Debtors often imagine living in Chapter 13 as being akin to debtor’s prison: under the financial microscope, tied up and tied down.
Not really. Depending on the plan, the plan payments may present a challenge, but beyond the dollars-and-cents challenge, living in Chapter 13 isn’t difficult.
What’s required
While Chapter 13 practices vary widely from trusteeship to trusteeship, the requirements are few:
- make plan payments;
- don’t incur significant new debt without approval; and
- keep current insurance on any asset that is collateral for a debt.
The debtor can move or change jobs without restriction. Some confirmation orders provide for regular submission of tax returns or information on a new job to the trustee..
Court approval may be needed in advance of getting a new car loan; incorporating a business that is an asset of the estate; or refinancing, selling or purchasing a home. Getting that approval can take 30-45 days.
Modifying the plan:
Plans can be changed if there is an interruption of income, through job loss or ill health.
When the payments are driven by means-test income, plan payments can be lowered or the percentage paid to creditors changed if the debtor’s income or expenses in the future won’t fund the plan as originally confirmed.
The modified plan must meet the tests for plan confirmation. Sometimes, the amount of money to be paid into a plan must be increased, where the claims that are actually filed and allowed are greater than estimated at the beginning of the case.
The cost of Chapter 13
Attorneys fees in Chapter 13 are usually paid in part before the case is filed, with the unpaid balance paid by the trustee from the payments the debtor makes into the plan.
With the increase in attorneys fees for all bankruptcy proceedings necessitated by bankruptcy “reform” in 2005, Chapter 13 may be a way to pay over time for good legal representation .
If the case is more complex or there are contests to confirmation or the allowance of a claim, the attorneys fees may exceed the initial fees set out at the beginning of the case.
The court must consider requests for additional attorneys fees, and if the request is approved, the additional fees will be added to the debts paid through the plan.
The discharge
Discharge is the legal forgiveness of debts. The debts are discharged at the completion of the plan.
When the discharge is entered, no creditor who had notice of the bankruptcy can try afterwards to collect the debt from you personally unless the debt is one for a non dischargeable debt. Debts that survive bankruptcy include criminal restitution, domestic support, or a student loan that wasn’t paid in full through the plan.
While the discharge stays on your credit record for 10 years from the filing of the case, (and several credit reporting agencies remove it after 7 years) it becomes less and less significant in a creditor’s decision to grant new credit with every year that passes.
Chapter 13 practice varies widely from district to district depending on the custom and attitudes of the local trustees and judges about what is “reasonable” and in “good faith”.
A successful Chapter 13 case requires an experienced bankruptcy lawyer familiar with the prevailing judicial attitudes in the district and the myriad of unwritten local rules.
Read more
Comparing Chapter 7 and Chapter 13
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