This is the third of a series of articles the author is writing concerning substantive and procedural issues pertaining to individual debtor(s) filing for relief under Chapters 7 and 13 of the U.S. Bankruptcy Code. Prior articles have focused on substantive and procedural issues pertaining to individuals filing Chapter 7 petitions; this article will focus on the substantive issues and process pertaining to individuals filing for relief under Chapter 13 of the U.S. Bankruptcy Code.

As indicated in earlier articles, unsecured debts (not procured through fraud or the willful misconduct of debtors) are fully dischargeable by individuals filing for relief under Chapter 7; however, secured debts are not dischargeable under Chapter 7 (or Chapter 13 for that matter). Secured creditors maintain their rights to collect all monies owed to them after The Bankruptcy Court's issuance of its final decree/discharge order in a Chapter 7 case or, in certain circumstances, during the Chapter 7 proceeding. However, debtor(s) can payoff arrearages (past due balances) owed to secured creditors over a three to five year period by filing for relief under Chapter 13. Debtor(s) must submit a Chapter 13 plan to The Bankruptcy Court which provides for the full payment of all arrearages owed to secured creditors unless the amount of the arrearages owed is greater than the fair market value of the debtor(s)' personal property securing the debt.

In the overwhelming majority of cases, Chapter 13 petitions are filed in order to give the debtor(s) time to catch up on arrearages owed on their mortgage(s). As long as the debtor(s)' petition indicates that the debtor(s) has sufficient disposable income to allow him/her to payoff the arrearages over a three to five year period, the debtor(s) Chapter 13 plan will be confirmed by The Bankruptcy Court. It is important for debtor(s) to realize that after filing a Chapter 13 petition they will still have to make their regular monthly payments directly to their mortgage company (and/or all other secured lien holders) as they become due. Interest typically does not accrue on the arrearages owed to secured creditors during the length of the Chapter 13 Plan.

By way of example, if a debtor is $10,000.00 in arrears on their mortgage, the debtor will be able to pay the $10,000.00 to his/her secured creditor through a five year Chapter 13 plan, but the regular mortgage payment must be submitted to the mortgage company beginning on the first day of the month following the debtor(s) filing a Chapter 13 petition. If the debtor(s) fails to submit his Chapter 13 installment plan payments to the Chapter 13 Trustee, the Trustee will file a motion to dismiss the debtor(s)' Chapter 13 petition; likewise, if the debtor fails to make his/her regular monthly mortgage payments to the mortgage company after filing a Chapter 13 petition, the mortgage company will likely file a motion with the U.S. Bankruptcy Court to lift the automatic stay. Upon filing a bankruptcy petition the stay immediately prevents the continuation of all legal actions against debtor(s), including state foreclosure proceedings; the stay goes into effect as soon as the debtor(s)' petition is filed. If a creditor is able to procure an Order lifting the automatic stay, the creditor would then be able to either commence or continue prosecuting any legal action previously filed against the debtor(s), including a foreclosure action against the debtor(s)' real property.

In order for a Chapter 13 plan to be approved by the Bankruptcy Court, the debtor(s)' unsecured creditors must receive at least the same amount of money they would have received had the debtor(s) filed a Chapter 7 petition; e.g. if the debtor has $10,000.00 in non-exempt assets and $50,000.00 of unsecured debt, the debtor(s) Chapter 13 plan must provide for unsecured creditors to receive at least 20% of the balances owed to them through the debtor(s)' Chapter 13 plan. By way of another example, if all of the debtor(s)' assets fall under the exemptions allotted by ' 522 of the U.S. Bankruptcy Code and the debtors satisfy the means test under the new Bankruptcy Code, the debtor(s) Chapter 13 plan does not have to provide for any recovery to the debtor(s) unsecured creditors. Typically, however, a Chapter 13 plan will provide anywhere from a 10% to a 100% recovery to the debtor(s)' unsecured creditors, depending on the debtor(s)' disposable monthly income listed in his/her petition and whether or not the satisfy the means test under the new Bankruptcy Code. (The Bankruptcy Code ’ s means test is performed in order to determine if potential debtors/clients must file a chapter 13 as opposed to a chapter 7 petition, the means test requirements fall beyond the scope of this article. All potential debtors/clients should speak to the undersigned or another experienced bankruptcy attorney concerning the Bankruptcy Codes means test requirements.

The bankruptcy process for a Chapter 13 case is essentially the same as that for a Chapter 7 case. The major exception is that, subsequent to the 341(a) Hearing, the Bankruptcy Court schedules a Confirmation Hearing to take place approximately three to four months after the 341(a) Hearing. The Confirmation Hearing is usually a perfunctory one which the debtor(s) do not have to attend; the purpose of the hearing is for the Trustee to make sure that the Chapter 13 installment payment plan is both fair to the debtor(s)' creditors and feasible (one which the debtor(s) will be able to complete, at least on paper). Discrepancies, if any, between the amounts that debtor(s) believe they owe to their creditors and the amounts claimed by creditors, are usually worked out amicably at the Confirmation Hearing by the Trustee and the debtor(s)' attorney. Of course, the discharge order will not be issued by the Bankruptcy Court until after the completion of the Chapter 13 plan. The debtor(s), however, can pay off the entire amount of their Chapter 13 plan in full at any time subsequent to the debtor(s)' plan being confirmed at the Confirmation Hearing.

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