Chapter 13, Title 11, United States Code

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Title 11 of the United States Code sets forth the statutes governing the various types of relief for bankruptcy in the United States. Chapter 13 of the United States Bankruptcy Code provides an individual with the opportunity to propose a plan of reorganization to reorganize their financial affairs while under the bankruptcy court's protection. The purpose of chapter 13 is to enable an individual with a regular source of income to propose a chapter 13 plan that provides for their various classes of creditors. Under chapter 13, the Bankruptcy Court has the power to approve a chapter 13 plan without the approval of creditors as long as it meets the statutory requirements under chapter 13. Chapter 13 plans are usually three to five years in length and may not exceed five years. Chapter 13 is in contrast to the purpose of Chapter 7, which does not provide for a plan of reorganization, but provides for the discharge of certain debt and the liquidation of non-exempt property. A Chapter 13 plan may be looked at as a form of debt consolidation, but a Chapter 13 allows a person to achieve much more than simply consolidating his or her unsecured debt such as credit cards and personal loans. [1] A chapter 13 plan may provide for the four general categories of debt: priority claims, secured claims, priority unsecured claims, and general unsecured claims. Chapter 13 plans are often used to cure arrearages on a mortgage, avoid "underwater" junior mortgages or other liens, pay back taxes over time, or partially repay general unsecured debt. In recent years, some bankruptcy courts have allowed Chapter 13 to be used as a platform to expedite a mortgage modification application.

Contents

Choice of chapter

An individual who is badly in debt can typically file for bankruptcy either under Chapter 7 (liquidation, or straight bankruptcy) or Chapter 13 (reorganization). In some cases, options may also include Chapter 12 (family farmer reorganization) and Chapter 11 (reorganization of a company, or an individual debtor whose debts exceed the limits for a Chapter 13 filing). [2] As a Chapter 11 bankruptcy is considerably more complex and expensive than a Chapter 13 case, few debtors will choose Chapter 11 if a Chapter 13 bankruptcy is an option.

Debtors may also be forced into bankruptcy by creditors in the case of an involuntary bankruptcy, but only under Chapters 7 or 11. However, in most instances, the debtor may choose under which chapter to file. In the case of an involuntary bankruptcy, the debtor may also choose to convert from the forced Chapter 7 or 11 proceeding into a proceeding under another chapter.

The debtor's financial characteristics and the type of relief sought play a tremendous role in the choice of chapters. In some cases, the debtor simply cannot file under Chapter 13, as he or she lacks the disposable income necessary to fund a viable Chapter 13 plan (see below). Furthermore, Section 109(e) of Title 11, United States Code sets forth debt limits for individuals to be eligible to file under Chapter 13: unsecured debts of less than $419,275, and secured debts of less than $1,257,850. [3]

Under Chapter 13, the debtor proposes a plan to pay his or her creditors over a 3-to-5 year period. [4] This written plan details all of the transactions (and their durations) that will occur, and repayment according to the plan must begin within 30 to 45 days after the case has started. During this period, his or her creditors cannot attempt to collect on the individual's previously incurred debt except through the bankruptcy court. In general, the individual gets to keep their property, and his or her creditors end up with less money than they would have had the amount given to the debtor continued to collect interest, allowing the debtor to find a way to pay the amount owed without losing their assets.

Disadvantages

The disadvantage of filing for personal bankruptcy is that, under the Fair Credit Reporting Act, a record of this stays on the individual's credit report for up to 7 years (up to 10 years for Chapter 7). [5] But it is possible to obtain new debt or credit (credit cards, auto, or consumer loans) after 12–24 months, and a new FHA mortgage loan 25 months after discharge and Fannie Mae and Freddie Mac loan after 36 months. But during the pendency of a Chapter 13 case, the debtor is not permitted to obtain additional credit without the permission of the bankruptcy court. Moreover, creditors may not be willing to risk lending money to such an individual. However, this disadvantage is not unique to Chapter 13; it may also apply to individuals currently in a Chapter 11 case, Chapter 12 case or those who are in or have recently been in a Chapter 7 case.

Advantages

The advantages of Chapter 13 over Chapter 7 include the ability to stop foreclosures although a foreclosure would be reinstated upon completion of the bankruptcy; achieve a "super discharge" of debts not dischargeable under Chapter 7; [6] "value collateral"; bifurcate the security interest of creditors in certain property that creditors are either charging too much interest for, or are over-secured, or both, and leading to a "cram down" modification of the debt; and prevent collection activities against non-filing co-signers ("co-debtors") during the life of the case.

Chapter 13 plan

A chapter 13 plan is a document filed with or shortly after a debtor's Chapter 13 bankruptcy petition.

The plan details the treatment of debts, liens, and the secured status of assets and liabilities owned or owed by the debtor in regard to his bankruptcy petition. In order for a plan to take effect, it must meet a number of requirements. These are specified in § 1325 and include:

Related Research Articles

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Chapter 11 of the United States Bankruptcy Code permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation may also occur under Chapter 11; while Chapter 13 provides a reorganization process for the majority of private individuals.

Chapter 7 of Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States, in contrast to Chapters 11 and 13, which govern the process of reorganization of a debtor. Chapter 7 is the most common form of bankruptcy in the United States.

Personal bankruptcy law allows, in certain jurisdictions, an individual to be declared bankrupt. Virtually every country with a modern legal system features some form of debt relief for individuals. Personal bankruptcy is distinguished from corporate bankruptcy.

Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can continue its operations.

<span class="mw-page-title-main">Bankruptcy in the United States</span> Overview of bankruptcy in the United States of America

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<span class="mw-page-title-main">Insolvency</span> State of being unable to pay ones debts

In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

<span class="mw-page-title-main">Bankruptcy Abuse Prevention and Consumer Protection Act</span> 2005 American bill

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is a legislative act that made several significant changes to the United States Bankruptcy Code.

