Chapter 13 Bankruptcy: Repay Your Debts

Chapter 1
Should You File for Chapter 13 Bankruptcy?

Introduction
If you're considering filing for Chapter 13 bankruptcy, you need to know whether or not you are eligible, what Chapter 13 bankruptcy can do for you and what the alternatives are. The main alternative to Chapter 13 bankruptcy is Chapter 7 (liquidation) bankruptcy, discussed in Section B, below.
A. Are You Eligible for Chapter 13 Bankruptcy? Chapter 13 bankruptcy has several important restrictions. Your first step is to see whether or not you are legally allowed to use the Chapter 13 process.
1. Businesses Can't File for Chapter 13 Bankruptcy
A business, even a sole proprietorship, cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help reorganizing their debts. If you own a business, however, you can file for Chapter 13 bankruptcy as an individual. You can include in your Chapter 13 bankruptcy case business-related debts you are personally liable for. There is one exception: Stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy case, even if just to include personal (nonbusiness) debts. (11 U.S.C. § 109(e).)
2. You Must Have Stable and Regular Income
You must have "stable and regular" income to be eligible for Chapter 13 bankruptcy. That doesn't mean you must earn the same amount every month. But the income must be steady-that is, likely to continue and it must be periodic-weekly, monthly, quarterly, semi-annual, seasonal or even annual. You can use the following income to fund a Chapter 13 plan:

Social Security benefits (although one court has ruled that Social Security payments do not constitute regular income to fund a Chapter 13 plan) disability or workers' compensation benefits unemployment benefits, strike benefits and the like public benefits (welfare payments)
child support or alimony you receive
royalties and rents
gifts of money from relatives or friends, and proceeds from selling property, especially if selling property is your primary business.
IF YOU ARE MARRIED
Your income does not necessarily have to be "yours." A nonworking spouse can file alone and use money from a working spouse as a source of income. And an unemployed spouse can file jointly with a working spouse. (See Ch. 4, Calculating Your Disposable Income, for more details.) The income of a non-filing spouse is property of the estate and must be included in your bankruptcy papers. 3. You Must Have Disposable Income

For you to qualify for Chapter 13 bankruptcy, your income must be high enough so that after you pay for your basic human needs, you are likely to have money left over to make periodic (usually monthly) payments to the bankruptcy court for three to five years. The total amount you must pay will depend on how much you owe, the type of debts you have (certain debts have to be paid in full; others don't) and your court's attitude. A few courts allow you to repay nothing on debts, that legally, don't have to be repaid in full, as long as you repay 100% of the others. Some courts push you to repay as close to 100% of those debts as possible. Most courts fall somewhere in between.
To determine if your disposable income is high enough to fund a Chapter 13 plan, you must create a reasonable monthly budget. Ch. 4, Calculating Your Disposable Income, explains how. If you are not proposing to repay 100% of your debts and the court, the trustee or a creditor thinks your budget is too generous-that is, it includes expenses other than necessities- your budget will be challenged.

4. Your Debts Must Not Be Too High

You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $871,550. This amount is increased every three years. A debt is secured if you stand to lose specific property if you don't make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor-such as the IRS -- has filed a lien (notice of claim) against your property. In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured debts cannot exceed $290,525. This amount is increased every three years. An unsecured debt is any debt for which you haven't pledged collateral. The debt is not related to any particular property you possess, and failure to repay the debt will not entitle the creditor to repossess property. Most debts are unsecured, including bank credit card debts, medical and legal bills, student loans, back utility bills and department store charges.

