Chapter 13 Bankruptcy FAQs

These are some of the common questions regarding Chapter 13 Bankruptcy. Just click on the question for the answer. If you cannot find the answers you need below, or have a new question you think might be helpful to others, please contact us for additional help.  – Robert C. Russell

How does Chapter 13 normally work? (Short Version)

In Chapter 13 you make payments to a trustee over 36-60 months. You do not have to pay back all of your creditors; you just do the best you can. However, if you want to keep a financed house or car, you will have to pay these creditors. You send the money to the trustee and the trustee sends it to your creditors based on the terms of your approved Chapter 13 “Plan”. Generally, at the end of making payments, the debtor receives a discharge of any debt not repaid through the Chapter 13 process.

How does Chapter 13 normally work? (Longer Version)

Chapter 13 is part of federal law that protects a person while they attempt to repay some or all of their debts over a period of time.  A person who files under Chapter 13 is called a “debtor.” Generally, a debtor does NOT have to pay all his/her debts in Chapter 13; debtors generally just have to do the best they can based on their assets, income and reasonable expenses. In a Chapter 13 case, the debtor submits to the Court a “Plan” for paying some or all of the debtor’s debts over a period of three years to five years. The debtor’s payments are generally based on the debtor’s income and reasonable expenses. Once the payment is determined, the debtor makes the monthly payment for the length of the plan. During the period of the plan, debtors continue to pay their own living expenses. During the plan period, the plan payments are paid to a person called the “Chapter 13 Trustee.” The Trustee collects the money, takes a small fee, and distributes the balance to creditors as indicated in the approved Plan. In our jurisdiction, we are blessed with a Chapter 13 Trustee that is very reasonable and easy to work with. The Chapter 13 Plan is complete when the debtor makes all the payments required under the plan. When that happens, with only a few exceptions, the debtor is no longer personally obligated (or is “discharged”) on any balance left on any debts not paid in full through the plan.Generally, obtaining a discharge is one of the major reasons why people file for Chapter 13 relief. A Discharge Order is an actual Order of the Bankruptcy Court that, when entered, releases a debtor from the personal obligation to repay the debtor’s discharged debts. The Discharge Order also orders creditors to not attempt to collect on a debt that has been discharged.

It’s also worth noting that a Chapter 13 bankruptcy can be filed even when a debtor is not entitled to a discharge. In that case, the Chapter 13 can help the debtor manage and pay certain debts. For example, a Chapter 13 can still be filed to help a debtor get caught up on mortgage arrears and stop foreclosure, and pay non-dischargeable debts such as certain taxes.

What is a Chapter 13 Discharge?

Generally, obtaining a discharge is one of the major reasons why people file for Chapter 13 relief. A Discharge Order is an Order of the Bankruptcy Court that releases a debtor from the personal obligation to repay the debtor’s discharged debts. The Discharge Order also provides that creditors may not collect on a debt that has been discharged.

What do I need to bring to the Chapter 13 341 Meeting?

You need to bring picture ID such as a Driver’s License and proof of your Social Security number such as a Social Security Card, an IRS Form W2 or 1099, or anything else that you did not create that shows your full and accurate SSN. Prior to the 341 Meeting, the trustee should have been provided with a bank statement showing your balance as of the date of filing. Trustee’s may also request additional documents. Normally, all you have to bring is the picture ID and proof of SSN.

How much does a Chapter 13 bankruptcy cost?

The filing fee is presently $310 to file a Chapter 13. The court sets the original attorney fee at $3,500 in this jurisdiction. Different law firms will require different amounts up front to file a Chapter 13. At the Robert Russell Law Group, you do NOT need to pay this up front in order to file a Chapter 13. In fact, in a lot of circumstances, we simply need you to you pay the $310 filing fee. If a different law office tells you the Chapter 13 attorney fees are less than $3,500, they are likely telling you that the amount they require to be paid up front is less than $3,500. Their full original attorney fee is likely the standard and court set $3,500.

