Chapter 13 Bankruptcy in Michigan
Chapter 13 in a nutshell is a repayment plan where you pay a percentage of your debt based on what you can afford.
Chapter 13 differs from Chapter 7 in a couple of ways and does have some advantages over Chapter 7. Chapter 13 is a reorganization type of bankruptcy in which you "the debtor" in the bankruptcy propose a 3 to 5 year repayment plan whereby you classify your creditors into various priorities and pay them according to how they rank, with the unsecured creditors, such as credit cards and medical bills being paid only a percentage of the debt you owe them, based on what you can afford. The advantages to filing a Chapter 13 include:
1. What is chapter 13 and how does it work?
Chapter 13, also called a "reorganization" Bankruptcy is part of the US Bankruptcy code whereby a person or married couple proposes a voluntary repayment plan to repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court. The Bankruptcy Code is part of the federal laws of the United States that deal with bankruptcy and is actually provided for in the US Constitution that only the Federal Government can propose laws regarding bankruptcy. Think of a Chapter 13 like a mini Chapter 11 that a large company like GM or Chrysler filed. Those companies were able to eliminate a lot of debt and restructure their business and emerged much healthier companies and stayed in business. A person who files under chapter 13 is called a debtor. In a chapter 13 case, the debtor must come up with a plan for the repayment of all or a portion of their debt. The plan must be approved by the court to become effective. If the court approves the debtor's plan, most creditors will be prohibited from collecting their claims from the debtor during the course of the case. The debtor must make regular payments to a person called the chapter 13 trustee, who collects the money paid by the debtor and disburses it to creditors in the manner called for in the plan, usually on a monthly basis. Upon completion of the payments called for in the plan, the debtor is released from liability for the remainder of his or her dischargeable debts.
2. How does chapter 13 differ from chapter 7 ?
The primary difference between chapter 7 and chapter 13 bankruptcy is that in a chapter 7 the debtor's nonexempt property (meaning property that cannot be protected with the bankruptcy laws, which is very rare) is liquidated (sold by the trustee) to pay as much as possible of the debtor's creditors claims. Whereas in chapter 13 cases a portion of the debtor's future monthly income (after reasonable living expenses) is used to pay as much of the debtor's debts as is feasible. As a practical matter, in most chapter 7 cases, the debtor loses nothing because the bankruptcy law protects most personal property and is actually very generous in its protections and the debtor simply gets a discharge of debts, which forever bars the creditors from collection of those debts. In a chapter 13 bankruptcy, on the other hand, the debtor will retain his nonexempt property but must pay off as much of his or her debts as the court deems feasible, and then receives a chapter 13 discharge, which is a bit broader in scope than a chapter 7 discharge and releases the debtor from liability for several types of debts that are not dischargeable under chapter 7.
3. When would you choose Chapter 13 over Chapter 7?
Chapter 13 is usually the route to go if you:
- Simply wish to repay all or most of your unsecured debt and have the present ability to do so within a 3 to 5 year time frame.
- Have valuable nonexempt (unprotected) property that would be lost in a chapter 7 case.
- Are not eligible for a discharge under Chapter 7 bankruptcy due to the fact that you have filed a Chapter 7 in the previous 8 years and received a discharge in that bankruptcy.
- Have a pending home foreclosure or car repossession and you wish to retain the house or car.
- You make too much money to qualify for Chapter 7 bankruptcy and really have the ability to pay your creditors something. Remember that a Chapter 7 must be filed in good faith and you must show via the means test and your budget that you truly do not presently have the ability to pay your creditor any meaningful monthly payment. See Attorney Walter Metzen if you are not sure if you presently qualify for a Chapter 7 Bankruptcy.
4. What happens to State Court collection actions and pending foreclosure proceedings if you file a Chapter 13 Bankruptcy?
Immediately upon the filing of a Chapter 13 bankruptcy case a bankruptcy court order is issued. That court order is called the "automatic stay" and it automatically stays (stops) lawsuits, bank levies, garnishments, foreclosures, utility shut-offs, repossessions and other actions by creditors against the debtor or the debtor's property. Just after the case is filed, the bankruptcy court clerk will mail a notice to all creditors telling them about the automatic stay and providing them with your bankruptcy case number. Your creditors are then prohibited from going forward against the you during the entire course of the chapter 13 case (3 to 5 years generally). If you are later granted a chapter 13 discharge, those samecreditors will then be forever barred from collecting those discharged debts from the you.
