Bankruptcy Chapter 13 – FAQ

Here are answers to the most asked questions regarding chapter 13 bankruptcy.  Use the information here to help you decide which bankruptcy chapter is right for you. Because people are usually not aware of the differences between chapter 13 and chapter 7, they are unsure of which bankruptcy chapter to file. The questions and answers below are for chapter 13 bankruptcy only!

  1. How do I get started?
  2. Is it true that I won’t see a Judge?
  3. Do I get to pick my Trustee?
  4. Who are the players in the 341 meetings?
  5. Who else attends the 341 meetings?
  6. What happens after the 341 meetings?
  7. So, who do I have to pay, and when do I start?
  8. How many months do I have to pay off the debts?
  9. Can I pay it off early?
  10. Can I pay the extra money to the trustee if I’m able too?
  11. Under the plan, how much am I expected to pay on unsecured debts?
  12. What if I need more than 60 months to pay off my creditors?
  13. Can they still foreclose on my house after I have filed?
  14. What happens if I stop paying or can’t pay the Trustee?
  15. Besides my filing fee, what other fees will I have to pay?
  16. What are the tax obligations of a person filing a bankruptcy?
  17. What happens to my federal tax debts?
  18. My spouse is declaring bankruptcy; should we file together?
  19. What is community property?
  20. What is “Equitable Distribution”?

Up | 1. How do I get started?

The first thing you must do is file a simple, two-page form in court asking for relief under chapter 13. All debtors participating in the case sign the form called a “Petition.”

The filed petition is the first official step in the chapter 13 process, and it’s the actual filing that puts into motion what’s called an “automatic stay.”

From this point on, creditors may no longer demand money from you, bring you to court to collect a debt or even to proceed with foreclosure or repossession of your property.

The court will provide a “docket number,” which is another way of saying your case number. This docket number can stop foreclosure proceedings and most other actions except those allowed by motion in the bankruptcy court.

The second thing that happens is about 7 – 10 days after filing the petition you’ll be required to submit a document, called the Matrix, which lists of all your creditors’ names and addresses to the court.

The third thing that happens is about 7 – 10 days after submitting your Matrix, you’ll need to submit a plan outlining exactly how you propose to reorganize under chapter 13. This plan includes your income, liabilities, all assets, monthly expenses, past financial history, and evidence that you are capable of fulfilling your financial obligations under your plan.

Once you’ve filed your plan, you’ll have an opportunity to file amendments as necessary. For instance, you may need to add creditors or modify your plan based on an income change, or some other unforeseen circumstance. Amendments may require additional filing fees.

Up | 2. Is it true that I won’t see a Judge?

Usually, people applying for Chapter 13 never see a Judge. More than likely, you’ll be assigned a Trustee who handles the particulars of your case. Only if your creditors contest your case and the Trustee cannot work out the issues, will you appear before a Judge.

Up | 3. Do I get to pick my Trustee?

No, the court assigns all trustees. You’ll be contacted for a 341 meeting 1 to 3 months after filing bankruptcy. At the 341 meetings, creditors, a trustee, examiner, or the United States trustee question debtors under oath about their financial affairs. Normally, there will only be one of these meetings.

Up | 4. Who are the players in the 341 meetings?

Besides you, there is the court-appointed trustee, all your creditors, and, if hired, your attorney. The trustee coordinates the meeting, asking most of the questions. The trustee acts on behalf of both you and the creditors to ensure your plan meets all the Bankruptcy Rules and ensures unsecured creditors are protected and allocated as high of a return as possible.

Up | 5. Who else attends the 341 meetings?

Everyone listed as a creditor. Don’t be alarmed about this because most of your creditors won’t even bother to show up. If any creditors do show up, they have the right to question you, (you’ll be under oath) regarding your financial situation and your proposed plan. All they want to know is how much you can pay.

Up | 6. What happens after the 341 meetings?

If you’ve outlined a solid plan (one with good intentions), everyone will accept it, and the meeting ends. You start making your proposed payments on the schedule outlined in the agreed-upon plan.

Up | 7. So, who do I have to pay, and when do I start?