Who is eligible to file for Chapter 13 bankruptcy?

In order to qualify for Chapter 13 relief, you must:

(a) be an individual or married couple [corporations and LLC’s cannot file Chapter 13];

(b) be presently making “regular income” from wages, pensions, unemployment, self-employment business income, or some other regular source;

(c) owe less than about $360,475 in unsecured debt (as of 2013);

(d) owe less than about $1,081,400 in secured debt (as of 2013); and

(e) be able to make the necessary monthly plan payment (see below).[/expand]

When am I protected from my creditors?

Unless you have filed two Chapter 13 cases that were dismissed in the year prior to filing, you are protected immediately upon filing. The filing of a Chapter 13 case automatically stays (or stops) virtually all collection and other legal proceedings that have been filed against the debtor. A few days after a Chapter 13 case is filed, the Court will mail a notice to all creditors ordering them to refrain from any further action against the debtor. If the debtor cannot wait this long, it is permissible for the debtor to notify one or more of the creditors of the filing of the case. Any creditor who intentionally violates this Court order may be liable to the debtor for damages. The most common actions not affected by the filing of a Chapter 13 case are criminal proceedings.

Do I have to pay off all my debts in a Chapter 13 bankruptcy?

No. Generally, in a Chapter 13 only a few important (“priority”) debts must be paid in full. Those debts include the balances due on recent taxes, mortgage arrears for retained homes, secured claims for things such as retained cars, and administrative fees such as Chapter 13 attorney and Trustee fees. Your other creditors receive only the money that is left over after the above important creditors are paid in full. Generally, at the end of your Chapter 13 Plan, you will be relieved from any legal obligation to pay any remaining balance due on creditor’s claim.

Do my creditors have to agree to the plan?

No. Unlike most non-bankruptcy options, such a consumer credit counseling services, creditors do not have to agree to the terms of your plan. The Court is the only entity that has to approve the plan. And, generally, as long as you are paying as much as you reasonably can, your plan will be approved – even if your creditors are not getting paid in full or otherwise don’t like it.

What debts are released under a Chapter 13 bankruptcy?

Although a debtor is generally protected during the plan from these debts, the Chapter 13 discharge does not release a debtor from debts including, but not limited to, the following:

(a) debts that are paid directly by the debts outside of the Plan, including mortgages,

(b) debts for alimony, maintenance, or support,

(c) installment debts whose last payment is due after the completion of payments under the Plan (e.g. second mortgages on retained property),

(d) debts incurred during the Chapter 13 that were not paid under the Plan,

(e) debts for restitution included in a criminal sentence imposed on the debtor,

(f) debts for criminal traffic fines (such as Driving While Suspended),

(g) debts for death or personal injury caused by the debtor’s operation of a motor vehicle while unlawfully intoxicated, and

(f) debts that qualify as a student loan.

How much will my plan payments be?

Generally, your payment is usually only what you can reasonably afford. In most situations, your payment is that amount you have left over from your paycheck after you pay your basic living expenses such as rent, food, transportation, utilities, recreation, etc. Your monthly Chapter 13 Plan payment is generally based on three different factors: (1) your income and reasonable expenses, (2) the amount and type of debt you must pay during the plan, and (3) the dollar value of your non-exempt assets. Again, because you do not generally have to pay all your creditors in full, your payment in a Chapter 13 is usually far less than it would be if you tried to pay all of your creditors directly yourself or through a consumer credit counseling service.

When are my plan payments due?

Your first Chapter 13 Plan payment must be received by the Chapter 13 Trustee on the 30th day following your date of filing. Payments thereafter are due at the same time each month.

How long is a Chapter 13 Plan?

