Chapter 13 Bankruptcy

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy – Personal Reorganization

Chapter 13 is available to individuals with a regular source of income. In a Chapter 13, the debtor proposes to pay creditors’ claims in full or a percentage over a period of time, generally three to five years. As in a Chapter 7, the debtor must disclose his financial status by filing schedules, including a list of monthly income and necessary expenditures. Income in excess of necessary expenditures (“disposable income”) is used to fund the plan.

Chapter 13 cases are administered by the Chapter 13 Trustees’ Office. Upon receiving notice of the bankruptcy filing, an unsecured creditor must file a “proof of claim” to participate in the plan. A proof of claim details the nature and dollar amount of the claim. If the claim is allowed, and the plan is confirmed, the Trustee will receive regular payments from the debtor and distribute the payments according to the plan. The payments are distributed in an order of priority determined by the Bankruptcy Code. For example, secured claims are paid before unsecured claims.

Secured creditors are generally paid up to the fair market value of their collateral, unless a secured loan is fairly recent, in which case the debtor may have to repay the entire loan. This valuation question often leads to fights between the debtor, who has interest in placing a low value on the collateral, and the secured creditors, who of course would like a high value. Such fights are resolved either by agreement or by the court, following an evidentiary hearing.

An “undersecured creditor” is a creditor whose collateral is worth less than the amount of its claim. An undersecured creditor actually has two claims — one for the secured portion, i.e., the FMV of its collateral, and a second unsecured claim, i.e., the difference between the FMV of the collateral and the amount owed.

Unsecured creditors generally fare better in a Chapter 13 than they do in a Chapter 7. The Chapter 13 plan will propose to pay unsecured creditors either 100% of their claims, or some percentage, often as low as 10%. If a plan proposes to pay less than 100%, the plan must run for at least three years, during which the debtor must pay all disposable income (“excess income”) to the trustee.  Unsecured creditors must receive at least as much as they would if the debtor had filed a Chapter 7, the “liquidation test.”  The percentage received by unsecured creditors is determined by the debtor’s ability to pay into the plan, and the amount of higher-priority claims in front of the unsecured creditors.

Related Services: Chapter 7 Bankruptcy; Chapter 11 Bankruptcy; Chapter 12 Bankruptcy; Michigan Bankruptcy Laws; Bankruptcy

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