How to classify and total up your debts is explained in Ch. 3, Adding Up Your Secured and Unsecured Debts.
B. When Chapter 13 Bankruptcy Is Better Than Chapter 7
There are many reasons why people choose Chapter 13 bankruptcy-and in particular, choose Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. Generally, you are probably a good candidate for Chapter 13 bankruptcy if you are in any of the following situations:
You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You have a tax debt that cannot be eliminated (discharged) in Chapter 7 bankruptcy, but can be paid off over time in a Chapter 13 plan. (See Section 3, below.)
You want to take advantage of something known as the Chapter 13 bankruptcy "superdischarge." Certain debts cannot be discharged in a Chapter 7 bankruptcy, but can be discharged in a Chapter 13 case. This means that if they are not paid in full, the balance is wiped out at the end. The debts that can be discharged under this superdischarge provision are debts incurred on the basis of fraud, debts from willful and malicious injury to another or another's property, debts from larceny, breach of trust or embezzlement and nonsupport debts arising out of a marital settlement agreement or divorce decree.

You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so.

You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future. This would be the case if for some reason you can't stop incurring new debt.

1. The Basics of Chapter 7 Bankruptcy

If you file for Chapter 7 bankruptcy, many of your debts will be canceled without any further repayment. In exchange, you might have to surrender some of your property. It costs $200 to file; and the whole process takes about four to six months and commonly requires only one trip to the courthouse. You can probably do it yourself, without a lawyer. You must give up your "nonexempt" property, which can be sold to pay your creditors. Most people who file for Chapter 7 bankruptcy, however, have no nonexempt property to turn over to the trustee. Common kinds of exempt and nonexempt property are listed below. At the end of the Chapter 7 bankruptcy case, the debts that qualify for discharge are wiped out by the court. You no longer legally owe those creditors. You can't file for Chapter 7 bankruptcy again for six years from the date of your filing.

Exempt and Nonexempt Property at a Glance:
Items you can typically keep (exempt property)

Items you may typically give up (nonexempt property)

2. Determining Which Is Better for You

Here are how certain common situations are handled in Chapter 13 and Chapter 7 bankruptcy. Scan it to see how the differences affect you.

HELP WITH CHAPTER 7 BANKRUPTCY

If you decide that Chapter 7 bankruptcy is the best way to handle your debts, or you just want to learn more about it, look at How to File for Bankruptcy, by Stephen Elias, Albin Renauer and Robin Leonard (Nolo). That book contains detailed information on dischargeable and nondischargeable debts, exempt and nonexempt property, strategies for dealing with secured debts, along with all the forms and instructions needed to file your own Chapter 7 bankruptcy case.

3. If You Owe Back Taxes to the IRS

If a large part of your debt consists of federal taxes, what happens to your tax debts may determine whether Chapter 7 bankruptcy or Chapter 13 bankruptcy is a better choice for you.

You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
The taxes are income taxes. Taxes other than income, such as payroll taxes, Trust Fund Recovery Penalty or fraud penalties, can never be eliminated in bankruptcy.You did not commit fraud or willful evasion. You did not file a fraudulent tax return or otherwise willfully attempt to evade paying taxes, such as using a false Social Security number on your tax return. You pass the three-year rule. The tax return was originally due at least three years before you file for bankruptcy. This usually means April 15 of the year the return was due. But, if you filed a request for an extension, then it might mean August 15 or October 15 of that year. If the 15th fell on a Saturday or Sunday, your return wasn't due until the following Monday. That is the date you start counting from. You pass the two-year rule. You actually filed the tax return at least two years before filing the bankruptcy-having the IRS file a substitute return for you doesn't count unless you agreed to and signed the substitute return. If you don't file a tax return, you can never discharge the taxes you owe for that year in bankruptcy. You can, however, include the taxes in a Chapter 13 repayment plan.

You pass the 240-day rule. The income tax debt was assessed by the IRS at least 240 days before you file your bankruptcy petition, or has not yet been assessed.

If any of the following situations apply to you, you will have to add time to the three-year, two-year or 240-day rules for your debts to qualify for discharge in bankruptcy.

You submitted an Offer in Compromise seeking to settle with the IRS for pennies on the dollar. An Offer in Compromise delays the 240-day rule by the period from the time from when the Offer is made until the IRS rejects it or you withdraw it, plus 30 days.