A Chapter 13 Plan usually lasts between three and five years. If your income in the six months prior to filing was above average (“above median” for your household size), your plan will normally be five years. If your income in the six months prior to filing was below average (“below median” for your household size), your plan minimum length is three years, but you can extend as needed up to five years. Of course, you can end a plan at any time if you have paid all of your creditors.

What if I am temporarily unable to make the payments?

If the debtor is temporarily out of work, injured, or otherwise unable to make the payments required under the Chapter 13 Plan, the Court may suspend the payments for a short while until the debtor is able to resume the payments. If that happens, the plan is normally extended for the debtor to make up the missed payments. If a debtor is unable to make the payments for an extended period, the case may be dismissed, or the debtor may be able to modify the payment schedule or convert the case to a Chapter 7.

How is a Chapter 13 bankruptcy different from Chapter 7?

There are several major differences between the two. Only a few of them are outlined here. Basically, both provide protection from creditors on the date of filing and result in a discharge of debt when completed. However, how you get there is completely different. Several key differences are as follows:

1. A Chapter 7 lasts about three months, where a Chapter 13 can last between 36 and 60 months.

2. A Chapter 13 will provide a plan to pay for a financed car, mortgage arrears, taxes and other debts. A Chapter 7 just highlights what debts are discharged and you are left to make a plan to pay any debts that are not discharged or you want to keep such as a car or home loan.

3. The debts discharged in Chapter 13 are about the same as those in a Chapter 7. One big difference is that divorce property settlements are discharged in 13 and not 7.

Why choose a Chapter 13 bankruptcy over a Chapter 7?

Chapter 13 is usually better than a Chapter 7 for the debtor who:

(a) has the ability to repay all of his/her creditors, but just needs a little more time or a lower payment than the creditors are willing to accept;

(b) needs more time than the creditor is willing to give to get caught up on mortgage arrears and/or car payments;

(c) owns a home with a second mortgage and more is owed on the first mortgage than the home is worth (in which case you can “disconnect” the second mortgage!);

(d) owes a lot more on a car (purchased more than 910 days prior to filing) than the car is worth;

(e) has non-exempt assets that would be lost to the Trustee if a Chapter 7 were filed;

(f) has one or more substantial debts that would possibly not be discharged under Chapter 7 (such as a recent tax debt); or

(g) is not eligible for a discharge under Chapter 7 because of a previous bankruptcy filing or for some other reason.

Will I lose my property in a Chapter 13 bankruptcy?

Usually not. Under Chapter 13, debts are normally paid out of the payments made to the Chapter 13 Trustee, and not out of the debtor’s property. If the debtor has considerable nonexempt property, however, and cannot make sufficient payments to pay enough of debts to satisfy the Court, some of the debtor’s property may have to be used to pay creditors, but that is very rare. Also, if a secured creditor is not being paid under the Plan, the secured creditor may be permitted to repossess the property securing the claim if the debt owed is not paid.

Also, you must list all claims you have against any one or any entity – even if you have not filed a lawsuit or received any money for the claim.  For example, if you have a claim against someone for an auto accident injury, you MUST list the claim for injuries as an asset in your bankruptcy or you may be FOREVER PROHIBITED from getting paid on the claim. If you do not list the asset, you might never collect even one dollar on the claim. If you have a million dollar claim, you will lose the million-dollar claim if you do not list it in your bankruptcy!

How will a Chapter 13 bankruptcy affect my credit?

A Chapter 13 bankruptcy is typically noted on your credit report for 7 years. The debts listed in your bankruptcy should be noted on your credit report as “zero balance due” and/or “included in bankruptcy.” However, filing bankruptcy does NOT mean that your credit is ruined for 7 years. If you really need to file for bankruptcy protection, that means not filing could lead to lawsuits, judgments, garnishments and other things that would negatively impact your credit and life for a period far longer than 7 years. For instance, in Washington, judgments are reported for ten years and can be renewed under certain circumstances for another ten years.

Who will know I filed for bankruptcy?

