Overview of Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a legal process that allows 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.”
One of the primary benefits of Chapter 13 is that it enables debtors 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.
How Chapter 13 Bankruptcy 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:
- Schedules of assets and liabilities
- A schedule of current income and expenditures
- A schedule of executory contracts and unexpired leases
- A statement of financial affairs
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.
The debtor must file a repayment plan with the petition or within 14 days after the petition is filed. The plan 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.
The plan must pay priority debts 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.
If the debtor is an individual or a married couple, there are additional document filing requirements. Such debtors must file:
- A certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling
- Evidence of payment from employers received 60 days before filing
- A statement of monthly net income and any anticipated increase in income or expenses after filing
- And, if the debtor is an individual with primarily consumer debts, a certificate of credit counseling, and a copy of any debt repayment plan developed through credit counseling
A debtor engaged in business must also file:
- A statement of financial affairs, including gross income from the business
- A cash-flow statement and an income/expense statement for the business
- Tax returns or transcripts
- Bank statements for the prior 6 months to filing
The Role of the Court in Chapter 13
The court has oversight over the Chapter 13 process. A trustee is appointed to manage the case and ensure the debtor adheres to the approved repayment plan. The court also holds a confirmation hearing to determine if the proposed plan is feasible and meets the requirements for confirmation under the Bankruptcy Code.
To confirm the plan, the court must find that:
- The plan is proposed in good faith
- The plan is in the best interests of creditors
- Creditors will receive at least as much under the plan as they would in a Chapter 7 liquidation
- Secured creditors are adequately protected
- The plan is feasible – meaning the debtor will be able to make all payments under the plan and to comply with the plan
The court may also consider other factors such as whether the plan provides for the payment of all secured debts, whether the plan provides for the cure of any default on a secured debt, and whether the debtor has the ability to make all payments under the plan.
Consequences of Defaulting on Chapter 13 Payments
Defaulting on Chapter 13 plan payments can have serious consequences for the debtor. When a debtor fails to make required payments, they risk losing the protections and benefits provided by the bankruptcy court. This can result in creditors taking actions to collect on debts, including foreclosure or repossession of property.
The specific consequences of non-payment will depend on the circumstances of the case and the actions taken by the trustee and creditors. However, some common outcomes of defaulting on Chapter 13 payments include:
Foreclosure and Repossession
One of the primary benefits of filing for Chapter 13 bankruptcy is the automatic stay, which prevents creditors from taking collection actions against the debtor. This includes stopping foreclosure proceedings on a home or repossession of a vehicle.
However, if the debtor fails to make payments under the plan, creditors may file a motion to lift the stay. If granted by the court, this would allow the creditor to proceed with foreclosure or repossession actions.
In some cases, the trustee may also file a motion to lift the stay if the debtor is not making required payments. This is more likely to happen if the debtor has significant equity in the property and the trustee believes selling the property would benefit unsecured creditors.
Case Dismissal
If the debtor fails to make required payments, the bankruptcy trustee may file a motion to dismiss the case. The court will then hold a hearing to determine whether to grant the motion and dismiss the case.
If the case is dismissed, the debtor loses the protections of the bankruptcy court and creditors are free to resume collection actions. In some cases, the court may dismiss the case with prejudice, which means the debtor is prohibited from filing another bankruptcy case for a certain period of time.
The trustee may also file a motion to dismiss if the debtor fails to comply with other requirements of the plan, such as failing to submit required documentation or attend required hearings.
Options for Curing Default
If a debtor falls behind on payments, they may have options for getting back on track and avoiding the negative consequences of default. These options will depend on the specific circumstances of the case and the willingness of the trustee and creditors to work with the debtor.
Some potential options for curing default include:
- Requesting a temporary suspension or reduction of payments due to a hardship
- Seeking a plan modification to extend the repayment period or reduce payments
- Converting the case to a Chapter 7 bankruptcy, which would discharge unsecured debts but may require liquidating assets
It’s important to note that modifying a plan to reduce payments may not be possible for priority debts like taxes or domestic support obligations, or for secured debts where the creditor is entitled to the full value of their collateral.
Debtors who are struggling to make payments should communicate with their trustee and attorney to explore potential options before falling too far behind. Acting quickly can increase the chances of finding a workable solution and avoiding the most severe consequences of default.
