A Chapter 13 adjustment of debts — also called a wage-earner plan — enables a debtor with regular income to develop a plan to repay all or part of his or her debts over a three- to five-year period. The debtor makes plan payments to a trustee who then distributes payments to creditors. The debtor has no direct contact with creditors while under Chapter 13 protection.
During the performance of a Chapter 13 plan, the law forbids creditors from starting or continuing collection efforts. Filing the petition automatically stays, at least temporarily, most collection actions against the debtor or the debtor’s property. Chapter 13 contains a special automatic stay provision that may also protect co-debtors and co-signers.
Saving a home from foreclosure is one of the primary benefits of filing under Chapter 13. Pending foreclosure proceedings are stayed and the debtor may be allowed to pay mortgage arrearages over the course of the plan while continuing to make current payments as they come due. Another advantage of Chapter 13 is that in some cases it can act like a consolidation loan by lowering payments on secured debts (other than mortgages on primary residences) and stretching them out over the life of the plan.
A Chapter 13 plan must be approved by the court. It must provide for payments of fixed amounts to the trustee on a regular basis, typically monthly or semimonthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer some creditors less than full payment on their claims.
The claims of all creditors must be addressed in a Chapter 13 plan, including priority, secured, and unsecured claims. Priority claims (e.g., most taxes and the costs of bankruptcy administration) are granted special status. With certain exceptions, the plan must include provisions to pay priority claims in full.
Secured claims are those for which the creditor has the right to take certain property (i.e., the collateral) if the debtor does not pay the underlying debt. If the debtor wants to keep the collateral securing a particular debt, the plan must provide that the secured creditor will receive at least the value of the collateral. If the purpose of the debt underlying the secured claim was to purchase the collateral (e.g., a car loan) and the debt was incurred within certain a time before the bankruptcy filing, the plan must provide for full payment of the debt, even if the amount of the debt exceeds the value of the collateral. Payments to certain secured creditors (e.g., a home mortgage lender) may be made according to the original loan payment schedule (which may be longer than the plan) provided any arrearages are made up during the plan.
In contrast to secured claims, unsecured claims are those for which the creditor has no special rights to collect against any particular property owned by the debtor. If certain legal requirements are satisfied, the plan need not pay unsecured claims in full.
The court decides whether a plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. Once a plan has been confirmed by the court, its provisions bind the debtor and all creditors, and the debtor must make the plan succeed by making regular payments to the trustee. Under a confirmed plan, the debtor is entitled to retain property so long as the payments are made, but may not incur new debt without consulting the trustee.
Once a debtor completes all payments under the plan, the court grants the debtor a discharge of debts. After discharge, creditors provided for in full or in part under the plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations. The discharge in a Chapter 13 case can be broader than in a Chapter 7 case, but there are complex exceptions to a Chapter 13 discharge which should be discussed with legal counsel prior to filing the bankruptcy. You may hire bankruptcy lawyer san diego to help you throughout the process.