So much is written and put out on the internet about the “Individual Repayment” option contained in the Bankruptcy Code under Chapter 13 that it probably is not surprising that much of it is either skewed for one reason or another – or is outright misinformation. This article includes some of the fairly constant refrains we as bankruptcy lawyers hear from clients to explain their hesitancy to consider Chapter 13. It is further an attempt to clarify and/or reassure individuals who may be considering Chapter 13 or desperately need its enhanced protections under the Bankruptcy Code.
- All my debts have to be repaid
No. There is no requirement in the Bankruptcy Code for full repayment of debts
because of a Chapter 13 filing. Often, there is little or even zero paid to general unsecured (i.e.
credit cards) in a 13 filing. The amount of the plan payment in a Chapter 13 depends on
numerous factors, including the value of your assets and what they would derive after
exemptions in a hypothetical Chapter 7 analysis; the amount of monthly disposable income based
on the so-called “means test; and the existence or absence of priority debts such as tax
- I will lose my house in 13
No. Quite to the contrary, a Chapter 13 is often utilized to save one’s home by
providing a three to five year period to repay mortgage arrears. As long as the mortgage is paid
current or provided for in the Chapter 13 plan, the house is secure. Sometimes, a second
mortgage can even be eliminated in Chapter 13 through what is called a “strip off” procedure.
- The creditors have to approve my Chapter 13 plan
No. As long a the criteria of the Bankruptcy Code for Chapter 13 plans are met, the
creditors cannot prevent a proposed Chapter 13 plan from being confirmed by the Bankruptcy
Court. While secured (i.e. mortgages or car loans) creditors can object if the plan does not
properly address their claims, the ultimate decision rests with the Bankruptcy Judge based solely
on the requirements of the Bankruptcy Code.
- My credit is destroyed worse than Chapter 7
No. A bankruptcy – irrespective of which chapter – is on your credit rating for ten
years following the date of the initial filing. While the bankruptcy “Discharge” is held in
Chapter 13 until completion of the plan payments, the credit reporting runs from the date of
filing. Furthermore, there are opportunities for additional credit even while in Chapter 13,
although Court approval may be required for any substantial credit application.
- I can’t afford to file Chapter 13
Misleading. The ultimate legal fee cost of a Chapter 13 is higher because of the
substantially increased work and time to process a Chapter 13 plan, but most attorneys will
permit a good portion of those fees to be paid by the Bankruptcy Trustee from your Chapter 13
payments over the 3-5 year plan. Often, one pays less up front to file a Chapter 13 than a 7.
- I can’t sell my house for five years
No. You can sell your house at any time. There are some added hoops because of the
Chapter 13 as the Bankruptcy Court must ensure that your proceeds are distributed consistent
with the Chapter 13 plan and that any professional working on your behalf is approved, but these
are minor procedural issues and only in the rarest of circumstances would they actually prevent
an actual sale.
- After my payments, I won’t have enough money
Misleading. As noted above, payments are determined on numerous factors. The
concept of Chapter 13 is to pay to creditors the extra left-over monthly disposable income for the
duration of the plan – but if that number is too high, a Chapter 7 Trustee would object anyway
that the bankruptcy filing is an abuse of the Bankruptcy Code. While fairly convoluted, there are
formulas that will match expense guidelines and normal monthly expenses in determining what
amount, if any, needs to be paid over to the Trustee for creditors. Most often, the expenses
allowed are reasonable enough to cover all traditional expenses with even a little left over for
miscellaneous or recreational expenses.
- The Bankruptcy Trustee will oversee my life
No. The Trustee is not interfering with your everyday life. There will be a plan
established and approved in the beginning, and as long as the payments are faithfully made, it is
most unlikely you will have any further dealing with the Bankruptcy Trustee in your plan. Only
in cases where there are substantial change of circumstances along the way is there any real
likelihood of additional Trustee scrutiny.
- I am married to this plan for five years
No. One of the benefits of Chapter 13 is the easy ability to dismiss the bankruptcy
filing if things change down the road. This right is protected in the Bankruptcy Code, absent
fraudulent conduct. Furthermore, the Chapter 13 plan can be modified along the way if
necessary or the case can even be converted to Chapter 7 if necessary.
- Most people don’t qualify for Chapter 13 anyway
Misleading. There are in fact debt limits to qualify for Chapter 13, but there are fairly
high and only disqualify individuals in unusual circumstances. As of 4/1/16, the debt limit for
unsecured debts will be $ 394,725 and for secured debts will be $ 1,184,200. As long as you are
an individual below the above limits, with regular income (even if from pension or social
security and sometimes can even be by way of additional household contributions), and you have
not had a prior bankruptcy discharge in four (4) years, you will qualify for filing 13.
- It’s too complicated to file a Chapter 13
Misleading. Without question, a Chapter 13 involves substantially more paperwork
and raises fairly complex legal issues so it is exceedingly difficult to file a successful Chapter 13
plan without an experiences bankruptcy lawyer. However, if the attorney has experience in this
area of the law, he or she will know the law, the judicial practices in your particular vicinage and
be able to successfully navigate the plan through conclusion.
- There is too much paperwork required for Chapter 13
Misleading. The paperwork is not substantially greater than what an experienced
bankruptcy attorney would need to properly prepare a Chapter 7 petition. The issue that can be
problematic is if the income is not verifiable as the Chapter 13 Trustee will insist on proving the
monthly disposable income both as to ensure the feasibility of the Chapter 13 plan and that it
conforms to the requirements of the Bankruptcy Code.
- Chapter 13 is just a way for lawyers to charge more
No. Chapter 13 has tremendous benefits (many of which are not available in Chapter
7) and can be a life saver for many people. No reputable attorney, however would
indiscriminately recommend a three to five year payment plan in Chapter 13 if not based on solid
legal benefits obtained under these particular provisions of the Bankruptcy Code. The best way
to ensure the best result for you and that it is fact necessary is to simply ask why a Chapter 13 is
suggested and what are the specific legal reasons for that advice. Counsel should have no
difficulty making that list for you.