Bankruptcy Law Explained

Chapter 13 Bankruptcy

[You do not need to study bankruptcy laws or to review this section if you have chosen to have us prepare your bankruptcy for you.]

Index:

Bankruptcy Law Summary
Chapter 7 bankruptcy laws
Chapter 13 bankruptcy laws
Property and Exemptions
Structure of bankruptcy laws
Case administration
Types of bankruptcy
How to file bankruptcy
 

Overview of Chapter 13

Chapter 13 bankruptcy, also known as Debt Adjustment of Individual With Regular Income, is the second most common type of bankruptcy. The purpose of Chapter 13 bankruptcy is to pay one's debts in an orderly fashion as opposed to wiping the debt out as in a Chapter 7 case.

There are certain debt situations where a Chapter 7 bankruptcy is not in your best interest. In those situations, you want some breathing room to catch up with your payments. Chapter 13 is suited for those situations where you are best off paying your debts but you need more time than your creditors will allow. Most people who file under Chapter 13 do so because they have fallen behind on their mortgage payments and are facing the possibility of foreclosure. In such situations, bankruptcy law allows debtors up to three years to pay up the arrearage while maintaining their regular payments. Let us say that you were unemployed for six months and during that time you feel behind on your house payments and the mortgage company has demanded that you pay the $5,000 in back payment within 20 days or else they will foreclose. Under a Chapter 13 bankruptcy, the law allows you 36 months to pay off the $5,000 arrearage while you keep up the regular monthly payments. Obviously, you need to show evidence of sufficient income to pay both the regular payments and the new plan payments.

The laws governing Chapter 13 bankruptcy can be found in Chapter 13 of the bankruptcy code also know as Title 11 of the United States code. Since Chapter 13 bankruptcy is characterized by a repayment plan, this chapter deals mostly with the Plan. Sections 1301 to 1307 deals with such issues as rights of co-debtors, the trustee, the debtor's right to engage in business and the conversion and dismissal of cases. Sections 1321 to 130 deal with the repayment plan and covers filing the plan, contents of the plan, modifications, the confirmation hearing, plan payments, and the discharge of unpaid debts.

Should you file Chapter 13 bankruptcy? That depends on the nature of your debts and on your objectives. If your debts are mostly credit cards and unsecured debts, file Chapter 7. If you are behind on your house payments and need several months to repay the arrearage, file Chapter 13.

Unlike Chapter 7, there is no time limits on how often a person can file Chapter 13. This makes sense since the goal is to pay one's debts, not to discharge them. The process for Chapter 13 is much like that for Chapter 7 except that there is the repayment Plan. In addition to the same procedure as in Chapter 7, Chapter 13 involves filing a plan and having that plan approved by the court at a confirmation hearing.

The process starts with the preparation and filing of the documents. After that, a trustee is appointed to administer the bankrupt estate and to ensure the smooth and equitable application of the law. Approximately four weeks after the commencement of the case, the debtor appears for the meeting of the creditors. There is also the confirmation hearing at which the bankruptcy judge approves the Plan. Once the Plan is approved, the debtor makes monthly payments through the trustee who disburses it first to the secured creditors and then to unsecured creditors, if the Plan calls for the payment of unsecured debts.

The case is closed when the Plan has been fully implemented and that could be in three years, which is the standard length of the Plan. For good cause, the court may consider a five year plan, five years being the maximum length in any case.

Essentials of Chapter 13 Law

Only a natural person can file a Chapter 13 case. Corporations seeking to pay their debts in bankruptcy while continuing to operate file a Chapter 11 bankruptcy. There are limits on the amount of secured and unsecured debts as well as value of the bankrupt estate in a Chapter 13 case. Filers exceeding those limits may file a Chapter 7 or a Chapter 11 in which there are no limits.

Bankruptcy law requires that the moment you file bankruptcy, there is an automatic stay that prohibits virtually all creditors from initiating or continuing any efforts, legal or otherwise, to collect debts you owe or to seize property of the bankrupt estate. This is know as the Automatic Stay and is one of the most powerful of all Federal laws. This means that the moment you file, evictions, repossessions and foreclosures must stop, at least for a while; you cannot be sued and existing lawsuits must come to a halt; creditors and collection companies cannot harass you or enforce money judgments against you. Even the government itself cannot come after you for civil debts that you owe including income taxes.

When a bankruptcy is filed, a legal fiction know as the bankruptcy estates is created and it is comprised of all the property that the debtor owned at the time of the filing of the case. The bankruptcy trustee is appointed by the United States Department of Justice is charged with administering the case and is given temporary control of the bankrupt estate.

