What is a Chapter 13 bankruptcy, and how is it different from a Chapter 7 case?

By Alfred Villoch, III, with Savage, Combs & Villoch, PLLC Only an individual (not businesses) with regular income can seek relief under Chapter 13 of the Bankruptcy Code. Chapter 13 allows individuals with regular income to propose a plan to repay all or part of their debts. Under Chapter 13, individuals file a proposed repayment plan to pay installments to their creditors over three to five years. If the individual’s monthly income is less than the applicable state median (see U.S. Trustee website, State Median Family Income by Family Size), the plan will last for only three years unless there is “cause” for additional time needed. If the individual’s current monthly income is more than the median, the proposed plan generally must be for five years. Courts will not allow plan periods of over five years. 11 U.S.C. §1322(d). During the plan period, creditors cannot start or continue collection efforts. There are certain advantages in Chapter 13 over liquidation in a Chapter 7 case. One of the most significant advantages, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. Individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. That said, individuals must still make all monthly mortgage payments on time during the Chapter 13 plan. Another advantage is that Chapter 13 allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also may protect third parties who are liable with the debtor on “consumer debts,” specifically co-signers or guarantors. Last, in Chapter 13, the individual makes plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals do not have direct contact with creditors while under Chapter 13. Upon completion of all payments under the Chapter 13 plan, an individual receives his or her discharge so long as the individual: (1) certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid; (2) has not received a discharge in a prior case filed within a certain time frame (two years for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases); and (3) has completed an approved course in financial management (if the U.S. trustee or bankruptcy administrator for the debtor’s district has determined that such courses are available to the debtor). 11 U.S.C. § 1328. The discharge releases all debts included in the plan or disallowed (under section 502), with limited exceptions. Creditors included in the successfully completed Chapter 13 plan cannot initiate or continue in the future any legal or other action against the debtor to collect the discharged debts. As a general rule, the discharge releases all debts included in the plan or disallowed except those referenced in Section 1328 of the Bankruptcy Code. Nondischargeable debts include certain long term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime. To the extent not fully paid, the individual in Chapter 13 will remain responsible for these debts after the conclusion of the bankruptcy case. Unlike Chapter 7, debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable. 11 U.S.C. §§ 1328, 523(c); Fed. R. Bankr. P. 4007(c). In this way, a Chapter 13 discharge can be broader than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. 11 U.S.C. § 1328(a). If you have any questions about bankruptcy and the differences between Chapters 7 and 13 of the Bankruptcy Code, please contact Alfred Villoch, III, with Savage, Combs & Villoch, PLLC, at 813-200-0013.