Bankruptcy Attorney in Michigan  

Walter A. Metzen, Michigan Bankruptcy Attorney

Board Certified Consumer Bankruptcy Specialist

American Board of Bankruptcy Certification

 


 

 Bankruptcy Basics: The Discharge in Bankruptcy
 

Chapter 13
Individual Debt Adjustment


BACKGROUND

A chapter 13 bankruptcy is also called a wage
earner’s plan. It enables individuals with
regular income to develop a plan to repay all
or part of their debts. Under this chapter,
debtors propose a repayment plan to make
installments to creditors over three to five
years. If the debtor’s current monthly income
is less than the applicable state median, the
plan will be for three years unless the court
approves a longer period “for cause.”1 If the
debtor’s current monthly income is greater
than the applicable state median, the plan
generally must be for five years. In no case
may a plan provide for payments over a period
longer than five years. 11 U.S.C. 1322(d).
During this time the law forbids creditors
from starting or continuing collection efforts.
This chapter discusses six aspects of a chapter
13 proceeding: the advantages of choosing
chapter 13, the chapter 13 eligibility
requirements, how a chapter 13 proceeding
works, what may be included in chapter 13
repayment plan and how it is confirmed,
making the plan work, and the special chapter
13 discharge.
ADVANTAGES OF CHAPTER 13
Chapter 13 offers individuals a number of
advantages over liquidation under chapter 7.
Perhaps most significantly, chapter 13 offers
individuals an opportunity to save their homes
from foreclosure. By filing under this chapter,
individuals can stop foreclosure proceedings
and may cure delinquent mortgage payments
over time. Nevertheless, they must still make
all mortgage payments that come due during
the chapter 13 plan on time. Another
advantage of chapter 13 is that it 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 has a special provision that
protects third parties who are liable with the
debtor on “consumer debts.” This provision
may protect co-signers. Finally, chapter 13
acts like a consolidation loan under which the
individual makes the plan payments to a
chapter 13 trustee who then distributes
payments to creditors. Individuals will have
no direct contact with creditors while under
chapter 13 protection.

CHAPTER 13 ELIGIBILITY
Any individual, even if self-employed or
operating an unincorporated business, is
eligible for chapter 13 relief as long as the
individual’s unsecured debts are less than
$336,900 and secured debts are less than
$1,010,650. 11 U.S.C. 109(e). These
amounts are adjusted periodically to reflect
changes in the consumer price index. A
corporation or partnership may not be a
chapter 13 debtor. Id.
An individual cannot file under chapter 13 or
any other chapter if, during the preceding 180
days, a prior bankruptcy petition was
dismissed due to the debtor’s willful failure to
appear before the court or comply with orders
of the court or was voluntarily dismissed after
creditors sought relief from the bankruptcy
court to recover property upon which they
hold liens. 11 U.S.C. 109(g), 362(d) and
(e). In addition, no individual may be a debtor
under chapter 13 or any chapter of the

Bankruptcy Code unless he or she has, within
180 days before filing, received credit
counseling from an approved credit
counseling agency either in an individual or
group briefing. 11 U.S.C. 109, 111. There
are exceptions in emergency situations or
where the U.S. trustee (or bankruptcy
administrator) has determined that there are
insufficient approved agencies to provide the
required counseling. If a debt management
plan is developed during required credit
counseling, it must be filed with the court.

