Chapter 13

A bankruptcy under Chapter 13 of the U.S. Bankruptcy Code is a financial reorganization for an individual who has regular income from one or more sources, regardless of employment status.  The bankruptcy petition is filed with the bankruptcy court in the district in which the debtor resides. Along with the petition, the debtor must file a reorganization Plan. If no Plan is filed along with the petition, the debtor is given 15 days to file a Plan.

Eligibility

Debtors must meet the following requirements for relief under Chapter 13:

• The debtor must be an individual. Partnerships, corporations, and other business entities are not eligible.
• The individual must have regular income. The income may be from sources such as wages, the operation of a business or farm, social security, or welfare.
• Total debtedness may not exceed $750,000 in secured debt and $250,000 in unsecured debt.
• Debt limits are adjusted for inflation every three years.

Role of the Standing Trustee

Upon filing, the case is referred to the standing trustee, who is appointed by the U.S. Trustee to handle all Chapter 13 cases in a particular location. The trustee is paid a percentage of the disbursements to creditors, as established by the U.S. Trustee. The standing trustee's responsibilities include the following:

• Collect the money from the debtor and disburse it to creditors according to a confirmed Plan.
• Preside at the 341 meeting and make recommendations to the court concerningconfirmation.
• Where appropriate, object to claims and other administrative aspects of the case, and bring preference or lien avoidance actions.

Filing a Proof of Claim

Generally, creditors must file a Proof of claim. The Proof of claim must be filed no later than 90 days after the first date for the meeting of creditors as initially set by the court or the office of the U.S. Trustee.

Reorganization Plan

Under Chapter 13, a reorganization plan is filed along with the bankruptcy petition. If the debtor fails to file a plan, the standing trustee will move to dismiss the case. Plans are generally of two types: extension plans and composition plans.

Extension plans provide for payment of all debts in full, over the life of the Plan.

Composition plans provide for partial payment of debts. The debtor must make payments for 36 months at a minimum. Composition plans fall in two categories:

• The debtor proposes a fixed dollar amount payment to be distributed pro rata among unsecured creditors. The fixed monthly payments continue over the life of the plan.
• The debtor pays a fixed percentage of allowed claims. The debtor proposes monthly payments, which are distributed until the specified percentage of each allowed claim is paid.

Confirmation Hearing

The Court must hold a confirmation hearing on the reorganization Plan and rule on any objections filed by creditors or the trustee. If all creditors have filed claims and no one has objected, the court will often dispense with the confirmation hearing and simply confirm the plan.

The trustee's primary concern at the confirmation hearing is meeting the confirmation tests. The test of greatest concern to unsecured creditors is the "best efforts" test. Under the best efforts test, a debtor must pay creditors substantially all of his or her disposable income for at least 36 months unless creditors are to be paid in full. 

Source: "Manual of Credit and Commercial Laws," edited by Charles M. Tatelbaum and John K. Pearson, available at theNACM Bookstore.