A Chapter 13 bankruptcy provides individuals with “regular income” an alternative to “straight bankruptcy.” Under Chapter 13, the individual may retain his or her assets, including non-exempt assets which otherwise would be liquidated and distributed to creditors in a Chapter 7 case. Instead he/she makes periodic payments to creditors under a three to five year payment plan approved by the court. However, a creditor can receive no less under a Chapter 13 than it would under a Chapter 7 liquidation. Chapter 13 has several additional aspects which might make it more advantageous to a debtor than a Chapter 7 proceeding. First, real estate mortgages in default may be cured. 11 U.S.C. § 1322(b)(5). Second, certain alterations may be made in the repayment terms of other secured obligations, such as lowering the monthly payment and extending the payout period. 11 U.S.C. § 1322(b)(2).
Under Chapter 13 procedure, there is also a First Meeting of Creditors § 341 Meeting at which the debtor is examined by the trustee and any creditors who wish to appear. In order to receive money (distribution by the Trustee), a creditor must file a Proof of Claim. The debtor can object, if necessary, to excessive claims, or amend the plan; if necessary, to provide for payment to the creditors who have filed claims. The plan must put the different types of debts into separate classifications and specify the proposed treatment for each class. Usually, Chapter 13 plans provide for payment of debts secured by property that the debtor wishes to retain.
It should be noted that the Chapter 13 plan need only cure arrearage on long-term secured claims (while paying all mortgage payments which fall due after the filing of the bankruptcy petition) and need not pay the debt in full. Alternatively, the debtor can propose to pay off the secured debt in full or not “provide for” the secured claim at all (although a secured creditor whose claim is “not provided for” ordinarily has the right to obtain an order granting relief from the automatic stay to pursue its remedies in state court). There are now several provisions which may impose limitations on the manner in which a debtor provides for debts secured by automobiles, depending upon the particular facts of the case. See 11 U.S.C. §§1325(a)(9), 1326(a)(1).
Plan payments are made to the trustee beginning the first day of the first month after the petition is filed. The plan must provide for the full payment of all priority claims. Priority claims typically include many tax obligations, support and alimony and administrative expenses (trustee’s commissions, debtor’s counsel’s attorney’s fee).
Unsecured claims must be paid at least as much as they would receive in a Chapter 7 case (which may be zero in a case that would be a “no-asset” Chapter 7 case). The debtor must devote to the plan the amount of the debtor’s “disposable income” for either a 36 or 60 month period, depending upon the level of the debtor’s “current monthly income” as that term is defined in 11 U.S.C. § 101(10A).
Disposable income means the debtor’s current monthly income less the amount of the reasonably necessary living expenses of the debtor and the debtor’s dependents or for, for a debtor engaged in business, the amounts necessary for the operation of the debtor’s business. 11 U.S.C. § 1325(b). In cases of above median debtors, the determination of the debtor’s reasonably necessary living expenses may be determined using most of the methodology employed in Chapter 7 cases in determining abuse under §707(b).
A confirmation hearing will be held approximately three to six months after filing. If everything is in order, the court will enter a confirmation order and the trustee will commence distributing money to the creditors pursuant to the filed plan.
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Philadelphia, PA 19102