What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a court-supervised payment plan whereby the bankruptcy debtor pays their secured and unsecured creditors a monthly amount based upon the debtor’s family income and reasonable expenses. The monthly payments and the amounts paid to various creditors make up the debtor’s “Chapter 13 plan.”
A Florida Chapter 13 has some advantages over a Chapter 7 bankruptcy. The debtor does not have to liquidate assets in Chapter 13 as they do in Chapter 7. Chapter 13 bankruptcy permits debtors to modify or eliminate some secured debts. Chapter 13 can stop a mortgage foreclosure and permit the debtor to catch up on past due mortgage payments. Also, Chapter 13 permits discharge of some unsecured debts not dischargeable in Chapter 7.
Understanding Chapter 13 Bankruptcy in Florida
Only Florida residents can file Chapter 13 bankruptcy in Florida. The Chapter 13 debtor must have sufficient income to make current payments to their secured creditors (mortgages, car loans, etc.) throughout the bankruptcy (including paying any past due payments). The debtor is required to pay their disposable family income for the benefit of their unsecured creditors. The Chapter 13 debtor must pay all disposable income to unsecured creditors until their creditors are paid in full or for five years, whichever comes first, and the debtor must pay their unsecured creditors through the bankruptcy at least as much as they would receive from your non‑exempt property if the debtor had filed a liquidating Florida Chapter 7 bankruptcy.
Chapter 13 bankruptcy has eligibility debt limits of approximately $465,000 (2022) of unsecured debt and approximately $1,400,000 (2022) of secured debt (these debt ceilings are increased from time to time). People with debt above these limits are not eligible to file a Chapter 13 bankruptcy. Unsecured debts include personal loans, medical bills, credit cards issued by banks (such as Visa, MasterCard, American Express, or Discover), and other credit cards used to purchase consumable items such as clothing, food, vacations, etc. Secured debts include those debts where the creditor has a security interest in your property to guarantee.
Chapter 13 Bankruptcy Trustee
The role of the Chapter 13 bankruptcy trustee is different from that of a Chapter 7 trustee. In Chapter 7, the trustee’s job is to find and assemble the debtor’s non-exempt assets, which become part of the Chapter 7 bankruptcy estate. The Chapter 7 trustee liquidates the debtor’s non-exempt assets. The Chapter 13 trustee’s primary role is evaluating and administering the debtor’s Chapter 13 payment plan. The Chapter 13 trustee collects the debtor’s plan payments and distributes the money among the debtor’s creditors under the terms of a court-approved Chapter 13 plan. The Chapter 13 trustee is entitled to compensation of 10 percent of the debtor’s monthly plan payments. The trustee fee may be lowered in some cases to make a plan financially feasible.
Chapter 13 Plan and Payments
The debtor’s bankruptcy attorney must file an initial Chapter 13 plan that proposes how the debtor will pay their creditors every month through a single monthly payment to the Chapter 13 trustee. The initial Chapter 13 Plan is usually filed with the Chapter 13 bankruptcy petition and schedules.
The Chapter 13 plan includes contractual monthly payments for secured debts such as mortgages and car payments. In Chapter 13, the debtor may choose to surrender collateral (such as a house or car) securing a secured loan instead of continuing payments. The secured creditor may not pursue the Chapter 13 debtor for any amount due under the secured loan if the debtor surrenders the loan collateral, such as a home or car.
If the debtor does not surrender a secured asset, then the debtor must pay monthly secured debt payments through your Chapter 13 Plan, with exceptions. A debtor may be able to pay some secured debts outside the plan if (a) the account is current and (b) the debt is paid by automatic deduction initiated by the creditor (not through bill pay) and has been paid that way for at least six (6) months before filing.
Car loans are treated differently than mortgage loans. Chapter 13 allows debtors to lower the interest rate on a secured car loan to the current market rate. The debtor may object to a claim filed by their secured car loan lender if the claim includes an interest rate above the applicable market rate.
The Chapter 13 plan also pays the debtor’s unsecured creditors. The plan’s payment to unsecured creditors is based on the debtor’s budget of income and expenses the debtor submits on Schedules I (Income) and Schedule J (Expenses) of their Chapter 13 bankruptcy petition. The debtor’s income budget must list their family income from all sources. The debtor’s income budget includes regular deductions such as tax withholding and medical insurance.
