Chapter 13 Bankruptcy Laws

Chapter 13 bankruptcy laws have been changed to require more tests, which make qualification for filing more difficult than it was before. Of primary importance is the new disposable income test. Debtors must have regular income to qualify, and must propose a three- or five-year plan and show an ability to pay to the plan for the entire time. Under the old laws, judges were allowed to determine the reasonableness of living expenses according to individual circumstances and historical data. The new Chapter 13 bankruptcy laws require the judge to calculate disposable income based on a single standard for an approved budget for all people with no allowance for special needs, disabilities, incapacities, or costs of commuting.

Apparently, it was abuse that spurred the passage of the new Chapter 13 bankruptcy laws. Now, anyone considering filing under any of the various legal channels must attend an approved course that provides credit counseling, budget investigation, and financial analysis, and the course must be concluded within 180 days before filing his case with the Bankruptcy Court. There are no guidelines in the law for how much should be charged for tuition for this course, but there are free classes online, and some nonprofit organizations that are subsidized by major credit card companies are offering the course. For the attentive student, the course should give an improved vision of his or her financial status and goals, and the tools for avoiding getting into financial trouble again. This is significant, since the Chapter 13 bankruptcy abuse lawmakers were particularly concerned about was repeated filings of petitions by an individual.

Chapter 13 bankruptcy abuse under the new laws is probably not impossible, but very much less likely to happen. If there is a presumption of abuse by someone filing under Chapter 7 (which would wipe the slate clean), his case will automatically be changed to a 13 (requiring a plan of payment). The presumption of abuse depends upon the outcome of the means test now in place. Debtors who net more every month than their state's median income would be subject to a means test. If the debtor has at least $166.67 in current monthly income after the allowed deductions, abuse is presumed no matter the amount of the debtor's unsecured debt; or, if the debtor had at least $100 of such income, abuse is presumed if he has sufficient funds to pay at least twenty-five percent of non priority unsecured debt over five years. There is a clause that allows rebuttal of the presumption of abuse if there are detailed documents proving special circumstances requiring additional expenses, or adjustment of current monthly total income.

IRS standards are used to calculate what debtors can claim as monthly living expenses, which would include food, clothing, personal care, and entertainment, depending on the debtor's family size. An increase up to five percent of that national standard can be allowed if it can be shown that it is reasonable and necessary. The new Chapter 13 bankruptcy laws require the debtor must file a certificate of credit counseling and repayment plan within 180 days of filing. (This requirement is waived for debtors who are disabled, incapacitated, or on active duty in a military zone.) The debtor must also submit the following: (1) a statement demonstrating debtor has received and read Sec. 342(b) notice; (2) pay stubs for the previous 60 days; (3) a statement of projected income after discharge or dismissal of the case, or increases in expenditures; (4) itemized monthly net income; (5) his most recent IRS return; (6) provide tax returns each year of the proceeding; (7) an annual income/expense statement; (8) disclosure of qualified education savings accounts and tuition programs; and (9) if requested by trustee, a photo ID. (Whew!) And that isn't all. Debtors must perform their intent to surrender, reaffirm, or redeem debt secured by property of the estate within 30 days after the first date set for the meeting of creditors. There are some other provisions fitting particular circumstances, and the best source for that information would be a good attorney. In fact, having a good attorney may be the only way to completely avoid the pitfalls of inadvertent Chapter 13 bankruptcy abuse.

Previous Chapter 13 bankruptcy abuse has been addressed by several provisions, and they are: increased protection for secured debtors; prompt filing of schedules and other information; adjustments to ensure that creditors receive notice of filings; require plans to extend for five years for debtors with incomes over the statutory limit; and limit the shelter to real estate assets. Also the time between filing Chapters 7 and 13 has been expanded to eight years. Further, non dischargeable debts have been expanded. The Court has to trust that the debtor will comply with the requirements under the law, and the debtor trusts that he will be protected and his work will be appreciated. Scripture mentions trust in the Lord: "The LORD recompense thy work, and a full reward be given thee of the LORD God of Israel, under whose wings thou art come to trust." (Ruth 2:12)

Clearly, the new Chapter 13 bankruptcy laws have made filing under that provision more difficult, and have given greater protection to creditors. For debtors who are in the position of really needing the protection of these provisions for getting out from under an excessive debt burden, this is probably not a total deterrent. Good attorneys will be able to evaluate an individual's position and explain the requirements thoroughly, so one can navigate the proverbial rough waters with some certainty. On the other side of the coin, Chapter 13 bankruptcy abuse should certainly be substantially reduced.