Chapter 12 of Title 11 of the United States Code, or simply chapter 12, is a chapter of the Bankruptcy Code. It is similar to Chapter 13 in structure, but it offers additional benefits to farmers and fishermen in certain circumstances, beyond those available to ordinary wage earners. Chapter 12 is applicable only to family farmers and fishermen.

A discharge in United States bankruptcy law, when referring to a debtor's discharge, is a statutory injunction against the commencement or continuation of an action to collect, recover or offset a debt as a personal liability of the debtor. The discharge is one of the primary benefits afforded by relief under the Bankruptcy Code and is essential to the "fresh start" of debtors following bankruptcy that is a central principle under federal bankruptcy law. Discharge is also believed to play an important role in credit markets by encouraging lenders, who may be more sophisticated and have better information than debtors, to monitor debtors and limit risk-taking.

An individual voluntary arrangement (IVA) is a formal alternative in England and Wales for individuals wishing to avoid bankruptcy. In Scotland, the equivalent statutory debt solution is known as a protected trust deed.

Debt settlement is a settlement negotiated with a debtor's unsecured creditor. Commonly, creditors agree to forgive a large part of the debt: perhaps around half, though results can vary widely. When settlements are finalized, the terms are put in writing. It is common that the debtor makes one lump-sum payment in exchange for the creditor agreeing that the debt is now cancelled and the matter closed. Some settlements are paid out over a number of months. In either case, as long as the debtor does what is agreed in the negotiation, no outstanding debt will appear on the former debtor's credit report.

An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference.

In finance, a secured transaction is a loan or a credit transaction in which the lender acquires a security interest in collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrower's default. The terms of the relationship are governed by a contract, or security agreement. A common example would be a consumer who purchases a car on credit. If the consumer fails to make the payments on time, the lender will take the car and resell it, applying the proceeds of the sale toward the loan. Mortgages and deeds of trust are another example. In the United States, secured transactions in personal property are governed by Article 9 of the Uniform Commercial Code (U.C.C.).

A general assignment or assignment is a concept in bankruptcy law in which an insolvent entity's assets are assigned to someone as an alternative to a bankruptcy. One form is an "assignment for the benefit of creditors", abbreviated ABC or AFBC.

Toibb v. Radloff, 501 U.S. 157 (1991), was a case in which the United States Supreme Court held that individuals are eligible to file for relief under the reorganization provisions of chapter 11 of the United States Bankruptcy Code, even if they are not engaged in a business. The case overturned the lower courts ruling which restricted individuals to chapter 7.

The insolvency law of Switzerland is the law governing insolvency, foreclosure, bankruptcy and debt restructuring proceedings in Switzerland. It is principally codified in the Federal Statute on Debt Enforcement and Bankruptcy of 11 April 1889 as well as in ancillary federal and cantonal laws.

A cram down or cramdown is the involuntary imposition by a court of a reorganization plan over the objection of some classes of creditors.

Bankruptcy in Florida is made under title 11 of the United States Code, which is referred to as the Bankruptcy Code. Although bankruptcy is a federal procedure, in certain regards, it looks to state law, such as to exemptions and to define property rights. The Bankruptcy Code provides that each state has the choice whether to "opt in" and use the federal exemptions or to "opt out" and to apply the state law exemptions. Florida is an "opt out" state in regard to exemptions. Bankruptcy in the United States is provided for under federal law as provided in the United States Constitution. Under the federal constitution, there are no state bankruptcy courts. The bankruptcy laws are primarily contained in 11 U.S.C. 101, et seq. The Bankruptcy Code underwent a substantial amendment in 2005 with the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005", often referred to as "BAPCPA". The Bankruptcy Code provides for a set of federal bankruptcy exemptions, but each states is allowed is choose whether it will "opt in" or "opt out" of the federal exemptions. In the event that a state opts out of the federal exemptions, the exemptions are provided for the particular exemption laws of the state with the application with certain federal exemptions.

Bank of America, N. A. v. Caulkett, 575 U.S. 790, 135 S. Ct. 1995 (2015), is a bankruptcy law case decided by the Supreme Court of the United States on June 1, 2015. In Caulkett, the Court held that 11 U.S.C. § 506(d) does not permit a Chapter 7 debtor to void a junior mortgage on the debtor's property when the amount of the debt secured by the senior mortgage on that property exceeds the property's current market value.

References

  1. ↑ "General Comparison of Chapter 7 and Chapter 13 Bankruptcy" (PDF). American Bar Association. Retrieved 9 September 2014.
  2. ↑ "Chapter 13 - Bankruptcy Basics". United States Courts. Retrieved 19 October 2017.
  3. ↑ "Revision of Certain Dollar Amounts in the Bankruptcy Code Prescribed Under Section 104(a) of the Code - Bankruptcy Basics". United States Courts. Retrieved 2 February 2019.
  4. ↑ "11 U.S. Code § 1325 - Confirmation of plan". Cornell University Law School. Retrieved 9 September 2014. ...the "applicable commitment period"... shall be 3 years; or not less than 5 years...
  5. ↑ "Fair Credit Reporting Act" (PDF). Federal Trade Commission. September 2012. p. 78. Retrieved 9 September 2014.
  6. ↑ The BAPCPA amendments diminished the extent of the super discharge, but discharges under chapter 13 remain broader than those under 7. They include the ability to discharge some tortious damage claims, untimely filed tax claims, marital settlement debts, and some others. See 11 U.S.C. 1328.

Further reading

United States Bankruptcy Code; 2016 Edition. ISBN   9781942842033.

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