Chapter 13 is one of various avenues of relief available under the U.S. Bankruptcy Code (Title 11). Some of the other chapters are chapters 7, 11, 12, 9 and 15. Chapter 11 offers relief for corporations and individuals. Chapter 12 is for family farmers and chapter 9 is for municipalities. Chapter 15 is a new chapter that offers relief in cross-border insolvency situations. Chapter 7 is commonly referred to as a “liquidation” chapter, although in most cases filed by an individual debtor no property is liquidated as all of the property is exempt or encumbered by liens. Sometimes chapter 7 is filed by a corporation to wind up its affairs.
Chapter 13 offers an individual with a regular source of income the opportunity to reorganize his affairs while under the protection of the bankruptcy court. A Chapter 13 plan usually involved payments under a Chapter 13 plan out of future income, usually wages. Chapter 13 bankruptcy was sometimes formerly known as a “wage earners plan” under the old Bankruptcy Act prior to 1978. (The present Bankruptcy Code went into effect on October 1, 1979). Under Chapter 13, a debtor proposes a plan of reorganization to make payments to the various classes of creditors usually over three to five years. A Chapter 13 plan is not allowed to be for longer than five years. 11 U.S.C. 1322§ (d).
Chapter 13 is only available to “individuals”. Therefore, corporations and partnerships are not eligible to file under Chapter 13. The individual also must have a “regular income” which is defined as an income sufficiently stable and regular to enable the individual to make payments under chapter 13. 11 U.S.C. § 101(30). Individuals are not eligible for chapter 13 if their debt exceeds certain secured and unsecured debt limitations. The debt limitations as of April 1, 2007 are $336,900.00 of noncontingent unliquidated unsecured debt and $1,010,650.00 of noncontingent unliquidated secured debt. A debtor’s case may be dismissed if his debts exceeds these limitations. Pursuant to section 104(b) of the Bankruptcy Code, these debt limitations are adjusted every 3 years.
Chapter 13 offers an individual the opportunity to reorganize his or her secured and unsecured debt while under the protection of the bankruptcy court. Chapter 7 only involves the liquidation of the debtor’s nonexempt property and the discharge of dischargeable debt and does not provide the debtor with the opportunity to reorganize his or her debt. For example, under Chapter 13, an individual can stop a foreclosure case and propose a plan to cure his delinquent mortgage payments over a three to five year period. An individual may also file Chapter 13 to stop the repossession of his or her vehicle. Under Chapter 13, the debtor is allowed to reschedule certain of his secured debt, such as a car loan or an IRS lien, over the length of his Chapter 13 plan.
Chapter 13 may also be the chapter of choice for the high income debtor. Many high income debtors’ budgets are not compatible with the provisions of Chapter 7. For example, §707(b) provides for the dismissal of a chapter 7 case filed by an individual who has primarily consumer debts if the granting of the relief would be a “substantial abuse” of chapter 7. A “means test” was added by BAPCPA in section 707(b)(2) to determine whether there is a presumption of abuse based on the debtor’s ability to repay creditors. The means test though does not apply to debtors whose defined income is below the state median income. 11 U.S.C. §707(b)(7).
Chapter 13 may also be a good alternative for an individual who has received a discharge in a chapter 7 case filed during the past 8 years and is therefore not eligible to receive a discharge in another chapter 7 case. In contrast, the limitation to receive a discharge in a chapter 13 case after a chapter 7 discharge is only 4 years.
Chapter 13 also has a special automatic stay provision prohibiting the collection of certain debt from cosigners. 11 USC §1301. Chapter 7 does not contain such a provision. This codebtor stay protects cosigners of consumer debts from collection activity to the extent that the debtor proposes to pay the claim through the chapter 13 plan.
Chapter 13 would also be used if the debtor has extensive property that would not be exempt under chapter 7. Property that is not exempt under chapter 7 remains property of the bankruptcy estate and is subjection to liquidation by the chapter 7 trustee. In chapter 13 a debtor need not surrender any property, but instead pays an amount to unsecured creditors in a minimum amount equal to his nonexempt property. This is commonly referred to as the “liquidation test.” 11 U.S.C. 1325§(a)(4).