You obtained a Taxpayer Assistance Order from an IRS Problems Resolution Officer. If an Order was issued preventing the IRS from collecting, the bankruptcy court may require that you add the time collection was suspended to the three years, two years and 240 days requirements. Not all courts require this, however. You filed a previous bankruptcy case. All three time periods-three years, two years and 240 days-stopped running while you were in the prior bankruptcy case. You must add the length of your case plus six months to all three.

If you are considering bankruptcy, call the IRS (800-829-1040) to obtain a plain English transcript, known as a literal transcript or IMF printout, for each tax year on which you might owe. This free computer printout lists important tax dates-when the returns were filed, when the taxes were assessed, and the dates of any tolling or extending events. Make sure you check the dates from the IRS transcript before filing bankruptcy.

EFFECT OF FEDERAL TAX LIEN

If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because prior recorded tax liens are not affected by your filing. A Chapter 7 bankruptcy will wipe out only your personal obligation to pay the debt. Any lien recorded before you file for bankruptcy remains. After your bankruptcy, the IRS can seize any property you owned at the time the bankruptcy was filed. But this doesn't mean that after your bankruptcy case is over the IRS will come and grab your property. Postbank-ruptcy, the IRS tends to seize only real estate and retirement accounts or pensions. And even then, IRS seizures generally take place only when a taxpayer has made no efforts to otherwise resolve the problem. Furthermore, IRS collectors must obtain approval from their supervisors before seizing a house or pension. The IRS is very concerned about negative publicity.

C. Other Alternatives

In some situations, filing for bankruptcy is the only sensible remedy for debt problems. In many others, however, another course of action makes better sense. This section outlines some alternatives.

1. Do Nothing
Surprisingly, the best approach for some people deeply in debt is to take no action at all. If you're living simply, with little income and property, and look forward to a similar life in the future, you may be what's known as "judgment proof." This means that anyone who sues you and wins won't be able to collect, simply because you don't have anything they can legally take. A creditor can't take away such essentials as basic clothing, ordinary household furnishings, personal effects, food, Social Security, unemployment benefits, public assistance or 75% of your wages (50% if the debt is for child support). If your creditors know it's unlikely they could collect a judgment, they probably won't sue you. Instead, they'll simply write off your debt and treat it as a deductible business loss for income tax purposes. In several years (usually between six and ten) it will become legally uncollectible under the state law called the statute of limitations.
STOPPING BILL COLLECTOR ABUSE AND HARASSMENT

You don't need to file for bankruptcy just to get annoying collection agencies off your back. Federal law forbids them from threatening you, lying about what they can do to you or invading your privacy. Under this law, you can also legally force collection agencies to stop phoning or writing you simply by demanding that they stop, even if you owe them a bundle and can't pay a cent. (The Fair Debt Collections Practices Act, 15 U.S.C. § 1692 and following.)
2. Negotiate With Your Creditors

If you have some income, or you have assets you're willing to sell, you may be a lot better off negotiating with your creditors than filing for bankruptcy. Negotiation may simply buy you some time to get back on your feet, or you and your creditors may agree on a complete settlement of your debts for less than you owe. In particular, if you are behind on a mortgage issued by Fannie Mae or Freddie Mac, your lender is encouraged to try to work out an arrangement to avoid having to foreclose or your filing for bankruptcy.

DEALING WITH CREDITORS

How to negotiate with creditors and collection agencies, and how to stop bill collector abuse, are covered in detail in Money Troubles: Legal Strategies to Cope With Your Debts, by Robin Leonard and Deanne Loonin (Nolo). That book covers how to deal with creditors when you owe money on credit cards, student loans, mortgage loans, car loans, child support and alimony, among other debts.

