Unlike the popular notion that bankruptcy erases a debtor’s debts, Chapter 13 bankruptcy, also known as the “wage earner’s plan,” allows debtors to forge a path to financial recovery by creating a repayment plan. Named after the chapter of the bankruptcy code that contains its rules, Chapter 13 lets debtors keep their property while repaying the debts owed, under the supervision of the bankruptcy court. This is in stark contrast to Chapter 7 bankruptcy, in which the debtor’s possessions are liquidated in order to pay his debt.
Chapter 13 bankruptcy provides individuals with the opportunity to restructure their debts in order to repay all or part of the amounts a debtor owes. The creditor presents a repayment plan to the court and creditors have the opportunity to object to a repayment plan -- especially since all debts do not have to be paid in full under this plan. Typically, the outstanding debts are consolidated and the debtor must repay everything in installments, according to plan, within three to five years. The debtor must file a repayment plan along with the bankruptcy petition, or within 14 days after the petition has been filed. The filing of the petition starts what is called the automatic stay, which means that creditors must cease from seeking repayment from you; any lawsuits, foreclosures or other actions also must cease during this time. During this repayment period, the debtor is not charged penalties or interest by the creditors. Payments under a Chapter 13 repayment plan begin within 30 days of the filing of the bankruptcy case, even if the court has not yet approved the repayment plan.
Typically, the bankruptcy trustee is an attorney appointed by the United States Trustee Program to oversee bankruptcy cases. A trustee is assigned to each bankruptcy case. The bankruptcy trustee convenes a creditors’ meeting with the debtor about six to eight weeks after the debtor has filed for bankruptcy. This meeting provides a forum for questions, as well as a time to raise initial objections. The repayment plan designates the frequency of payments. Payments made under the Chapter 13 repayment plan are made to the bankruptcy trustee, who then pays the creditors in accordance with the court-approved plan. The trustee also serves as a point of reference for both the debtor and creditors, as to the process and for any other relevant information.
The confirmation hearing will be held no later than 45 days after the creditors’ meeting. The bankruptcy judge determines whether the repayment plan is workable and if it meets the legal standards in the bankruptcy code. Creditors may come to the confirmation hearing and make objections to the confirmation of the repayment plan. A creditor may object to the debtor's proposed repayment plan if, for example, the debtor does not utilize all of his disposable income for repayments. A creditor may also object to a proposed repayment plan if the creditor receives less under the plan than it would if the debtor’s assets were liquidated as they would be in a Chapter 7 bankruptcy. The judge will then make a determination whether to confirm the repayment plan based on the testimony of the creditors and the debtors.
If the judge confirms the Chapter 13 repayment plan, the debtor will continue to make payments to the trustee, in accordance with the schedule. The trustee is required to make payments to the creditors “as soon as practicable.” If the judge declines to confirm the repayment plan, the debtor may revise the payment plan and address the issues that caused the plan to not be confirmed. The court will hold another confirmation hearing to determine whether the revised plan meets the standards in the bankruptcy code. If the court continues to decline to confirm the repayment plan, the bankruptcy case may be dismissed, which would terminate the automatic stay and allow creditors to resume their actions against the debtor.