Bankruptcy Chapter 13

Introduction to Bankruptcy Chapter 13

“Creditors have better memories than debtors.” - Benjamin Franklin

Chapter 13 bankruptcy has become a much more popular subject since 2005. The enacftment of the new bankruptcy laws, including the controversial “means test,” was supposed to stop consumers from allegedly “abusing” the bankruptcy process. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was seemingly enacted in an attempt to force more high income consumers to file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. This is because consumers who file for Chapter 13 bankruptcy generally must work with creditors to design repayment plans for their debts. This is in contrast to Chapter 7 bankruptcy where consumers often seek to discharge much of their unsecured debts.

However, most consumer bankruptcy cases filed today are still Chapter 7 (”liquidation”) cases, not Chapter 13 (”personal reorganization”) cases. Toward the end of this post we’ll discuss some recent stats from the Bankruptcy Courts showing that Chapter 7 is still the most popular type of consumer bankruptcy.

As we’ve stated previously, this site’s main focus is on personal, aka “consumer,” bankruptcy issues- people, not businesses. Chapter 13 is generally thought of as the consumer equivalent of Chapter 11 bankruptcy which corporations file in order to reorganize their operations. Therefore, we won’t be talking about business bankruptcy much in this post. There are lots of great sources of information online about corporate bankruptcies and Chapter 11. Here are two:

http://www.sec.gov/investor/pubs/bankrupt.htm

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter11.html

Besides, unlike Chapter 7 bankruptcy, which both consumers and businesses file, Chapter 13 can only be used by individuals (think: “humans”).

Finally, our research indicates that people looking for information on Chapter 13 bankruptcy (and Chapter 7 bankruptcy for that matter) are searching MUCH more for the phrase “bankruptcy Chapter 13” than “Chapter 13 bankruptcy,” in that order. We mentioned this phenomenon briefly in our discussion of Bankruptcy Chapter 7. While we are 99% certain that the intentions of our visitors are the same no matter how the words are ordered, it is hard to be certain. And, without getting too deep into a discussion about web publishing & visitor intentions, believe it or not, some search phrases have completely different meanings when words are ordered differently.

For example, a person looking for “mortgage rate Dallas” may be looking for something completely different than “Dallas rate mortgage.” In the first example, people may be looking to compare mortgage rates in Dallas. And, in the 2nd, they may be looking for ratings of Dallas mortgage brokers. Could either be a new meme going around the web? The different word orders may indicate people are looking for different things. Visitor intentions can occasionally be pretty surprising.

Regardless, the sequence of this keyword phrase is a little baffling to us as Chapter 13 is generally phrased as “Chapter 13” or “Chapter 13 bankruptcy,” not “bankruptcy Chapter 13.” But, we don’t want to disappoint anyone…. If our assumptions aren’t correct, please leave a comment below. But, for this discussion, we will simply use the term “Chapter 13 bankruptcy.”

Bankruptcy Chapter 13 and BankruptcyAccess.com

Personal bankruptcy in general is a topic that’s gotten more complex during the last few years (particularly since 2005’s enactment of BAPCPA). And Chapter 13 bankruptcy in itself is a large topic. Chapter 13 can get quite complex and attempting to discuss all the details would be difficult to accomplish in just one blog post. Therefore, we will give a broad overview of some of the main points of Chapter 13 here. We will most likely return to this topic in the future and provide additional Chapter 13 details and FAQs. Hopefully, this will give us enough time to do more research and provide more information and links for our readers.

Now that we have concluded our brief introduction, let’s begin our Chapter 13 discussion.

Consumer Bankruptcy in The US: Background

Bankruptcy law in the US is federal law. Title 11 of the United States Code outlines bankruptcy in the US. The United States has a long history of passing, repealing and amending bankruptcy laws. The first law seems to have originated somewhere around the turn of the 19th Century…A very long discussion of the history of US bankruptcy laws can be found here:

…In 1800, 1841 and 1867 Congress passed federal bankruptcy laws; in 1803, 1843 and 1878, it promptly changed its mind…

http://www.vault.com/articles/A-Brief-History-Of-Bankruptcy-Law-17926399.html

For sake of this discussion, we assume that the original bankruptcy laws at least covered individuals filing for bankruptcy, not only businesses. Since Congress has been refining the bankruptcy process for more than 200 years, clearly, by now, we’d hope they got it right….or have they? See our discussion of the new bankruptcy laws below.