HOW CHAPTER 13 WORKS
A chapter 13 case begins by filing a petition
with the bankruptcy court serving the area
where the debtor has a domicile or residence.
Unless the court orders otherwise, the debtor
must also file with the court: (1) schedules of
assets and liabilities; (2) a schedule of current
income and expenditures; (3) a schedule of
executory contracts and unexpired leases; and
(4) a statement of financial affairs. Fed. R.
Bankr. P. 1007(b). The debtor must also file a
certificate of credit counseling and a copy of
any debt repayment plan developed through
credit counseling; evidence of payment from
employers, if any, received 60 days before
filing; a statement of monthly net income and
any anticipated increase in income or
expenses after filing; and a record of any
interest the debtor has in federal or state
qualified education or tuition accounts. 11
U.S.C. 521. The debtor must provide the
chapter 13 case trustee with a copy of the tax
return or transcripts for the most recent tax
year as well as tax returns filed during the case
(including tax returns for prior years that had
not been filed when the case began). Id. A
husband and wife may file a joint petition or
individual petitions. 11 U.S.C. 302(a). (The
Official Forms may be purchased at legal
stationery stores or downloaded from the
internet at:
http://www.uscourts.gov/bkforms/index.html.
They are not available from the court.)
The courts must charge a $235 case filing fee
and a $39 miscellaneous administrative fee.
Normally the fees must be paid to the clerk of
the court upon filing. With the court’s
permission, however, they may be paid in
installments. 28 U.S.C. 1930(a); Fed. R.
Bankr. P. 1006(b); Bankruptcy Court
Miscellaneous Fee Schedule, Item 8. The
number of installments is limited to four, and
the debtor must make the final installment no
later than 120 days after filing the petition.
Fed. R. Bankr. P. 1006(b). For cause shown,
the court may extend the time of any
installment, as long as the last installment is
paid no later than 180 days after filing the
petition. Id. The debtor may also pay the $39
administrative fee in installments. If a joint
petition is filed, only one filing fee and one
administrative fee are charged. Debtors should
be aware that failure to pay these fees may
result in dismissal of the case. 11 U.S.C.
1307(c)(2).
In order to complete the Official Bankruptcy
Forms that make up the petition, statement of
financial affairs, and schedules, the debtor
must compile the following information:
1. A list of all creditors and the amounts and
nature of their claims;
2. The source, amount, and frequency of the
debtor’s income;
3. A list of all of the debtor’s property; and

4. A detailed list of the debtor’s monthly
living expenses, i.e., food, clothing, shelter,
utilities, taxes, transportation, medicine, etc.
Married individuals must gather this
information for their spouse regardless of
whether they are filing a joint petition,
separate individual petitions, or even if only
one spouse is filing. In a situation where only
one spouse files, the income and expenses of
the non-filing spouse is required so that the
court, the trustee and creditors can evaluate
the household’s financial position.
When an individual files a chapter 13 petition,
an impartial trustee is appointed to administer
the case. 11 U.S.C. 1302. In some districts,
the U.S. trustee or bankruptcy administrator2
appoints a standing trustee to serve in all
chapter 13 cases. 28 U.S.C. 586(b). The
chapter 13 trustee both evaluates the case and
serves as a disbursing agent, collecting
payments from the debtor and making
distributions to creditors. 11 U.S.C. 1302(b).
Filing the petition under chapter 13
“automatically stays” (stops) most collection
actions against the debtor or the debtor’s
property. 11 U.S.C. 362. Filing the petition
does not, however, stay certain types of
actions listed under 11 U.S.C. 362(b), and
the stay may be effective only for a short time
in some situations. The stay arises by
operation of law and requires no judicial
action. As long as the stay is in effect,
creditors generally may not initiate or continue
lawsuits, wage garnishments, or even make
telephone calls demanding payments. The
bankruptcy clerk gives notice of the
bankruptcy case to all creditors whose names
and addresses are provided by the debtor.
Chapter 13 also contains a special automatic
stay provision that protects co-debtors. Unless
the bankruptcy court authorizes otherwise, a
creditor may not seek to collect a “consumer
debt” from any individual who is liable along
with the debtor. 11 U.S.C. 1301(a).
Consumer debts are those incurred by an
individual primarily for a personal, family, or
household purpose. 11 U.S.C. 101(8).
Individuals may use a chapter 13 proceeding
to save their home from foreclosure. The
automatic stay stops the foreclosure
proceeding as soon as the individual files the
chapter 13 petition. The individual may then
bring the past-due payments current over a
reasonable period of time. Nevertheless, the
debtor may still lose the home if the mortgage
company completes the foreclosure sale under
state law before the debtor files the petition.11
U.S.C. 1322(c). The debtor may also lose
the home if he or she fails to make the regular
mortgage payments that come due after the
chapter 13 filing.
Between 21 and 50 days after the debtor files
the chapter 13 petition, the chapter 13 trustee
will hold a meeting of creditors. If the U.S.
trustee or bankruptcy administrator schedules
the meeting at a place that does not have
regular U.S. trustee or bankruptcy
administrator staffing, the meeting may be
held no more than 60 days after the debtor
files. Fed. R. Bankr. P. 2003(a). During this
meeting, the trustee places the debtor under
oath, and both the trustee and creditors may
ask questions. The debtor must attend the
meeting and answer questions regarding his or
her financial affairs and the proposed terms of
the plan.11 U.S.C. 343. If a husband and
wife file a joint petition, they both must attend
the creditors’ meeting and answer questions.
In order to preserve their independent
judgment, bankruptcy judges are prohibited
from attending the creditors’ meeting. 11