3. Get Outside Help to Design a Repayment Plan

Many people can't do a good job of negotiating with their creditors or with collection agencies. Inside, they feel that the creditors and collectors are right to insist on full payment. Or the creditors and collectors are so hard-nosed or just plain irrational that the process is too unpleasant to stomach. If you don't want to negotiate on your own, you can seek help from a nonprofit credit or debt counseling agency. These agencies can work with you to help you repay your debts and improve your financial picture. To use a credit or debt counseling agency to help you pay your debts, you must have some disposable income. A counselor contacts your creditors to let them know that you've sought assistance and need more time to pay. Based on your income and debts, the counselor, with your creditors, decides on how much you pay. You then make one payment each month to the counseling agency, which in turn pays your creditors. The agency asks the creditors to return a small percentage of the money received to the agency office to fund its work. This arrangement is generally referred to as a debt management program.

Some creditors will make overtures to help you when you're on a debt management program. For example, Citicorp waives minimum payment and late charges-and may freeze interest assessments-for customers undergoing credit counseling. But few creditors will make interest concessions, such as waiving a portion of the accumulated interest to help you repay the principal. More likely, you'll get late fees dropped and the opportunity to reinstate your credit if you successfully complete a debt management program.

The combination of high consumer debt and easy access to information (the Internet) has led to an explosion in the number of credit and debt counseling agencies ready to offer you help. Some provide limited services, such as budgeting and debt repayment, while others offer a range of services, from debt counseling to financial planning. Participating in a credit or debt counseling agency's debt management program is a little bit like filing for Chapter 13 bankruptcy. Working with a credit or debt counseling agency has one advantage: no bankruptcy will appear on your credit record.

But a debt management program also has two disadvantages when compared to Chapter 13 bankruptcy. First, if you miss a payment, Chapter 13 protects you from creditors who would start collection actions. A debt management program has no such protection and any one creditor can pull the plug on your plan. Also, a debt management program plan usually requires that your debts be paid in full. In Chapter 13 bankruptcy, you often pay only a small fraction of your unsecured debts.

Critics of credit and debt counseling agencies point out that they get most of their funding from creditors. (Some offices also receive grants from private agencies such as the United Way and federal agencies including the Department of Housing and Urban Development.) Nevertheless, critics claim that counselors cannot be objective in counseling debtors to file for bankruptcy if they know the office won't receive any funds. In response to this and other consumer concerns, credit and debt counseling agencies accredited by the National Foundation for Consumer Credit (the majority of agencies are) reached an agreement with the Federal Trade Commission to disclose the following to consumers:

that creditors fund a large portion of the cost of their operations, that the credit agency must balance the ability of the debtor to make payments with the requirements of the creditors that fund the office, and a reliable estimate of how long it will take a debtor to repay his or her debts under a debt management program. a. Consumer Credit Counseling Service Consumer Credit Counseling Service (CCCS) is the oldest credit or debt counseling agency in the country. Actually, CCCS isn't one agency. CCCS is the primary operating name of many credit and debt counseling agencies affiliated with the National Foundation for Consumer Credit. In most CCCS offices, the primary services offered are the debt management program and budgeting. A few offices have additional services, such as helping you save money toward buying a house or reviewing your credit report. CCCS may charge you a minimal fee for its services. If you can't afford the fee, CCCS will waive it.

4. File for "Chapter 20" Bankruptcy

Chapter 20 isn't a specific section of the Bankruptcy Code. Instead, it's a shorthand way of referring to the practice of filing a Chapter 7 bankruptcy to eliminate unsecured dischargeable debts, and then immediately following up with a Chapter 13 bankruptcy to pay off the remaining debts. This is an excellent strategy for many people, especially if your debts are so high that you don't initially qualify for Chapter 13 bankruptcy or can't come up with a feasible repayment plan.
5. File for Chapter 11 Bankruptcy