Who Files for Bankruptcy?

In the US, consumers are still the largest debtor group filing for bankruptcy. As of June 2007, Chapter 7 non-business bankruptcy is still the most popular type of bankruptcy filed. And, for the most part, most consumer bankruptcies are still “no asset” cases….

According to the ABA website:

…over 85 percent of Chapter 7 filings are “no-asset filings…

http://www.abanet.org/publiced/practical/bankruptcy7_assetnonexempt.html

“No asset” meaning that there is no property left for unsecured creditors’ claims after the debtor claims his exemptions in the bankruptcy case.

See Bankruptcy FAQ #7 below.

When Do Consumers File Bankruptcy?

Consumers in the US file for bankruptcy for a variety of reasons and there doesn’t seem to be any specific sign which indicates that it’s definitely time to file. But, generally speaking, many consumers file for bankruptcy to deal with debts that have become too big to realistically pay off. After a consumer files for bankruptcy, he is referred to as the “debtor.”

The official Bankruptcy Court website defines a debtor as:

A person who has filed a petition for relief under the Bankruptcy Code.

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/glossary.html#D

and the parties who are owed money are referred to as “creditors:”

One to whom the debtor owes money or who claims to be owed money by the debtor

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/glossary.html#C

Think of it like this: the creditors gave credit to the debtor who’s now got debt. Reread it a few times if you are confused.

Why Do Consumers File For Bankruptcy?

Consumers file for bankruptcy for a variety of reasons. People often file for bankruptcy because they want to get their finances in order and because their debt levels have become too high.

And, according to some studies, medical bills may be one of the major reasons why consumers file for bankruptcy:

A study published Wednesday in the policy journal Health Affairs found that approximately half of people in the US who file for bankruptcy cite medical costs as a significant reason for their financial troubles.

http://newstandardnews.net/content/?action=show_item&itemid=1439

Bankruptcy: Chapter 13

What is Chapter 13?

Chapter 13 bankruptcy is sometimes called “the wage earners” plan because it is mainly used by debtors who have sufficient monthly income to service their debts. In a Chapter 13 bankruptcy, the debtor works with creditors to design a repayment plan- paying back creditors over 3 or 5 years. This is in direct contrast to Chapter 7 bankruptcy in which a consumer debtor seeks to “discharge” a lot of his unsecured debts.

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/

Who files for Chapter 13 Bankruptcy and Why?

As stated above, Chapter 13 is for wage earners…debtors with regular income coming in. However, isn’t 5 years into the future a long time to plan ahead? Couldn’t anything happen between now and then?
And, if a debtor can discharge much of his unsecured debts by filing for Chapter 7, why would a debtor choose Chapter 13 bankruptcy instead?

One of the reasons could be that the debtor is facing foreclosure & he wants to try and “keep his stuff” including his house. While nothing is guaranteed, the debtor may think that Chapter 13 is a better option because he hopes to work with creditors & retain his property.

Other reasons could be:

• The debtor may be ineligible for Chapter 7 bankruptcy because he makes over the median income. See the new bankruptcy laws section below.
• The debtor might want to repay creditors for ethical reasons.
• The debtor might just want extra time to deal with his creditors if he thinks his financial situation will be better in the next 3 or 5 years.

These 2 links have more information on other possible advantages of filing for Chapter 13:

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/

http://bankruptcy.findlaw.com/bankruptcy/bankruptcy-chapter-13/

The Chapter 13 Trustee

Besides the above mentioned debtor and creditors, other parties involved in the bankruptcy case are the bankruptcy Judge and the “trustee.”

When an individual files a Chapter 13 petition, an impartial trustee is appointed to administer the case. 11 U.S.C. § 1302. In some districts, the U.S. trustee or bankruptcy administrator (2) appoints a standing trustee to serve in all Chapter 13 cases. 28 U.S.C. § 586(b). The Chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors. 11 U.S.C. § 1302(b).