There is a mandatory meeting that all debtors must attend and it is called the meeting of the creditors or the 341(a) hearing (since it is contained in Section 341a of the bankruptcy code) The bankruptcy trustee presides at this meeting which is held approximately 4 weeks after filing. If you fail to appear at the meeting of creditors, the court can and will dismiss your case. There is also a confirmation hearing in which the bankruptcy judge presides to review and approve the Plan.

Once the Plan is approved, monthly Plan payments are paid to the trustee who disburses this first to your attorney for attorney fees, then to secured and unsecured creditors in that order.

You are allowed to amend any documents to correct any information or to add creditors or assets that were omitted in the initial filing. Also, you are allowed a maximum of 15 days to file any of the initial documents (except for the Plan), that you failed to file at the commencement of the case. You have 30 days to after the start of the case to file the Plan. In any case, it is always advisable to consult the trustee as to the payment dates since the law imposes deadlines for starting the proposed plan payments even if a plan has not yet been confirmed.

The case is closed when the Plan period has run out or has been full implemented.

The Documents 

Chapter 13 bankruptcy is filed by preparing and submitting to the court, documents conforming substantially to the official Federal bankruptcy documents prescribe by the Federal Bankruptcy Rules. It consists of a petition, Schedules A to J , a creditor mailing list, various statements and the Chapter 13 Plan.

Bankruptcy forms are the same nationwide, so technically, a bankruptcy document set can be file in any state. In reality, that is not quite true and this is because of exemption laws. Exemption laws vary from state to state and determine what you are allowed to keep after filing bankruptcy.

There are many hundreds of laws to keep in mind and numerous calculations to perform and if you have never done this before, you have now way to know if what looks good to your eyes is actually what the court wants. You can save a few dollars typing the forms yourself or even using software but it is not worth it. To be on the safe side, you are best off hiring us to do everything for you.

The Trustee

The day to day functions of the trustee and the court depends on the type of bankruptcy that you file. For example, in Chapter 7 cases, the debtor never sees the judge or appears in a court room. His or her only contact with the government is usually one short meeting with the trustee that could last about one minute. In contrast, in a Chapter 11 case, the debtor is in continually contact with the court and the trustee and has to file many case reports. In a Chapter 13 case, the trustee conducts the meeting of the creditors and handles the Plan payments as well as other duties.

The principal role of the trustee is to act as the custodian of the bankrupt estate. What this means in lay person terms is that when you file bankruptcy, legal control to everything you own at the moment of filing is transferred by law to the trustee. Except for normal daily living or the day to day operation of a business, you cannot sell or transfer ownership of any property of the bankrupt estate until the case is closed. For most cases, you will need the authorization of the trustee in order to sell your house, boat or automobile. Since selling any of these mentioned property is not a regular occurrence for most individuals this power of the trustee will have little or no effect on your freedom during the process.

If you file a Chapter 13 bankruptcy, you will deal almost exclusively with the trustee. Before you panic, note that dealing with the trustee is easy and nothing to be nervous about. In most cases, you encounter the trustee only at the meeting of creditors and at the confirmation hearing.

The Judge 

The bankruptcy judge plays very little role in the process of a Chapter 13 case and that is because, as noted above, the process is mostly administrative in nature. The judge plays a significant role only when there are disputes between the debtor and others parties such as creditors or the trustee. If yours is a Chapter 13 case, except as noted above, you will meet the judge only at the confirmation hearing

For information on the structure of the bankruptcy law, click the details link below.

Get Details - Structure of Bankruptcy laws

Bankruptcy Alternatives, Consolidation & Counseling

There are alternatives to filing bankruptcy the most common of which are bill or debt consolidation wherein the debtor takes a loan to pay of the other debts, and debt counseling or management as it is often referred. In debt or credit counseling, the debtor makes one payment to the consolidation company which in turn disburses this money to the creditors according to a pre-negotiated arrangement. These alternatives usually do not succeed in avoiding bankruptcy if the debts are too much for the debtor. They merely prolong the agony and delay the inevitable bankruptcy. These alternatives do not deal with secured debts such as mortgages. On the other hand Chapter 13 bankruptcy is ideal for mortgage arrearages and is just as well called, mortgage bankruptcy since that is its main application.

Another alternative is legal insurance or pre-paid legal as it is called. Under this insurance, a person pays a monthly fee to an organization, in exchange for reduced legal fees, should the need arise. This type of insurance is suited to general business legal matters but not to specific areas such as bankruptcy. Even when a bankruptcy attorney participates in a pre-paid legal plan, the debtor often has other less costly ways to go about it than the pre-paid plan attorney.