Legal Implications of Not Paying Chapter 13
Many debtors worry about the potential legal implications of failing to make required payments under a Chapter 13 plan. In particular, some fear that they could face jail time or other criminal penalties for defaulting on their bankruptcy payments.
In general, however, debtors do not face criminal prosecution or jail time solely for failing to pay their debts, including debts under a Chapter 13 plan. Debt collection is a civil matter, not a criminal one, and debtors’ prisons have been abolished in the United States for well over a century.
Debt Collection Laws and Practices
Creditors and debt collectors are prohibited from threatening debtors with criminal prosecution or jail time for failing to pay a debt. The Fair Debt Collection Practices Act (FDCPA) specifically prohibits debt collectors from making such threats, and debtors who experience these types of illegal collection tactics can file a complaint with the Consumer Financial Protection Bureau or sue the collector for damages.
Some states have additional laws that provide even stronger protections for debtors. For example, Florida law specifically prohibits putting someone in jail for failing to pay a debt or judgment.
Exceptions Where Jail is Possible
While jail time is not a consequence of failing to pay ordinary debts, there are a few exceptions where a debtor could potentially face criminal charges related to unpaid debts:
- Income taxes: Failing to pay taxes can result in criminal charges for tax evasion or tax fraud.
- Violation of court orders: If a court orders a debtor to pay certain debts, such as child support or other court-ordered periodic payments, failing to do so could be considered contempt of court and result in jail time.
- Debtors’ examination: In some cases, a creditor may request a debtor appear for questioning about their finances and ability to pay a judgment. If the debtor fails to appear, they may be held in contempt of court.
However, these situations are separate from the bankruptcy process itself. Simply defaulting on Chapter 13 plan payments will not result in jail time, although it may have other serious financial and legal consequences as discussed above.
Debtors who are concerned about their ability to make plan payments or potential legal implications should consult with a qualified bankruptcy attorney. Many law firms, such as Jacksonville Law Firm Parker & DuFresne, specialize in consumer protection and can advise debtors of their rights and options.
Other Consequences of Unpaid Debts
While jail time is not a typical consequence of unpaid debts, defaulting on Chapter 13 payments or other debts can have serious financial repercussions. Some potential consequences of unpaid debts include:
- Negative credit reporting: Unpaid debts and bankruptcies can remain on a debtor’s credit report for up to 7 years (10 years for Chapter 7), making it difficult to obtain credit in the future.
- Property seizure: Creditors may be able to seize a debtor’s property, such as bank accounts or vehicles, to satisfy unpaid judgments.
- Wage garnishment: In some cases, creditors can obtain a court order to garnish a portion of a debtor’s wages until a debt is paid.
Additionally, defaulting on a Chapter 13 plan can result in the case being dismissed without a discharge of debts, meaning the debtor remains responsible for paying those debts.
Debtors struggling with unpaid debts should seek the advice of a qualified attorney to understand their options and potential consequences. Many bankruptcy attorneys offer free initial consultations and can help debtors understand their rights and make informed decisions about managing their debts.
Seeking Legal Advice
Dealing with unpaid debts and potential bankruptcy can be stressful and overwhelming. It’s important for debtors to understand their rights and options, and to seek qualified legal advice to make informed decisions.
Bankruptcy attorneys, such as those at Jacksonville Law Firm Parker & DuFresne, specialize in helping debtors navigate the complex world of bankruptcy law and consumer protection rights. They can review a debtor’s financial situation, explain their options, and help them choose the best path forward.
Some signs that it may be time to seek legal advice include:
- Falling behind on Chapter 13 plan payments or other debts
- Receiving threats or harassment from creditors or debt collectors
- Facing potential legal action, such as foreclosure, repossession, or lawsuits
- Experiencing a significant change in financial circumstances, such as job loss or medical emergency
Many bankruptcy attorneys offer free initial consultations, so debtors can get advice and guidance without worrying about upfront costs. Seeking legal advice early can help debtors avoid more serious consequences down the road and get back on the path to financial stability.
Remember, while falling behind on Chapter 13 payments or other debts can feel overwhelming, debtors have rights and options. Working with a qualified attorney can provide peace of mind and help debtors make the best decisions for their unique financial situation.
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