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter13.html

The trustee’s role in a Chapter 13 case is apparently slightly different than in a Chapter 7 bankruptcy case. In a Chapter 7 case, the trustee is in charge of collecting the debtor’s property for liquidation. The post from The United States Bankruptcy Court also states:

Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter13.html

Chapter 13 Bankruptcy Exemptions

Consumer bankruptcy exemptions are a intricate topic in general. And attempting to define them in the scope of Chapter 13 can be even more difficult. So, we’ll try to summarize some of the main points here. (See our Chapter 7 bankruptcy post for more on bankruptcy exemptions in general.)

• When a consumer bankruptcy case begins, all of the debtor’s property is deemed “property of the estate.”
• However, the bankruptcy code has decided that the debtor needs some basic property to effectively be off limits to unsecured creditors.
• This basic property that is off limits to credits is referred to as “exempt.”

The same exemptions generally apply in both Chapter 7 and Chapter 13 bankruptcy cases. However, in Chapter 13 cases, exemptions can get even more confusing because the debtor is often seeking to keep his property, not liquidate it like in a Chapter 7 case.

Keeping non-exempt property is one of the key features of Chapter 13 that might cause someone to decide to file a Chapter 13 bankruptcy case instead of a Chapter 7 case.

http://www.bankruptcylawnetwork.com/2007/

So, what are the differences in the way the exemptions work in Chapter 7 or 13?

The difference seems to be in how the exemptions are used in each case. According to one source:

The exemptions establish what property, and how much of it, you get to keep in a chapter 7 case; they establish indirectly how much your monthly payment must be in some Chapter 13 cases.

http://www.bankruptcylawnetwork.com/2007

Regardless, the debtor is supposed to have a choice as to which exemptions he can choose: federal or his local state exemptions. However, many states have “opted out” of the federal exemptions. Therefore, the debtor often has no choice and must use the local state exemptions…

For a state by state list, click this link:

http://www.realworldlaw.com/stateoptout.html

Furthermore, the interplay between bankruptcy exemptions, state and federal laws, and Chapter 13 bankruptcy has gotten even more intricate since the new bankruptcy laws went into effect in 2005. Consumers should always consult with a bankruptcy lawyer if they are considering filing for bankruptcy.

See these posts for more:

http://www.bankruptcylawnetwork.com/2007/

http://www.bankruptcyaction.com/questions.htm#Exemptions

http://www.moranlaw.net/exemptions-13.htm

and for debtors in Texas:

http://www.texasbankruptcylaw.com/7v13.html

Chapter 13 Bankruptcy vs. Chapter 7 Bankruptcy

According to Findlaw.com:

Chapter 13 bankruptcy, sometimes called the wage earner’s plan, or reorganization bankruptcy, is quite different from Chapter 7 bankruptcy (which wipes out most of your debts).

http://bankruptcy.findlaw.com/bankruptcy/bankruptcy-chapter-13/

If we use the above definition, we can deduce the major differences between Chapter 7 and Chapter 13 bankruptcy:

• In Chapter 13, debtors reorganize their finances and the debtor hopes to keep some of his property by working out a repayment plan with his creditors.
• In Chapter 7, debtors seek to liquidate and get a fresh start. They generally must accept that most of their non exempt property will be sold in exchange for a discharge of some of their unsecured debts.

Chapter 13 enables individuals with steady income to repay their debts over time, with court protection from their creditors.

http://chicago-bankruptcy.blogspot.com/2006/07/

Given the information above, we can see that Chapter 13 may have its advantages over Chapter 7 for some debtors. However, many debtors may file for bankruptcy because:

• They may think that their debts are too large to realistically pay off anytime soon or
• They want to discharge their debts and get a “fresh start.”

