WHY FILE A CHAPTER 13 ?
There are a number of reasons you may need or want to file for Chapter 13 relief as opposed to a Chapter 7. First, income is an issue. You have to provide 6 months of pay stubs to establish an average monthly income. If your average income indicates that you have or will exceed the median income level for a 12 month period in Utah you will have to file a Chapter 13.
Another common reason for filing a Chapter 13 is having too many non-exempt assets. For example, if you own a home you can exempt $42,700 (times 2 if you and your spouse are both on the title) of the equity in that home. However, if your equity exceeds the amount of the exemption a Chapter 7 Trustee may want to sell your home. The reason to sell you home is to use additional equity to pay to your creditors. This will only happen in a Chapter 7 because in a Chapter 13 you can just agree to pay creditors the amount a Chapter 7 Trustee may have recovered by selling your home. The same holds true for any other non-exempt assets that you have that may be sold for cash to pay creditors in Chapter 7. You will want to consult with me about what property you own and whether it is exempt or not.
In a Chapter 13 bankruptcy, you would pay off some or all of your debt through a payment plan over the course of either 36 to 60 months. This is different than Chapter 7 bankruptcy where your assets would be collected and used to pay creditors and any remaining debt would be discharged. Some of the process for filing Chapter 7 is the same for Chapter 13 (if you have already read our Chapter 7 page). If you are looking here first this is the basic process you will go through.
Step 1 – Credit Counseling
Before filing either a Chapter 7 or a Chapter 13 you are required to take a court-approved credit counseling class. I will recommend the best and most cost effective classes at the time of your consultation. These classes can be taken online or over the telephone if you do not use a computer. Once you have completed your credit counseling class, you will receive a certificate of completion and I will also receive a copy. Your certificate of completion must be filed along with your Chapter 13 (or Chapter 7) bankruptcy petition.
Step 2 – Filing Your Chapter 13 Petition
A Chapter 13 bankruptcy case is initiated by filing a Chapter 13 bankruptcy petition with the bankruptcy court. The Central District of Utah is where I file bankruptcies in Utah. Your petition is generally accompanied by “schedules A – J” that detail your assets, liabilities, income and expenses. There are several additional documents that must be filed along with the petition, including a list of all of your creditors called the “matrix”.
In some cases, we have to do an “emergency filing” like in the case of an imminent foreclosure or wage garnishment. If that happens we will file the petition immediately and then follow up with the Statements and Schedules. At that point the bankruptcy court will mail notice to all of your creditors. The notice tells them that your bankruptcy case has been filed and also includes the date of your hearing. The hearing is called the Meeting of Creditors or 341 hearing. (Due to COVID-19 all 341 hearings are conducted by Zoom meetings at the present time). As soon as the case is filed the “automatic stay” on collection actions goes into effect. This means that creditors are prohibited from taking any collection action against you while your case is ongoing.
Step 3 – Filing Your Chapter 13 Repayment Plan
Within 14 days of filing your Chapter 13 petition, you must file a “plan” that details how you plan to repay your debts over the next 3 years or 5 years. The duration of the plan depends on your income or need to prolong your payments. If your income for 12 months would be above the median in Utah you must file a 60 month plan. Your plan will propose to pay to the Chapter 13 Trustee a fixed sum every month. Your first payment is due on or before the date of your 341 hearing. The trustee takes that money and distributes it over the course of your plan to your creditors. The Chapter 13 trustee is a lawyer appointed to oversee your case and review your plan. He also assures the Court that your bankruptcy is being filed in good faith and he assures the court that your creditors are being treated fairly.
Step 4 – Meeting of the Creditors
Your Meeting of Creditors mush be held within 60 days of the date the petition was filed. In Utah it usually is much faster than 60 days. At the meeting (Zoom meeting at this time) the trustee will first put you under oath. The trustee will ask you questions regarding your Statements and Schedules. He may also have changes that should be made to your Statements and Schedules. You may even have to modify your plan to make it feasible (meaning it will pay all debts required and it will be completed no later than in 60 months). I will already have submitted your most recent tax returns and 60 days of pay stubs required. You must bring to the following to the hearing (although now with COVID-19 you would provide the information to me and I will have uploaded it ahead of the hearing to the Trustee):
- Your driver’s license or other picture ID;
- Your Social Security card;
- Any property tax statement if you own real property’;
- Your bank statement(s) for the month in which you filed and;
- Your most recent pay stub.
Step 6 – Confirmation
The final step before you are officially approved is the Confirmation Hearing which is actually held before the Judge who will determine whether to confirm your proposed repayment plan (these hearings are currently by telephone). If we have all of the information required by the Trustee before the Confirmation Hearing no one has to attend. We can have your plan approved on what is called the “Consent Calendar” if everything is good to go. If we go to the hearing and the trustee recommends the plan the judge will confirm it. However, if there are still objections we may have to continue your hearing to another date.
Step 7 – Finally Discharge of Your Debt
In a Chapter 13 you must commit 3 to 5 years of tax returns over the amount of $1,000 to your Chapter 13 plan. If you have the child tax credit available you can retain $2,000. This sometimes results in your plan ending before 60 months are up, but you will have to have been in your Chapter 13 at least 36 months.
It is possible to pay off your bankruptcy early is somehow you have the money to do that like maybe a new job or an inheritance etc. Once you have made all of your plan payments to the trustee you are ready for a discharge. Before receiving a discharge, however, you must complete a financial management course. This class can be taken online or on the telephone like before or our Chapter 13 Trustee offers the class free of charge (although I don’t know how that would still be available right now with the Pandemic crisis).
If you have domestic support obligations you will need to be current to receive your discharge. I also want to define two terms often confused with bankruptcy clients.
“Discharge” means any debts covered by the plan are extinguished. They are discharged in full even if the plan did not provide for them to be paid in full.
The other term is “dismissed”. “Dismissed” means that your case is tossed out of the court for some reason. This happens for many reasons. The most common reason is not keeping up with your plan payments. A second common reason is refusing to turn over tax returns.
Another good thing to know is that if you ever were to really need to keep your tax returns for some emergency reason, you can petition the court to do that. BUT this can only happen with the permission of the court. Remember: You want to ask for permission, not forgiveness.