U.S.C. 341(c). The parties typically resolve
problems with the plan either during or shortly
after the creditors’ meeting. Generally, the
debtor can avoid problems by making sure
that the petition and plan are complete and
accurate, and by consulting with the trustee
prior to the meeting.
In a chapter 13 case, to participate in
distributions from the bankruptcy estate,
unsecured creditors must file their claims with
the court within 90 days after the first date set
for the meeting of creditors. Fed. R. Bankr. P.
3002(c). A governmental unit, however, has
180 days from the date the case is filed file a
proof of claim.11 U.S.C. 502(b)(9).
After the meeting of creditors, the debtor, the
chapter 13 trustee, and those creditors who
wish to attend will come to court for a hearing
on the debtor’s chapter 13 repayment plan.

THE CHAPTER 13 PLAN AND
CONFIRMATION HEARING

Unless the court grants an extension, the
debtor must file a repayment plan with the
petition or within 14 days after the petition is
filed. Fed. R. Bankr. P. 3015. A plan must be
submitted for court approval and must provide
for payments of fixed amounts to the trustee
on a regular basis, typically biweekly or
monthly. The trustee then distributes the funds
to creditors according to the terms of the plan,
which may offer creditors less than full
payment on their claims.
There are three types of claims: priority,
secured, and unsecured. Priority claims are
those granted special status by the bankruptcy
law, such as most taxes and the costs of
bankruptcy proceeding.3 Secured claims are
those for which the creditor has the right take
back certain property (i.e., the collateral) if the
debtor does not pay the underlying debt. In
contrast to secured claims, unsecured claims
are generally those for which the creditor has
no special rights to collect against particular
property owned by the debtor.
The plan must pay priority claims in full
unless a particular priority creditor agrees to
different treatment of the claim or, in the case
of a domestic support obligation, unless the
debtor contributes all “disposable income” -
discussed below - to a five-year plan.
11 U.S.C. 1322(a).
If the debtor wants to keep the collateral
securing a particular claim, the plan must
provide that the holder of the secured claim
receive at least the value of the collateral. If
the obligation underlying the secured claim
was used to buy the collateral (e.g., a car
loan), and the debt was incurred within certain
time frames before the bankruptcy filing, the
plan must provide for full payment of the debt,
not just the value of the collateral (which may
be less due to depreciation). Payments to
certain secured creditors (i.e., the home
mortgage lender), may be made over the
original loan repayment schedule (which may
be longer than the plan) so long as any
arrearage is made up during the plan. The
debtor should consult an attorney to determine
the proper treatment of secured claims in the
plan.
The plan need not pay unsecured claims in full
as long it provides that the debtor will pay all
projected “disposable income” over an
“applicable commitment period,” and as long
as unsecured creditors receive at least as much
under the plan as they would receive if the
debtor’s assets were liquidated under chapter
7. 11 U.S.C. 1325. In chapter 13,
“disposable income” is income (other than