Clearly, the debtor needs to choose which type of bankruptcy to file based upon his individual financial situation. For more information on the differences between Chapter 13 and 7, there is a great chart comparing them here:

http://bankruptcy.findlaw.com/bankruptcy/bankruptcy-basics/

The New Bankruptcy Laws

Why Chapter 13 Bankruptcy Has Been More Important After BAPCPA

No modern discussion of Chapter 13 would be complete without mentioning the unfortunately named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, sometimes referred to as the “new bankruptcy law.” BAPCPA was (and still is) very controversial. It is so controversial that some authors even blame 2008’s economic downturn and “credit crunch” on BAPCPA:

I have yet to hear anyone get to the root cause of the U.S. economic crisis. The root cause was the passage of the Bankruptcy Reform Act of 2005.

http://www.2theadvocate.com/opinion/30454084.html

Related: read U.S. Bankruptcy Judge Cecelia Morris’ comments here: http://www.reuters.com/article/etfNews/idUSN1230734120080512

Whether the enactment of BAPCPA is the root cause of the economic collapse remains to be seen.

But, the intended result of BAPCPA was to disqualify more high income consumer debtors from filing Chapter 7 bankruptcy. Congress’ alleged reasoning being: if a debtor is making above the median state income, he should repay his unsecured debts in a Chapter 13 bankruptcy case, not discharge them in a Chapter 7 bankruptcy.

Instead, many debtors making above the median state income must now file for Chapter 13 bankruptcy. We have a chart below discussing the practical effect of BAPCPA. And, depending on how you view the numbers, it may be true that a larger percentage of debtors have been forced to file for Chapter 13 bankruptcy.

The New Bankruptcy Laws’ Means Test:

The cornerstone of BAPCPA and Chapter 13 bankruptcy is the “means test” which consumer debtors must pass if they want to file for Chapter 7 bankruptcy. The means test is difficult to cover completely in this short space. Therefore, we will most likely be doing a long post on just BAPCPA’s means test in the future. Stay tuned…

Here is a really good visual map of the BAPCPA means test:

http://www.moranlaw.net/means_test_map.htm

The big concept is: consumer debtors making above their state’s median income will now, most likely, not pass(or fail depending on your point of view) the means test. Consumer debtors who don’t “pass” the means test will now be forced file for Chapter 13 bankruptcy and therefore workout repayment plans for their debts. And Congress was pretty specific in putting language in BAPCPA that focused on debts that are “primarily consumer.” BAPCPA’s focus clearly is on consumers, not businesspeople.

Many higher income debtors might not be happy about this as they might prefer to file for Chapter 7 and discharge some of their unsecured debts. But, since they have incomes above their states’ medians, they might find that they are now ineligible for Chapter 7.

There is a very lengthy, and very good, discussion of BAPCPA here:

http://www.bankruptcylitigationblog.com/archives/

And see these previous posts where we mentioned BAPCPA:

Obama and Biden Bankruptcy Law Reform

Filing For Bankruptcy- Legal Growth Area.

Chapter 7 and Debtors Making 25K Every Month…

Duh!

Finally, see this post from The DOJ for more info on the new bankruptcy laws and Chapter 13 bankruptcy:

http://www.usdoj.gov/ust/eo/bapcpa/index.htm

Bankruptcy Chapter 13 FAQs:

Why would a debtor file for Chapter 13 bankruptcy?

As we stated above, some higher income debtors might file for Chapter 13 bankruptcy because they cannot pass BAPCPA’s “means test” and are therefore ineligible for Chapter 7 bankruptcy. These debtors flunking the means test might find themselves forced to file for Chapter 13 bankruptcy instead. Also, some debtors who own houses might file for Chapter 13 bankruptcy in hopes of possibly keeping their homes if they are being threatened with foreclosure by their mortgage lender.

Do Chapter 13 debtors pay back 100% of their unsecured debts?

Each bankruptcy case is unique because each debtor has a different level of income and debt…but:

The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected “disposable income” over an “applicable commitment period,” and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under chapter 7. 11 U.S.C. § 1325.

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics

How much of a homestead exemption can a debtor claim under the new bankruptcy laws?

After the enactment of BAPCPA in 2005…

….the new bankruptcy law provides for a homestead exemption of no more than $125,000 if the home was acquired in the 40 months before filing, or if the debtor engaged in certain fraudulent conduct.”

http://www.abanet.org/publiced/practical/bankruptcy13_homeassets.html

As we said above, bankruptcy exemptions are a rather difficult subject to discuss accurately because exemptions often involve issues of state debtor and creditor laws. Furthermore, since the bankruptcy laws were changed in 2005 with the enactment of BAPCPA, the topic of bankruptcy exemptions have become even more complex. Consult with a bankruptcy lawyer for more information.