Bankruptcy is a matter of public record. However, generally, it is not publicized beyond notice to your creditors and co-debtors. Employers and newspapers are NOT generally notified of the bankruptcy.

Is bankruptcy immoral? Am I just taking the easy way out?

Some people argue that filing bankruptcy is taking the easy way out. I suppose that it could be the easy way out if you never tried any other way to pay your debts. However, most people try their best to avoid bankruptcy. Some people even sacrifice their health and relationships in an effort to pay bills that are beyond their ability to pay. Bankruptcy is a gut-wrenching experience that most people try very hard to avoid.

Also, bankruptcy is a legal remedy made available by the United States Constitution. It was recognized by our Founding Fathers that there are certain circumstances where a person or family simply needs relief from their debts. And bankruptcy relief is only available to people that actually qualify for assistance.

Is it wrong to file bankruptcy? No, not if you need the help. You should not be forced into virtual life-long slavery to your creditors because either you had a medical emergency, loss of employment, or even made bad financial decisions. Bankruptcy is rarely a first choice. But sometimes it is simply the best choice, all options considered.

Will I have to go to court?

A debtor does not generally go to court. However, there is as administrative hearing called a Meeting of Creditors or 341 Meeting that occurs about 20-40 days after the case is filed. At this hearing, the Chapter 13 Trustee places the debtor under oath and asks questions about the debtor’s money, property, and debts. Generally, a debtor’s creditors do not attend this hearing. However, if one does, the Trustee will give the creditor only a few minutes to ask a few quick questions. Most 341 Meetings take only 5-10 minutes.

How can I get in trouble in my Chapter 13 bankruptcy?

The following people should expect problems in bankruptcy:

(a) Persons who conceal, transfer, or destroy their property with the intent to defraud their creditors or the Trustee in the Chapter 7 case.

(b) Persons who conceal, destroy, or falsify records of their financial condition or business transactions.

(c) Persons who make false statements or claims in their Chapter 7 case, or who withhold recorded information from the Trustee in the case.

(d) Persons who fail to satisfactorily explain any loss or deficiency of their assets.

(e) Persons who refuse to answer questions or obey orders of the Bankruptcy Court, either in their case or in the case of a relative, business associate, or corporation.

(f) Persons who have engaged pre-filing activity with intent to defraud creditors.

Does a Chapter 13 debtor have to file all of his/her tax returns to qualify for Chapter 13?

The Bankruptcy Code requires that to the extent that a debtor is required to file returns that: (1) the debtor shall file with appropriate tax authorities all tax returns for all taxable periods ending during the 4-year period ending on the date of the filing of the petition, and (2) the required returns must be filed no later than 120 days after the initial 341 Meeting date. 11 USC § 1308. In short, the debtor must file at least the last four years’ tax returns and do so no later than 120 days after filing.

How will a Chapter 13 bankruptcy affect my credit?

Chapter 7 and Chapter 13 bankruptcies can be listed on a credit report for 10 years from the date of filing.  However, the three primary consumer credit reporting companies will remove a Chapter 13 bankruptcy from your credit report after 7 years.   The law allows them to leave it on the credit report for up to 10 years.  But they chose to remove a Chapter 13 bankruptcy after seven years as an incentive to consumers to file a Chapter 13 (instead Chapter 7) and attempt to repay their creditors as best they can.     A person with financial problems might consider avoiding bankruptcy because of the potential impact on their credit report.  However, sometimes a score/rating will go UP  after a case is filed.  Second, in Washington State a judgment is good for 10 years and can reported for 10 years.  A judgment can also be renewed for another 10 years.   So, a judgment for a bad debt could be listed for up to TWENTY years — and the consumer might still owe the debt!   A judgment unpaid also allows the creditor to garnish wages and bank accounts, and engage in other collection activities.  The point:   Sometimes not filing a bankruptcy can be far worse than filing a bankruptcy, both for your credit report and the impact on a consumer’s daily life.