5. How are secured creditors dealt with under chapter 13?
A secured creditor is a creditor who holds some collateral that you have they they can repossess or foreclose on if you don't pay, such as your house and car. There are four methods of dealing with secured creditors in a Chapter 13 bankruptcy:
- The secured creditor may accept the debtor's terms pursuant to the proposed plan,
- The creditor may retain its lien on the collateral and be paid the full amount of its secured claim pursuant to the plan,
- Th debtor may surrender or give back the collateral to the creditor, or
- The creditor may be paid or dealt with directly outside of the plan (note that the court protections will not apply in this scenario.
6. What if you need credit during a chapter 13 case?
The law provides that only two types of debts incurred after the filing of the case may be included in a chapter 13 plan. Debts for taxes that become due while the bankruptcty case is pending, and consumer debts that arise after the filing of the case that are for property or services necessary for the debtor's performance under the plan and that are approved in advance by the chapter 13 trustee. All other debts that arise after the case is filed must be paid by the debtor outside the plan. Our Detroit Bankruptcy judges issue an order prohibiting the debtor from obtaining new credit in excess of $1000 during the bankruptcy case unless approved in advance by the chapter 13 trustee. Therefore, the approval of the chapter 13 trustee should be obtained before incurring credit or new debts after the case has been filed. The incurrence of regular debts, such as debts for telephone service and utilities, doesrequire the trustee's approval.
7. Who is eligible to file under chapter 13
A Chapter 13 is sometimes called a "wage earner" plan. You do not have to have a job, only some sort of regular monthly income from which you can propose a feasible repayment plan to your creditors. Section 109(e) of Title 11, United States Code sets forth debt limits for individuals to be eligible to file under Chapter 13. The debt limits for filing Chapter 13 are unsecured debts of less than $360,475.00 and secured debts of less than $1,081,400.00. These debt limits are subject to annual cost of living increases.
To file a chapter 13, you must:
- reside in, do business in, or own property in the United States,
- have regular stable income from any source (can include social security benefits),
- have unsecured debt which is less than $360,475.00
- have secured debts of less than $1,081,400.00,
- are not a stockbroker or a commodity broker, and
- have not been a debtor in another bankruptcy case that was dismissed within the last 180 days on certain technical grounds. Corporations, partnerships and limited liability companies may not file under chapter 13.
8. How does a bankruptcy attorney help in a chapter 13 case?
The bankruptcy attorney helps navigate the debtor through the court system in a typical chapter 13 case by:
- Meeting with the debtor or debtors and assessing their financial situation and determining whether chapter 13 is a feasible choice for the debtor, and if so, whether a single or a joint case should be filed.
- Assisting the debtor in the preparation of a budget of income and expenses and proposing this budget to creditors and the court.
- Examining the liens and security interests of secured creditors to ascertain their validity, and taking the legal steps necessary to protect the debtor's interest in such matters.
- Assisting the debtor in devising a chapter 13 reorganization plan that meets the needs of the debtor and is acceptable to the court (a feasible plan).
- Preparing the necessary bankruptcy papers, petition, statement of financial affairs, schedules and chapter 13 forms.
- Filing the chapter 13 forms and pleadings with the court and paying, or providing for the payment of, the bankruptcy court filing fee.
- Attending the meeting of creditors or 341 hearing, the chapter 13 confirmation hearing, and any other court hearings required in the case.
- Assisting the debtor in obtaining court approval of a chapter 13 plan (confirming the plan).
- Checking the court docket proof of claims record filed in the case, filing objections to improper claims, and attending court hearings thereon.
- Assisting the debtor in overcoming any legal obstacles that may arise during the course of the case.
- Assisting the debtor in obtaining a discharge upon the completion of the plan.
All fees charged by an attorney in representing a debtor in a chapter 13 case must be reviewed and approved by the bankruptcy court judge. This rule is followed whether the fee is paid to the attorney prior to or after the filing of the case, and whether it is paid to the attorney directly by the debtor or by the chapter 13 trustee. The court will approve only a fee that it finds to be reasonable.