The debtor’s expense budget should consider necessary repairs on the debtor’s home and vehicles, reasonable personal expenses, reasonable expenses for caring for children and pets, etc. On the other hand, if the debtor’s expense budget includes luxury items, the trustee may require the debtor to liquidate these luxury items unless the Chapter 13 plan repays the debt owed to all unsecured creditors in full. The debtor is required to pay budgeted net monthly income (“disposable income”) to the Chapter 13 trustee.
The total amount of the debtor’s monthly Chapter 13 payment amount includes the debtor’s contractual secured debt payments, the debtor’s monthly disposable income, an amortized payment for the debtor’s own attorney fees subject to court approval, the trustee’s fees, and court administration fees. The debtor’s first plan payment to the Chapter 13 trustee is due 30 days after the bankruptcy filing.
Chapter 13 Procedures and Administration
An automatic bankruptcy stay commences upon the filing of the Chapter 13 bankruptcy petition. The stay acts as a shield between the debtor and their creditors during the Chapter 13 bankruptcy. The automatic stay prohibits the commencement or continuation of a creditor’s judicial proceeding and other debt collection against the debtor. The automatic stay will apply to mortgage foreclosure proceedings only if the debtor continues making monthly mortgage payments through their Chapter 13 plan. If the debtor intends to surrender a mortgaged property, the lender will usually ask the bankruptcy court to lift the stay so it can proceed with foreclosure.
Section 341 Meeting of Creditors and Trustee
The debtor and their attorney are required to attend a meeting with the Chapter 13 bankruptcy trustee or the trustee’s attorney (the “341 meeting” or “creditors meeting”) approximately four weeks after the bankruptcy filing date. The meeting is held in a meeting room – not a courtroom – and the federal bankruptcy judge is prohibited by law from being there. Typically, this meeting will last about five to ten minutes. Creditors rarely attend.
At the creditors’ meeting, the Chapter 13 trustee or their attorney will ask the debtor questions, but they will not interrogate, cross-examine, or threaten the debtor. The trustee may give the debtor payment envelopes with the trustee’s mailing address for plan payments (the first plan payment will usually be due prior to the creditors’ meeting). The trustee may suggest changes to the debtor’s initial Chapter 13 plan. Most debtors submit one or more amended plans during the Chapter 13 bankruptcy as creditors file their claims.
Creditors’ meetings are scheduled by the bankruptcy court. The debtor’s bankruptcy attorney cannot request a meeting date or time. The Chapter 13 trustee will schedule a continued meeting approximately two weeks after the initial date if the debtor or their attorney cannot attend the first scheduled 341 meeting. The court dismisses the bankruptcy and lifts the automatic stay if the debtor fails to attend a rescheduled creditor meeting.
Monthly Plan Payments
If a Chapter 13 debtor does not make monthly plan payments when due, the trustee will file a Motion to Dismiss for Failure to Maintain Timely Plan Payments. Thereafter, the debtor will have 21 days to make the overdue payment plus the next payment due in the Chapter 13 plan. The Chapter 13 bankruptcy will be dismissed for non-payment without hearing or additional notice if the debtor does not pay the missed payments or object to the Motion to Dismiss within 21 days.
When the debtor can demonstrate a valid excuse for non-payment (illness, loss of employment, etc.), the trustee may agree to modify the Chapter 13 plan in place of dismissal. The Chapter 13 plan will be modified, and plan payments will be increased for the next 12 months so that the debtor can make up missed monthly plan payments.
Wage Deduction Orders
Many debtors prefer to have their payments made through a voluntary wage deduction. The debtor’s employer deducts the debtor’s Chapter 13 plan payment from the debtor’s paycheck and sends the deducted amount directly to the Chapter 13 trustee. This procedure makes it easier for the debtor to stay current in their Chapter 13 plan and eliminates the cost of purchasing money orders or cashier’s checks. Empirically, there is a substantial increase in successful Chapter 13 completion for debtors who use wage deduction to make plan payments.
The debtor remains responsible for making sure all payments are made. The bankruptcy debtor must tell their attorney if the debtor’s employer fails to make a plan payment deduction. The debtor must immediately send the payment to the trustee by cashier’s check or money order.