Chapter 11 bankruptcy is the type of bankruptcy used by financially struggling businesses-such as Macy's-to reorganize their affairs. It is also available to individuals. Individuals who consider Chapter 11 bankruptcy usually have debts in excess of the Chapter 13 bankruptcy limits, $290,525 of unsecured debts or $871,550 of secured debts, or substantial nonexempt assets, such as several pieces of real estate. The initial filing fee is currently $830, compared to $200 for Chapter 7 or $185 for Chapter 13 bankruptcy. In addition, you must pay a quarterly fee that is a percentage of your debts (often several hundreds or thousands of dollars) until your reorganization plan is approved or dismissed, or your case is converted to Chapter 7 bankruptcy. Most attorneys require a minimum $7,500 retainer fee to handle a Chapter 11 bankruptcy case. Add to that the Chapter 11 bankruptcy court fees, which one year after you file could run you $10,000. If you want to read more on this kind of bankruptcy, see A Feast for Lawyers, by Sol Stein (M. Evans & Co., Inc.).

HELP FROM A LAWYER

You'll need a lawyer to file for Chapter 11 bankruptcy. A Chapter 11 bankruptcy often turns into a long, expensive, lawyer-infested mess, and many Chapter 11 filings end up being converted to Chapter 7 bankruptcy. Chapter 11 bankruptcy also offers a fast-track bankruptcy for small businesses with debts up to $2 million. (11 U.S.C. § 1121(e).) You will still need an attorney to use the fast-track procedure.

6. Consider Chapter 12 Bankruptcy

Chapter 12 bankruptcy is almost identical to Chapter 13 bankruptcy. To be eligible for Chapter 12 bankruptcy, however, at least 80% of your debts must arise from the operation of a family farm.

Although Chapter 12 bankruptcy has been unavailable as of June 30, 2000, in March, 2001 Congress passed legislation that would reauthorize the program. All expect that the president will sign the bill into law.

HELP FROM A LAWYER

See a lawyer if you want to file for Chapter 12 bankruptcy. D. Converting from Chapter 7 Bankruptcy to Chapter 13 Bankruptcy Even if you've already filed for Chapter 7 bankruptcy, you can switch to Chapter 13 bankruptcy if you decide it would be better. For example, you might discover that a tax debt you thought you could discharge in a Chapter 7 bankruptcy can't be discharged, but can be included in a Chapter 13 repayment plan.

You have the absolute right to convert a Chapter 7 bankruptcy case into a Chapter 13 bankruptcy case at any time, as long as you did not previously convert this case to Chapter 13 bankruptcy from Chapter 7 bankruptcy. However, you must be eligible to file for Chapter 13 and to prepare a workable repayment plan. You do have to file a written request (called a motion) with the bankruptcy court, send a copy of your motion to each of your creditors and obtain an order from the court.

RESOURCES FOR MOTION FORMS

To see what a motion to convert your case to Chapter 13 bankruptcy looks like, consult a bankruptcy forms book at a law library. Also, Consumer Bankruptcy Law and Practice, written and published by the National Consumer Law Center, contains sample motion forms.

The major issue that will come up at the court hearing on your request is whether or not you are eligible to file for Chapter 13 bankruptcy. Your debts must meet the $871,550 secured debt and $290,525 unsecured debt limits, and you must have sufficient disposable income to fund a Chapter 13 plan. (These limits increase every three years.) Courts are split as to whether your eligibility for Chapter 13 bankruptcy is based on your financial circumstances at the time you filed your Chapter 7 bankruptcy or at the time you seek to convert. For most people, it doesn't matter. But it may matter to you. For example, if you had no regular income when you filed for Chapter 7 bankruptcy, you may not be allowed to convert to Chapter 13 bankruptcy if your court bases eligibility on circumstances at the time you filed your Chapter 7 bankruptcy case. In that situation, the court would probably require you to dismiss your Chapter 7 case and refile a Chapter 13 case. You would have to pay a $185 filing fee.

If the court does approve your motion to convert, you must file your Chapter 13 repayment plan within 15 days and start making payments under the plan within 30 days after you file it.