Chapter 13 Bankruptcy Rules

Under Chapter 13 bankruptcy rules, an individual can set up a court-approved plan to pay his or her financial obligations. This is just one of six basic types of bankruptcies under the Federal Rules of Bankruptcy Procedure. The Chapter 13 type is also titled as an Adjustment of Debts of an Individual with Regular Income. This type is designed for people who have fallen behind in their financial obligations due to a temporary setback and just need time to catch up. Perhaps there was a temporary job loss, a major medical emergency, or a natural disaster. For example, victims of major hurricane, fire, or flood devastation may need a temporary reprieve to help them get back on their feet. The Chapter 13 bankruptcy rules may offer the opportunity these unfortunate people need to get their lives back to normal so that they can take care of financial obligations.

Federal legislation requires that individuals or married couples must go through credit counseling from an approved agency prior to filing for protection from creditors. The counseling may help the debtors get finances in order without going through the court system. Through the sessions, those being counseled will learn helpful financial principles. Scripture also provides sound economic advice: "Be not thou one of them that strike hands, or of them that are sureties for debts. If thou hast nothing to pay, why should he take away thy bed from under thee?" (Proverbs 22:26-27). However, if the situation requires it, the counseling can also help the debtor decide which one of the basic types of bankruptcies best fit his or her situation. The chapter 13 bankruptcy rules require the debtor to file a simple form, or petition, with the appropriate court and pay the required filing fee. The filing initiates an automatic stay which means that creditors are essentially put on hold. They can no longer take steps to collect the owed money. The court clerk will give the petitioner a docket number or case number which the debtor will later use to put on the memo line of checks or money orders that are given to the trustee.

According to the chapter 13 bankruptcy rules, the petitioner must submit a document, known as a matrix, to the court within seven to ten days after filing the petition. The matrix is a listing of all creditors and addresses. Within another seven to ten days, the petitioner is required to submit a reorganization plan that includes income information, personal assets, and expenses. The document will also include the petitioner's plan for repayment of debts and meeting ongoing obligations within the next three to five years. A trustee or examiner is assigned to the case. The trustee has authority to mediate agreements between the petitioner and creditors; usually the case does not need to appear before a judge. About one to three months after the petition is filed, the trustee arranges what is known as a 341 meeting. The name refers to Section 341 of the Bankruptcy Code. Under chapter 13 bankruptcy rules, the debtor is required to appear before the trustee and creditors, though the creditors seldom attend. The trustee asks the petitioner, who is under oath, various questions regarding the financial situation. The debts owed to each creditor are negotiated so that the final obligation may be less than the original amount. Most creditors negotiate to get at least of the amount that is owed.

Creditors are divided into three classifications and, under chapter 13 bankruptcy rules, repayment depends upon the classification. Secured creditors are such lenders as mortgage companies or auto financing companies. They have an asset, such as a house or vehicle, as collateral for the loan. Payments for these types of assets continue as before the petition was filed and are commonly referred to as payments outside the plan. The court may allow a property to be foreclosed upon or a vehicle to be repossessed if the payments are not kept up. Unsecured creditors are lenders who lent money without collateral. This could include credit card debt, utility payments, and other store accounts. Once the final amounts are negotiated, the debtor sends one check to the trustee who then distributes the funds to the unsecured lenders according to the agreed upon plan. The final classification is the post-petition lenders. These are obligations that the debtor incurred after filing the petition and are not protected by the payment plan. These may include medical bills, utility bills, or additional credit card debt.

Not every debt can be renegotiated to a lesser amount under chapter 13 bankruptcy rules. For example, child support and alimony must be paid as mandated by the courts in child support or divorce proceedings. Past tax bills are not dischargeable, either. Only in extremely rare circumstances are student loans discharged from a petitioner's obligations. If the debt is too high for the petitioner to meet the obligations in the three to five year time frame, the bankruptcy may be converted to a chapter 7. This type of protection wipes the slate clean, to some extent, but petitioners must meet stringent requirements to be eligible for a chapter 7. To exit either chapter 7 or chapter 13 bankruptcies, the petitioner is required to take an approved personal financial management course. The skills learned in this course should help the petitioner in making future financial decisions and to build a secure economic foundation. Bankruptcies stay on an individual's credit report for seven to ten years, depending on the type. Under chapter 13 bankruptcy rules, the notation stays on the credit report for seven years. One of the first steps a person should make after ending the process is to begin rebuilding a positive credit history.

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