All your debts fall into three categories; secured creditors, unsecured creditors, and post-petition creditors

Secured Creditors: are usually on big-ticket items such as mortgages (first and second) and large motor homes, boats, and so forth. You pay these creditors directly, just as before filing bankruptcy. These payments, known as “payments outside the plan,” are made on their normal due dates. For example, if your mortgage is due on the 10th of the month, then you must resume making the payment on or before that date.

NOTE: Failure to make payments on secured property gives creditors the right to ask for relief from the automatic stay and proceed with seizure actions such as foreclosing on your home.

Unsecured Creditors: These are the unsecured debts (and some secured debt) that accrued before filing bankruptcy and that you agreed to pay in your repayment plan.

You write one check each month (money order, cashiers check, bank check) with the docket number written on it and send it to the Trustee who then pays each of your creditors.

IMPORTANT TIP: It’s a good idea to demonstrate “good faith” by bringing your first check, made out in the amount you propose in your plan, to the 341 meetings, especially if it’s been 1-2 months since you filed Chapter 13.

WARNING! If creditors try to contact you in an attempt to have you reaffirm an old debt or pay them money, DO NOT give them any money or sign any papers! Stick to your court-approved payment plan and notify the Trustee of this and any other illegal contact attempts.

Post-petition Creditors: These are debts (credit cards, phone bills, car payments, mortgage payments, etc.) incurred after you filed for bankruptcy and must be paid in a timely fashion since your payment plan does not protect them.

Up | 8. How many months do I have to pay off the debts?

The length of time depends upon your plan and your income over the life of the plan, and the size of the debt. You’ll get anywhere from 36 up to 60 months.

Up |9. Can I pay it off early?

Not really, because if your income would allow for faster payback than 36 months, the Trustee will normally set the plan at 36 months and require a larger percentage of funds go to your unsecured creditors.

Up |10. Can I pay extra money to the trustee if I’m able too?

That is not a good idea.  If your income changes permanently, you must inform the court so your payment plan can be adjusted. But, if you come into a few extra dollars, save it for emergencies.

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11. Under the plan, how much am I expected to pay on unsecured debts?

Normally it’s 50 percent of the creditors claim spread over the 36 (or up to 60 months) plan. For example, if you owed $5,000 on a credit card, then you would typically pay back $2,500 or about $69 per month.

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12. What if I owe so much that I’ll need more than 60 months to pay off my creditors?

Some creditors may be willing to work with you to come up with creative payment options, but if not, then normally, your case will be converted to a Chapter 7 Bankruptcy.

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13. Can lenders still foreclose on my house after I have filed for bankruptcy?

Not if you’ve made all mortgage payments on time. Otherwise, the court may permit them to foreclose.

Up |14. What happens if I stop paying or can’t pay the Trustee?

It depends! If the problem is temporary, usually not more than three months, then contact the Trustee and ask to work out an alternate payment plan. If you’re acting in good faith, the Trustee will normally work with you.

However, if you cannot work out a plan or fail to make the payments then, the Trustee will have your case either converted to a Chapter 7 or completely dismissed, in which case you’ll lose all bankruptcy protection.

The important point here is to communicate with the Trustee!

Up | 15. Besides my filing fee, what other fees will I have to pay?

None, unless there are amendments or additional motions or your chapter 13, is converted to a Chapter 7.

Up | 16. What are the tax obligations of a person filing a bankruptcy?

The tax obligations of the person filing a bankruptcy petition vary depending on whether you file a Chapter 7 or Chapter 13.

Unlike chapter 7, when filing a Chapter 13 bankruptcy petition, you do not create a separate taxable estate for federal tax purposes. You file the same federal income tax return (Form 1040) that you filed before the bankruptcy petition.

When filing a Chapter 7 bankruptcy petition, you create a separate taxable bankruptcy estate, consisting of property that belongs to you before the filing date, and is completely separate from you as an individual taxpayer. The trustee is responsible for preparing and filing the estate’s tax returns (Form 1041) and paying its taxes. The individual debtor remains responsible for filing returns (Form 1040) and paying taxes on any income that does not belong to the estate.

