Chapter 13 Bankruptcy: How does it work?

A chapter 13 bankruptcy case begins by filing a petition with the bankruptcy court in the area where the debtor lives. Unless the court orders otherwise, the debtor must also file with the court:

• Detailed lists of his assets, liabilities, and other financial information;
• A schedule of current income and expenditures;
• A statement of financial affairs that includes a series of questions the debtor must answer in writing concerning such things as his sources of income, transfers of property, and lawsuits by creditors; and
• A schedule of contracts or leases under which both parties to the agreement have duties remaining to be performed.

The debtor must also file:

• A certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling;
• Evidence of payment from employers, if any, received sixty days before filing;
• A statement of monthly net income and any anticipated increase in income or expenses after filing; and
• A record of any interest the debtor has in federal or state qualified education or tuition accounts.

Additionally, the debtor must provide the chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case including tax returns for prior years that had not been filed when the case began.  (The case trustee is the representative of the bankruptcy estate whose responsibilities include reviewing the debtor’s petition and schedules as well as bringing actions against creditors or the debtor to recover property of the bankruptcy estate.) A husband and wife may file a joint petition or individual petitions.

The courts must charge a $235 case filing fee and a $39 miscellaneous administrative fee. Normally the fees must be paid to the clerk of the court upon filing. With the court’s permission, however, they may be paid in installments.  If a joint petition is filed, only one filing fee and one administrative fee are charged.  Failure to pay these fees may result in dismissal of a case.

In order to complete the official bankruptcy forms that make up the petition, statement of financial affairs, and schedules, the debtor must also provide the following information:

• A list of all creditors and the amount and nature of their claims;
• The source, amount, and frequency of the debtor’s income;
• A list of all of the debtor’s property; and
• A detailed list of the debtor’s monthly living expenses such as food, clothing, shelter, utilities, taxes, transportation, and medicine.

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. When only one spouse files a petition, the income and expenses of the non-filing spouse is required so that the court, the trustee, and the creditors can better evaluate the household’s financial situation.

Filing a petition under chapter 13 automatically stays or stops most collection actions against the debtor or the debtor’s property.  But filing the petition does not stay certain types of actions such as the commencement or continuation of a criminal action against a debtor or a proceeding concerning child custody.  Also, the stay may be effective only for a short time in some situations.

The stay arises by operation of law and requires no action by the court. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a consumer debt from any individual who is liable along with the debtor.  (Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose.)

An individual may use a chapter 13 bankruptcy to save his or her home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose his home if the mortgage company completes the foreclosure sale before the debtor files the petition for bankruptcy.  The debtor may also lose his home if he fails to make the regular mortgage payments that come due after the chapter 13 filing.

Between twenty and fifty days after the debtor files the chapter 13 bankruptcy petition, the case trustee will hold a meeting of creditors.  During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan.  If a husband and wife file a joint petition, they both must attend the creditors’ meeting and answer questions.  The parties typically resolve problems with the plan either during or shortly after the creditors’ meeting. Generally, the debtor can avoid problems by making sure that the petition and plan are complete and accurate, and by consulting with the trustee before the meeting.

To participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. However, a governmental unit has 180 days from the date the case is filed to file a claim with the bankruptcy court.

After the meeting of creditors has taken place, the debtor, the case trustee, and those creditors who wish to attend will come to court for a hearing on the debtor’s proposed repayment plan.