The process usually goes as follows for an individual filing under chapter 13:

1. The debtor takes a required credit counseling class.
2. The debtor files the petition, along with statements, schedules, and a proposed payment plan.
3. The debtor immediately begins paying the trustee on the 25th under the proposed plan.
4. The court sends out notice of deadlines and the time and place of the meeting of creditors.
5. The court also sends notice to the creditor of the confirmation hearing.
6. At the meeting of creditors, trustee and creditors can ask the debtor questions under oath.
7. The creditors have deadlines to object to confirmation, discharge, and other matters.
8. At the confirmation hearing, the court decides whether to approve the plan.
9. The trustee files the final report.
10. The debtor takes a required financial management class.
11. The debtor requests discharge, and the court enters the order of discharge.

Chapter 13 Plan

The Chapter 13 Plan says (1) the amount the debtor will pay each month, (2) for how long, and (3) how the money will be distributed.

There are three rules governing the amount the debtor will pay each month. The first is that the minimum payment must be all of the debtor's "disposable income" as determined by the means test. The second is that the minimum payment must total up to at least the amount creditors would have gotten in a Chapter 7 bankruptcy (assets minus exemptions). The third rule is that the payments need to be at least enough to cover the attorney's fees and the trustee's fees.

There are two rules governing how long the debtor must pay: The first is the mean test rule -- most debtors who would have been eligible to file under Chapter 7 under the means test have the right to choose a 3 year plan, whereas others must choose a 5 year plan.

There are several rules governing how the money must be distributed (including what the rights of creditors are). They take into account the difference between secured and unsecured creditors and between priority and nonpriority creditors. In some instances, the debtor can modify secured creditor's rights in a Chapter 13 bankruptcy in a way that does not exist in a Chapter 7 bankruptcy (sometimes called "cram-down" or lien stripping).

If there are no objections to the plan, the court will confirm it. If there are objections, the court will hold a hearing and decide whether the debtor's plan meets the requirements of the law. Once the court confirms the plan, the debtor is assured that paying the plan payments will be sufficient to obtain a discharge.

If the plan meets all of the requirements of law (or in some cases, if nobody objects, even though some requirements are not met), the court will confirm the plan. Creditors (especially secured creditors) must be wary to make sure they are not failing to object to a plan that does not meet the law's requirements and may wish to get legal advice on the subject.

Chapter 13 Plan Strategies

There are several common types of plans that may occur in a Chapter 13, based on the rules described above.

0% Plan: The term "0% Plan" is used to describe plans where all of the plan payments go to the trustee and the attorney and there is nothing left over for the creditors. This type of plan is usually used for debtors who would qualify for Chapter 7 bankruptcies but are choosing to file Chapter 13 in order to take advantage of the special provisions of a chapter 13, such as cram-down, lien stripping, and the lighter re-filing limits.

100% Plan: The term "100% Plan" is used to describe plans where the debtor pays off the debts completely. It may seem odd that anyone would need the help of bankruptcy to pay all of their debts, but only until you think about it a bit harder. The chapter 13 plan has the ability to stretch out time periods, change interest rates, and strip liens in ways that cannot be done outside of bankruptcy. It also forces creditors to work together in ways that they never would do outside of bankruptcy. The 100% plan is usually used for higher income debtors who could pay their debts but need the help of bankruptcy to control how it is done and force the creditors to work together. It can save thousands of dollars in interest and help the debtor pay debts down in an order that makes sense for the debtor's needs.

36/60 Plan: The typical Chapter 13 plan for the person who has some disposable income for the unsecured creditors is often called a 36/60 plan (the numbers 36 and 60 refer to the lower and upper limits of how many months the plan must last). Debtors who fail the means test and cannot file a Chapter 7 typically file this type of plan.

Base Plan: The term "base plan" is used to describe a special-purpose plan that is made to achieve a particular goal, such as cramming down a single secured creditor. The amounts are set based on the goal, within the limits the law prescribes.

Chapter 13 Debt Limits

One of the oddities of a chapter 13 bankruptcy is that debtors must have less than \$360,475 in unsecured debt and less than \$1,081,400 in secured debt in order to be eligible to file them. Family farmers and fishers can get around these limits by filing Chapter 12 bankruptcy, which is just like a Chapter 13 but with higher debt limits. The reason the debt limits exist is that Congress created Chapter 13 with special streamlined procedures that are much simpler than a Chapter 11 bankruptcy, and debtors with debts higher than this who wish to reorganize should be required to use the more complicated and expensive Chapter 11 procedure.

Statements and Schedules

The debtor files all the same statements and schedules in a chapter 13 bankruptcy as in a chapter 7 bankruptcy, so that the court can determine whether the debtor's proposed plan meets the requirements of the law.

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