child support payments received by the
debtor) less amounts reasonably necessary for
the maintenance or support of the debtor or
dependents and less charitable contributions
up to 15% of the debtor’s gross income. If the
debtor operates a business, the definition of
disposable income excludes those amounts
which are necessary for ordinary operating
expenses. 11 U.S.C. 1325(b)(2)(A) and (B).
The “applicable commitment period” depends
on the debtor’s current monthly income. The
applicable commitment period must be three
years if current monthly income is less than
the state median for a family of the same size -
and five years if the current monthly income is
greater than a family of the same size. 11
U.S.C. 1325(d). The plan may be less than
the applicable commitment period (three or
five years) only if unsecured debt is paid in
full over a shorter period.
Within 30 days after filing the bankruptcy
case, even if the plan has not yet been
approved by the court, the debtor must start
making plan payments to the trustee. 11
U.S.C. 1326(a)(1). If any secured loan
payments or lease payments come due before
the debtor’s plan is confirmed (typically home
and automobile payments), the debtor must
make adequate protection payments directly to
the secured lender or lessor - deducting the
amount paid from the amount that would
otherwise be paid to the trustee. Id.
No later than 45 days after the meeting of
creditors, the bankruptcy judge must hold a
confirmation hearing and decide whether the
plan is feasible and meets the standards for
confirmation set forth in the Bankruptcy Code.
11 U.S.C. 1324, 1325. Creditors will
receive 28 days’ notice of the hearing and may
object to confirmation. Fed. R. Bankr. P.
2002(b). While a variety of objections may be
made, the most frequent ones are that
payments offered under the plan are less than
creditors would receive if the debtor’s assets
were liquidated or that the debtor’s plan does
not commit all of the debtor’s projected
disposable income for the three or five year
applicable commitment period.
If the court confirms the plan, the chapter 13
trustee will distribute funds received under the
plan “as soon as is practicable.” 11 U.S.C.
1326(a)(2). If the court declines to confirm
the plan, the debtor may file a modified plan.
11 U.S.C. 1323. The debtor may also
convert the case to a liquidation case under
chapter 7.4 11 U.S.C. 1307(a). If the court
declines to confirm the plan or the modified
plan and instead dismisses the case, the court
may authorize the trustee to keep some funds
for costs, but the trustee must return all
remaining funds to the debtor (other than
funds already disbursed or due to creditors).
11 U.S.C. 1326(a)(2).
Occasionally, a change in circumstances may
compromise the debtor’s ability to make plan
payments. For example, a creditor may object
or threaten to object to a plan, or the debtor
may inadvertently have failed to list all
creditors. In such instances, the plan may be
modified either before or after confirmation.
11 U.S.C. 1323, 1329. Modification after
confirmation is not limited to an initiative by
the debtor, but may be at the request of the
trustee or an unsecured creditor. 11 U.S.C.
1329(a).
MAKING THE PLAN WORK
The provisions of a confirmed plan bind the
debtor and each creditor. 11 U.S.C. 1327.
Once the court confirms the plan, the debtor

