How A Chapter 13 Bankruptcy Works
Regardless of the threats made by creditors, you have options regarding how you resolve your debt. If Chapter 7 doesn’t work for your financial situation, a Chapter 13 bankruptcy can help by placing you in control of many elements of your debts. The law offices of Advanced Bankruptcy Legal Services of Connecticut can show you how. Contact our firm now to schedule a free initial consultation.
Chapter 13 bankruptcy allows you to deal with your debts on much more favorable terms than your creditors are likely to offer. It can allow you to:
- Stop foreclosure on a home mortgage
- Keep your car and other assets from being repossessed
- Set up a repayment plan that works for you
- Satisfy income tax obligations without paying interest or penalties
To protect your interests, you need an attorney who knows how to properly implement a Chapter 13 bankruptcy. Our firm has helped numerous people in Hartford, Bloomfield and throughout Connecticut resolve their debts favorably. We understand debtor-creditor law and how to make it work for you.
An Overview Of Chapter 13 Bankruptcy
Chapter 13 of Title 11 of the United States Bankruptcy Code is known as Adjustment of Debts of an Individual With Regular Income. The concept behind Chapter 13 is to provide a bankruptcy court forum to individuals who can then restructure debts and receive a discharge after providing a payment plan to creditors that lasts for either 36 or 60 months, depending on one’s income. If the petitioner’s gross income is above the calculated median income in the state of Connecticut for the same household size, then the plan goes into effect for 60 months. If the income is below the median income, the plan term is reduced to 36 months.
Not all debts have to be paid in Chapter 13 by the petitioner. Creditor claims are categorized into three groups, with each group having certain rights to payments and also being subject to having its claims modified or restructured in accordance with the bankruptcy laws. The three groups are as follows:
1. Secured creditors: Known as “lien creditors,” such as holders of mortgages against real property, and including liens against automobiles of all kinds, motorcycles, ATVs, furniture and other large-ticket items bought on credit and financed by a retail merchant or finance company
2. Priority creditors: Known as unsecured creditors but whose debts are given a “special status” in bankruptcy in that the debts can’t be discharged and must be paid back in full, without interest, in a Chapter 13 during the term of the plan.
3. General unsecured creditors: Known as “non-priority” unsecured creditors, which include all other creditors whose claims don’t belong in the first two groups. It is these creditors whose claims can be discharged or paid in whole or in part, depending on the petitioner’s ability to pay or how much asset value would be distributed to these claims by a trustee in a hypothetical Chapter 7 liquidation case.
The Participants Of A Chapter 13 Case
- The bankruptcy trustee
- The debtor, who is the petitioner or client
- The holders of claims, which are the creditors
- The bankruptcy judge
- The Office of the United States Trustee in New Haven
A case is commenced by the filing of a petition accompanied by schedules, a means test, declarations, statements and, of course, the plan. About 30 days after filing, the attorney and the petitioner must attend a first meeting of creditors held in Hartford, New Haven or Bridgeport bankruptcy court, depending on which town is the petitioner’s city of residence. The meeting is conducted by the trustee or their attorney, and the petitioner is examined based on all the information disclosed in the filed schedules, the plan and the means test. The focus on the meeting is to provide all creditors with an opportunity to appear and be heard and to allow the trustee to analyze the feasibility of the petitioner’s plan and the chances for successful completion of the plan payments.
Creditors participate more fully in the process by submitting a written Proof of Claims to the court evidencing the amount of the claim and the terms of repayment. The petitioner and the attorney rely on the filing of the Proof of Claims in order to draft the plan of repayment and calculate the amounts due to each claim holder so that the plan can be funded correctly. Further, creditors can file motions with the court to contest the case or challenge the right of the petitioner to do what is being proposed in the plan.
The trustee is the person who administers the case for the term of the plan and the person who actually disburses the plan money to the holders of approved claims. The petitioner sends in money to the federal bank account held by the trustee, known as the “lock box,” which holds all the money for the trustee and the petitioner. The money can’t be released until such time as the Bankruptcy Court judge approves the plan and authorizes the plan payments. Prior to the court’s approval of the plan, all money is held by the trustee and is sent in by the client directly to the lock box. After the court approves the plan, the judge will order that future plan payments be sent to the lock box by way of a wage deduction or “voluntary payroll deduction.” If the client is not a wage earner or receives income from fixed benefits of some kind and there is no “employer” who pays the client, then, in those cases, the client will be allowed to continue sending monthly payments directly to the lock box for the duration of the plan.
The hearing before the court, when the judge determines whether to approve the plan, is known as the confirmation hearing. This hearing is usually held about six months after the case is filed. The clients don’t have to attend the hearing but are encouraged to do so if they can take the time off from work. If the judge approves the plan, then all parties are bound by it for the term of the plan. If the judge doesn’t approve it, then the attorney may submit an amended plan for further judicial review and consideration and, ultimately, approval.
As the plan is paid over the 36- or 60-month term, events may arise that necessitate the attorney, on behalf of the petitioner, to file motions to amend the plan, seek to convert the case to Chapter 7 or simply dismiss the case. Post-confirmation changes in the client’s financial status may render the confirmed plan no longer feasible and payments no longer able to be made. The client must then come into the office to discuss the changes, and the attorney will make whatever recommendations that are necessary to address the situation. Chapter 13 cases are voluntary plans, so the client can decide to withdraw (dismiss) the case whenever they believe that it is no longer in their best interests to remain in Chapter 13.
Once the client finishes the plan, the trustee reports this fact to the court and files a report detailing the payments made to all creditors and requests that the case be closed and the discharge enter. The client must then submit a request for discharge filed with the court. The court will enter the discharge and likewise order that the “voluntary wage deduction” cease and that any unused funds held by the trustee that were not paid out to creditors be immediately returned to the client.
Once the case is closed and the discharge enters, the petitioner should check their credit report to see if the discharge was accurately noted on the credit report. Failure to note the discharge will delay the ability of the client to rehabilitate their FICO score promptly to the fullest extent allowed.
Attorney’s fees charged by the attorney differ from case to case, but all fees charged must be approved by the court. Fees paid both before and after the case commences are all subject to Bankruptcy Court approval. Should the client not be able to pay the attorney fees requested in full in advance of filing the case, the attorney and the client can agree to put some or all of the retainer fee in the plan. Also, should the court award the attorney additional fees beyond those paid initially prior to filing the case, then those fees will likewise be put into the plan and paid over to the attorney by the trustee over the term of the plan as ordered by the court as an administrative expense “priority” (see remarks on creditor groups above). Clients also have to pay a court filing fee and generally bear the cost of obtaining any and all appraisals needed to correctly value real property and items of personal property that have collector value.
Finally, it must be understood by the client that the trustee does earn and receive compensation for acting as the disbursing agent for the court and the petitioner. This compensation is known as the trustee commission, and it is a percentage of the total amount of the money paid to the creditors as the plan is approved by the court. The commission comes off the top of the money contributed by the client prior to the funds being disbursed to the holders of allowed claims that will be paid by the debtor’s plan. The percentage rate for the commission earned varies but cannot exceed 10%.