Creditors’ Proof of Claim
Creditors are given a limited amount of time after the Chapter 13 bankruptcy filing to submit claims (the “Claims Bar Date”). Secured creditors almost always file a claim (the debtor’s bankruptcy attorney can file a claim on the secured creditor’s behalf). The secured creditor’s proof of claim filing indicates the total debt amount, including delinquency for past due payments.
The delinquency amount (the “cure” amount) can include past-due interest, costs, and creditor’s attorney fees to date of filing. Some unsecured creditors also file claims.
Income Taxes in Chapter 13 Bankruptcy
The Chapter 13 debtor must timely file all federal income tax returns due before and after the bankruptcy filing date. Failure to file any tax return is grounds for dismissal. The debtor may apply for an extension of time from the bankruptcy before the date the tax return is due.
Income tax refunds are assets and must be surrendered to the Chapter 13 trustee. The Chapter 13 trustee may permit a debtor to retain a tax refund when the debtor demonstrates a need, such as a required medical procedure, paying property taxes, unexpected home or vehicle repairs, etc.
One advantage of filing Chapter 13 bankruptcy is that income taxes owed the IRS can be paid through the bankruptcy plan without further penalty or interest, which would otherwise accrue outside bankruptcy. Some federal income taxes are dischargeable in Chapter 13. A discussion of income taxes and bankruptcy is found elsewhere on this website. Income taxes that are not dischargeable in Chapter 13 are considered a priority debt and must be paid in full during the Chapter 13 bankruptcy plan.
It is illegal for a Chapter 13 debtor’s current employer to discriminate against the debtor because the debtor has filed Chapter 13 bankruptcy.
A private employer may legally refuse to hire people who have filed bankruptcy before an employment application. Government employers may not discriminate against bankruptcy debtors in hiring.
Mortgages in Chapter 13 Bankruptcy
The treatment of mortgages in Chapter 13 depends on whether the mortgage is on the debtor’s principal residence or recorded against an investment property.
Chapter 13 bankruptcy will not change the amount owed, interest rate, or other terms of a first mortgage on the homestead. If the debtor’s homestead is worth less than the amount of the first mortgage (“upside-down” or “underwater”), Chapter 13 does not lower your mortgage balance to the property’s current fair market value.
Though a first home mortgage is not modified in a Chapter 13 bankruptcy, the bankruptcy filing can help some debtors save their home from foreclosure. Florida bankruptcy courts have implemented a program whereby debtor homeowners may address mortgage modification in a court-supervised mediation. Mortgage mediation in bankruptcy allows the Chapter 13 debtor to discuss mortgage payment adjustments directly with the lender’s underwriters with the help of a third-party professional mediator. Mortgage modification mediation is only available in Chapter 13 bankruptcy.
Chapter 13 bankruptcy can assist debtors with second mortgages on their primary residence. If the debtor shows by a professional, certified appraisal that the debtor’s home is upside down (worth less than the first mortgage), the debtor may be able to strip off the second mortgage (making it an unsecured debt). The bankruptcy discharge will remove the second mortgage as a lien against the house after the debtor completes the Chapter 13 plan. The second mortgage debt will still be owed as a secured debt if the debtor does not complete the Chapter 13 plan.
A Chapter 13 debtor may be able to reduce the first mortgage balance on non‑homestead property to the property’s current appraised value (a “cram down”). This is a complicated process that requires a certified appraisal of the property. The debtor must be able financially to pay 100 percent of the crammed-down mortgage balance during the Chapter 13 Plan (usually with a balloon payment due in the 24th month of your plan).
Court Confirmation of Chapter 13 Plan
When a debtor’s Chapter 13 payment plan is complete and approved by the Chapter 13 trustee, the debtor can submit the plan to the court for “confirmation.” The court will schedule a confirmation hearing before the bankruptcy judge where the debtor’s payment plan will be reviewed, and if acceptable, be confirmed by the court. If the debtor’s financial situation significantly changes after plan confirmation, they should contact their bankruptcy attorney to modify the plan payment.
Any decrease in the debtor’s ability to pay may warrant plan modification. The Chapter 13 trustee may file a Motion to Modify Plan Payments to increase your payments if the debtor’s annual federal tax return shows a significant increase in the debtor’s family income.