Up | 17. What happens to my federal tax debts?

It depends whether you file a Chapter 7 or a Chapter 13.

A Chapter 7 debtor can wipe out federal income taxes if all the following apply:

    1. the IRS had not filed a prior tax lien on the assets you own (if they have, the lien survives bankruptcy, which means that the government may still seize property to collect the discharged tax debts);
    2. you didn’t file fraudulently or try to evade paying your taxes;
    3. your liability is for a tax return filed at least two years before the bankruptcy;
    4. the tax return was due more than three years ago; and
    5. tax deficiencies assessed on prior returns were assessed at least 240 days before the filing of the bankruptcy.

In a Chapter 13 filing, you’ll pay the IRS as part of your repayment plan.

Up | 18. My spouse is declaring bankruptcy; should he file alone, or should we file together?

Whether married couples should file a joint petition or a single one depends on various factors: type of property, the amount of community debt involved, and how the property is held (e.g., community, joint tenancy, or an estate-by-the entirety).

Filing together eliminates the separate debts of you and your spouse and all the jointly-held marital debts. Filing alone leaves the non-bankrupt spouse still liable for his or her share of joint debts but wipes out the spouse’s separate debts and his/her share of the joint debts.

If you are legally separated, have divided your property, and taken care of all the financial considerations, your best option may be to have your spouse go it alone. If you incurred the debts before you were married, there is no point in having you both file.

Community property and common law, also called equitable distribution,are the two types of martial property ownership. The vast majority of states apply the equitable distribution rules; nine states apply the community property rules. If you live in a common-law property state, your spouse’s bankrupt estate will include his/her separate property and half of the jointly-held marital property. The non-bankrupt spouse will not have to worry about the effects of the bankruptcy on his or her separate property.

However, the bankruptcy court takes a dim view if the non-bankrupt spouse is merely holding the property or has received the property from the bankrupt spouse within one year of filing bankruptcy. In this case, this transaction is considered fraudulent, and your property is turned over to the bankruptcy trustee.

In community property states, spouses equally own all property earned or received during the marriage, splitting 50-50. In bankruptcy, then all the community property you and your spouse own jointly is part of the bankruptcy estate, regardless whether you join in the filing.

Your spouse’s bankruptcy does not impact your separate property (i.e., property owned before the marriage).  The trustee uses property held by your spouse to settle debt first, and then, if debt remains, the trustee uses non-exempt community property.

Up | 19. What is community property?

There are nine community property states:

    1. Arizona
    2. California
    3. Idaho
    4. Louisiana
    5. Nevada
    6. New Mexico
    7. Texas
    8. Washington
    9. Wisconsin.

Additionally, Puerto Rico is a community property jurisdiction.

These states generally regard community property to be all property acquired during the marriage, other than a gift or inheritance. Even if one spouse earns all the money to acquire the property, all the property acquired is community property.

While there are several differences in each of the nine states, all of them have special laws that operate on the theory that both spouses contribute equally to the marriage; thus, all property acquired during the marriage is the result of the combined efforts of both spouses.

In community property jurisdictions, spouses equally own all community property (fifty percent owned by the husband and fifty percent owned by the wife).

Up | 20. What is “Equitable Distribution”?

Most states employ “equitable distribution” in dividing marital (community) property as a result of the dissolution of marriage (divorce).

Instead of a strict fifty-fifty split (in which each spouse receives exactly one-half of the marital or separate property), the equitable distribution looks at the financial situation that each spouse will be in after the termination of the marriage.

While equitable distribution is more flexible, it is harder to predict the actual outcome, since the various factors are subjectively weighed.

Factors considered in an equitable distribution include:

    • Earning power of the spouses (one might be much greater than the other)
    • Separate property of the spouses (one might be greater in value than the other)
    • One spouse having done all the work to acquire the property
    • The value that one spouse contributed as the home-maker for the family
    • he economic fault of one spouse in wasting and dissipating marital property
    • Duration of the marriage
    • Age and relative health of the spouses
    • The responsibility for providing for children of the marriage
    • Spousal abuse or marital infidelity (to penalize the offending spouse)