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Frequently Asked Questions About Chapter 13

Deciding to file for bankruptcy is only the first answer to a long series of questions. In actuality, many questions remain, and the best way to make intelligent, informed answers to those questions is to have the help of experienced, knowledgeable bankruptcy counsel. When questions are answered promptly, correctly, and completely, a consumer can make the best decision as to his or her future, and work as a team with his or her lawyer. Chapter 13 cases are a lengthier, more involved process than chapter 7 cases, so it pays to have someone on your side who is equipped to resolve issues quickly and accurately.

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Q: How does a Chapter 13 bankruptcy case work?

A: Yes. A Chapter 7 case may be converted to a Chapter 13 case at the request of the debtor at any time before the case is closed, unless the case was converted previously from Chapter 13 to Chapter 7.

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A: Chapter 13 of the federal Bankruptcy Code allows a consumer to repay all or a majority of his or her debts through a payment plan approved by the Bankruptcy Court. When the plan is in place, creditors generally are prohibited from collecting debts directly from the debtor. Instead of paying his or her creditors directly, the debtor pays a certain amount every month to the Chapter 13 Trustee (there are some exceptions, such as some leases payments that are made directly to the lessor), and the Trustee distributes the money to the creditors, as provided in the Chapter 13 plan. When the last payment is made, the debtor is no longer liable for the remainder of his or her dischargeable debts.

Q: How long does it take to complete a Chapter 13 plan?

A: A Chapter 13 plan lasts for three or five years, depending on the amount of the debt, the ability to pay, and the specifics of the plan, unless all debts can be paid off in less time. Under certain circumstances, the court may approve a plan that lasts as long as five years.

Q: How is Chapter 13 different from Chapter 7 from the point of view of the debtor?

A: The essential difference between Chapter 7 and Chapter 13 is in the handling of the debtor's property. In a Chapter 7 case, all non-exempt property owned by the debtor is sold, and the proceeds used to pay as many of the debtor's debts as possible. In Chapter 13 cases, a debtor's income is applied towards payment of as many of the debtor's debts as possible. A Chapter 13 debtor typically retains more of his or her non-exempt property. Also, the discharge issued in a Chapter 13 case usually is broader than a Chapter 7 discharge, and will relieve the debtor of liability for several types of debts that are not discharged by a Chapter 7 case.

Q: Why would a debtor choose Chapter 13 over Chapter 7?

A: Chapter 13 is the preferred choice for a person who wishes to repay most or all of his or her unsecured debts, and whose income is sufficient to allow him or her to do so in a reasonable amount of time. In addition, if the debtor has a considerable amount of non-exempt property, or a lot of valuable exempt property used as security for debts, this property could be lost in a Chapter 7 case, and so a Chapter 13 may be the preferred option. Some other types of debtors who might opt for Chapter 13 over Chapter 7 are those whose debts might not be discharged under Chapter 7, and those with one or more large debts that may be discharged only under Chapter 13. Beginning in 2005 debtors must qualify for Chapter 7 by a financial means test, so that will be a factor that could loom large for many potential debtors facing this choice.

Q: What debts get paid by a Chapter 13 plan?

A: The plan may pay any and all debts of the debtor, including secured and unsecured debts, and even debts that are non-dischargeable, such as student loans and spousal and child support.

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Q: How much must the debtor pay to the trustee?

Q: May a debtor convert a Chapter 7 case to a Chapter 13 case?

Q: May a self-employed person file under Chapter 13?

Q: Who is the trustee?

Q: Should a married couple file a joint Chapter 13 petition?

A: The law says that all of a debtor's "disposable income" received during the time of the plan must be paid to the trustee. The law defines "disposable income" as all income earned or received by the debtor that is not reasonably needed for the support of the debtor and the debtor's dependents or domestic support obligations.

A: The trustee in a Chapter 13 case is someone who is appointed by the Bankruptcy Court to receive the regular payments from the debtor, distribute those payments to the creditors according to the Chapter 13 plan, and administer the bankruptcy case until it is closed. The debtor is always required to cooperate with the Chapter 13 trustee.

A: Yes. A self-employed person meeting the eligibility requirements may file under Chapter 13 and may continue to operate the business during the resolution of the bankruptcy case and the completion of the plan.

A: If both the husband and wife owe a significant amount of money, they may wish to file jointly under Chapter 13, even if only one of them has income. Otherwise, the non-filing spouse could still be liable on the unpaid debts.