How many years does it take before a debtor can file for Chapter 13 bankruptcy again?

One of the main goals of bankruptcy is for the consumer to get their finances in order. But, if the debtor needs to file for bankruptcy again…

You are not eligible for a discharge under Chapter 13 if you received a previous discharge under Chapter 7, 11 or 12 within the prior four-year period. If the prior case was a Chapter 13, you must wait two years before you are eligible for another Chapter 13 discharge.

http://www.totalbankruptcy.com/chapter_13_bankruptcy_timeline.htm

How long does it take for a debtor to pay back his debts under Chapter 13?

Depending on the debtor’s income, the debtor will generally have to repay his debts in either 3 or 5 years.

This, according the The US Bankruptcy Courts’ website, is referred to as the “applicable commitment period” for Chapter 13 debtors:

The “applicable commitment period” depends on the debtor’s current monthly income. The applicable commitment period must be three years if current monthly income is less than the state median for a family of the same size – and five years if the current monthly income is greater than a family of the same size. 11 U.S.C. § 1325(d). The plan may be less than the applicable commitment period (three or five years) only if unsecured debt is paid in full over a shorter period.

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/

What is the most unsecured debt a debtor can have to file for Chapter 13 bankruptcy?

According to one source…

If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900.

http://www.nolo.com/article.cfm/

How many more debtors now file Chapter 13 bankruptcy instead of Chapter 7?

Just from looking at the stats that we used in our previous discussion of Chapter 7…

http://www.uscourts.gov/Press_Releases/bankruptcyfilings081607.html

…there doesn’t look like there has been a huge surge in the number of people filing for Chapter 13…however, let’s do some quick math based on the chart above:

…Using the data above, it looks like 2007 had a larger PERCENTAGE of consumer bankruptcies that are now Chapter 13 cases. This would make sense now that some high income debtors are finding it tougher to qualify for Chapter 7….

And here is a link to the spreadsheet we used to calculate the stats:

http://www.bankruptcyaccess.com/images/bankruptcy_chapter_13.xls

(By the way, since Chapter 11 is primarily corporate reorganizations and Chapter 12 was enacted for family farmers, we didn’t use those numbers in our calculations)

…But, this may not be the end of the story because:

• The above stats may be skewed because, according to some sources, many more debtors may have filed bankruptcy prior to the enactment of BAPCPA in 2005 and…
• Many high income debtors may now be dissuaded from filing any type of bankruptcy after learning that they will probably be forced to file for Chapter 13 and have to repay most of their unsecured debts and…
• We only really have year total data for 1 year (2007).

With inconclusive data like this, it’s tough to figure out exactly what has been happening. The data seems to indicate that based on the percentages alone, more consumers are being forced to file for Chapter 13.

But, see these posts regarding a possible reversal of this trend in 2008:

http://www.creditslips.org/creditslips/bankruptcy_data/

So, did BAPCPA really have its intended effects? If 2008’s stats are accurate, maybe not…

Conclusion:

In conclusion, Chapter 13 bankruptcy has become a much more popular subject since the enactment of the sweeping changes to the bankruptcy laws in 2005. Prior to the new laws, the process of choosing to declare bankruptcy for many debtors was fairly straight forward. But some high income debtors may now be finding it harder to qualify for Chapter 7 bankruptcy and must now file for Chapter 13 instead. As mentioned above, debtors filing for Chapter 13 now have to work with creditors in working out repayment plans. Expect to see more news and information about Chapter 13 bankruptcy both on this site and others in the future.

Further Reading:

http://www.totalbankruptcy.com/chapter_13_bankruptcy_timeline.htm

http://www.nytimes.com/2007/11/06/business/06mortgage.html

http://bankruptcy.findlaw.com/bankruptcy/bankruptcy-chapter-13/

http://www.stayviolation.com/2008/03/bankruptcy-fili.html

http://www.mortgagelawnetwork.com/chapter-13-bankruptcy

http://www.bankruptcylawnetwork.com/2008/07/25/

Thank you for reading our discussion of bankruptcy: Chapter 13.

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