What You Need to Know About Bankruptcy (Part 3): Chapter 13
As we discussed in Part 1, Chapter 13 Bankruptcy is commonly referred to as the “Wage Earner Plan.” This is because it is mostly designed for wage earners and small businesses that are not incorporated, such as sole proprietorships and partnerships. Many subcontractors fall into this category of bankruptcy. The main goal of this chapter is to deal with the readjustment of an individual’s debts.
Debtor’s ResponsibilitiesLike other chapters in bankruptcy, the first step is for the debtor to file a petition with the Bankruptcy Court. The difference between Chapter 13 and Chapter 11 is that in Chapter 13, the debtor must file a budget at the same time as the initial petition. The debtor is not given the 120-day period to turn in a plan as is true with Chapter 11 proceedings. The budget should outline the debtor’s monthly living expenses and point out any extra or disposable income.
The Bankruptcy Court will appoint a Chapter 13 trustee who will work with the debtor and oversee his or her finances and budget. Any amount of disposable income is paid directly to the trustee, who takes a commission, and then distributes the rest of the funds to the debtor’s creditors.
Normally the debtor is given a three-year schedule in which to pay back the debts, but he or she may petition to have the time extended to five years. Obtaining such an extension is fairly common.
Chapter 13 proceedings require the debtor to meet a good faith requirement. The court-appointed trustee will review the debtor’s budget to determine if it is reasonable. If it is determined by the trustee that the budget is unreasonable, the trustee may recommend that the petition be either dismissed altogether or changed to a Chapter 7 proceeding in which all of the debtor’s assets are liquidated and the proceeds are distributed to the creditors.
Once the debtor has filed for Chapter 13 bankruptcy, a meeting of all the creditors will be scheduled. The debtor should be sure to have made his first payment either before the creditors’ meeting or at the meeting. If the “first money,” as it is called, is not paid at or before this meeting, it will demonstrate a lack of commitment on the part of the debtor to repay the money he or she owes to the creditors. Such a failure may result in the trustee making a motion to the court to convert the proceeding to a Chapter 7 proceeding. If the court were to grant such a motion, then all of the debtor’s assets would be liquidated and the proceeds from the sales would be distributed among the creditors.
One thing that debtors should consider before attempting to file a Chapter 13 petition is the debt ceiling. You should check with an attorney in your area to find out what the limits on debt, both secured and unsecured, are for your jurisdiction. If your debt exceeds the debt ceilings as set forth in your area, you should consider filing under another bankruptcy chapter.
Creditor’s ResponsibilitiesIn Chapter 13, as with other bankruptcy chapters, once the debtor files the petition and plan, there is an automatic stay that prevents creditors from attempting to recover any monies or secure any liens on the debtor’s property.
Once the debtor files under Chapter 13 there will be a “341 Meeting of Creditors.” The court will send out a notice to all the creditors about the meeting including time and place. In Chapter 13 proceedings, the meeting is usually confirmed within days and the creditor is given very little time to investigate or do research into the situation. The meeting is conducted by the trustee and is a good time for creditors to ask general questions about the repayment schedule and other simple, informal questions. If the creditor wishes to examine the debtor more thoroughly, he or she must do so in a deposition or a more formal setting.
It is an excellent idea for a creditor to file a proof of claim. Such a proof of claim should include information about the claim and have attached copies of security agreements, deeds of trust or other written evidence of the debt. The deadline for filing is 90 days after the first date set for the 341 Creditors Meeting. Proofs of claim should generally be filed with the trustee and not the bankruptcy court.
The ins and outs of filing for bankruptcy can be confusing, even to an experienced attorney. If you are considering filing for bankruptcy or you are doing business with someone who has filed for bankruptcy, the best course of action is to consult an attorney familiar with bankruptcy laws for guidance. The information contained in this article should not be construed or relied upon as legal advice.