must make the plan succeed. The debtor must
make regular payments to the trustee either
directly or through payroll deduction, which
will require adjustment to living on a fixed
budget for a prolonged period. Furthermore,
while confirmation of the plan entitles the
debtor to retain property as long as payments
are made, the debtor may not incur new debt
without consulting the trustee, because
additional debt may compromise the debtor’s
ability to complete the plan. 11 U.S.C.
1305(c), 1322(a)(1), 1327.
A debtor may make plan payments through
payroll deductions. This practice increases the
likelihood that payments will be made on time
and that the debtor will complete the plan. In
any event, if the debtor fails to make the
payments due under the confirmed plan, the
court may dismiss the case or convert it to a
liquidation case under chapter 7 of the
Bankruptcy Code. 11 U.S.C. 1307(c). The
court may also dismiss or convert the debtor’s
case if the debtor fails to pay any post-filing
domestic support obligations (i.e., child
support, alimony), or fails to make required
tax filings during the case. 11 U.S.C.
1307(c) and (e), 1308, 521.
THE CHAPTER 13 DISCHARGE
The bankruptcy law regarding the scope of the
chapter 13 discharge is complex and has
recently undergone major changes. Therefore,
debtors should consult competent legal
counsel prior to filing regarding the scope of
the chapter 13 discharge.
A chapter 13 debtor is entitled to a discharge
upon completion of all payments under the
chapter 13 plan so long as the debtor: (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 court will
not enter the discharge, however, until it
determines, after notice and a hearing, that
there is no reason to believe there is any
pending proceeding that might give rise to a
limitation on the debtor’s homestead
exemption. 11 U.S.C. 1328(h).
The discharge releases the debtor from all
debts provided for by the plan or disallowed
(under section 502), with limited exceptions.
Creditors provided for in full or in part under
the chapter 13 plan may no longer initiate or
continue any legal or other action against the
debtor to collect the discharged obligations.
As a general rule, the discharge releases the
debtor from all debts provided for by the plan
or disallowed, with the exception of certain
debts referenced in 11 U.S.C. 1328. Debts
not discharged in chapter 13 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 that they
are not fully paid under the chapter 13 plan,
the debtor will still be responsible for these
debts after the bankruptcy case has concluded.
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).
The discharge in a chapter 13 case is
somewhat 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
non-dischargeable tax obligations, and debts
arising from property settlements in divorce or
separation proceedings. 11 U.S.C. 1328(a).

THE CHAPTER 13 HARDSHIP
DISCHARGE

After confirmation of a plan, circumstances
may arise that prevent the debtor from
completing the plan. In such situations, the
debtor may ask the court to grant a “hardship
discharge.” 11 U.S.C. 1328(b). Generally,
such a discharge is available only if: (1) the
debtor’s failure to complete plan payments is
due to circumstances beyond the debtor’s
control and through no fault of the debtor; (2)
creditors have received at least as much as
they would have received in a chapter 7
liquidation case; and (3) modification of the
plan is not possible. Injury or illness that
precludes employment sufficient to fund even
a modified plan may serve as the basis for a
hardship discharge. The hardship discharge is
more limited than the discharge described
above and does not apply to any debts that are
non-dischargeable in a chapter 7 case. 11
U.S.C. 523.

NOTES
1. The “current monthly income” received by
the debtor is a defined term in the Bankruptcy
Code and means the average monthly income
received over the six calendar months before
commencement of the bankruptcy case,
including regular contributions to household
expenses from non-debtors and including
income from the debtor’s spouse if the
petition is a joint petition, but not including
social security income or certain payments
made because the debtor is the victim of
certain crimes. 11 U.S.C. 101(10A).
2. In North Carolina and Alabama, bankruptcy
administrators perform similar functions that
U.S. trustees perform in the remaining forty eight
states. The bankruptcy administrator
program is administered by the Administrative
Office of the United States Courts, while the
U.S. trustee program is administered by the
Department of Justice. For purposes of this
publication, references to U.S. trustees are
also applicable to bankruptcy administrators.
3. Section 507 sets forth 10 categories of
unsecured claims which Congress has, for
public policy reasons, given priority of
distribution over other unsecured claims.
4. A fee of $15 is charged for converting a
case under chapter 13 to a case under chapter
7.

 

   
  •   Driver's License or State ID & Social Security card
  •   Pay Stubs for the past 2 months
  •   Copies of all Bills, Summons or Judgments against you by creditors
  •    Divorce Judgments or Decrees
  •   Real Estate Documents, Deeds, Recorded Mortgages, mortgage balance statements
  •   Property Tax Bills (SEV)
  •   Bank Statements for 3 months
  •   Recorded Mortgage and Deed
  •   Car Titles
  •   Income Tax Returns & W2 forms
    for the last 2 years

  •