Chapter 13 enables individual debtors (including sole proprietors) to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages, car loans and debts arising from property settlements in divorce or separation proceeding.
Chapter 13 does not have any income based eligibility limitations. Rather, all individuals are generally eligible for Chapter 13 provided they earn regular income and have debts that do not exceed the debt limits set by the bankruptcy law. Specifically, to qualify as a Chapter 13 debtor, one must have less than $419,275.00 in unsecured debts and $1,257,850.00 in secured debts.
While the case is pending, the debtor remains in exclusive possession and control of all property of the estate, and is empowered to use, sell or lease such property, even outside the ordinary course of business upon Court approval. A trustee is automatically appointed to all Chapter 13 cases. The trustee is charged with, among other things, investigating the debtor’s financial affairs, facilitating plan confirmation and act as disbursing agent for certain of the debtor’s plan payments. There is a co-debtor stay.
In a Chapter 13, the debtor has perpetual exclusivity to file a plan, and must do so within 14 days of the date of the petition date. Creditors do not vote to confirm a Chapter 13 plan. Instead, creditors receive notice of the confirmation hearing and are afforded the right to object. Generally, to achieve court approval (confirmation), the plan must, among other things:
- Be proposed in good faith
- Be feasible
- Provide that all priority unsecured claims are paid in full over the 3-5 year plan term (e.g. recent taxes, domestic support obligations, administrative claims, etc.)
- Satisfy the “Best Interest Test” by providing that general unsecured claims are to be paid at least what they would receive in a hypothetical Chapter 7 liquidation
- Satisfy the “Best Efforts Test” by providing that general unsecured claims are to be paid at least all of the debtor’s projected disposable income over the 3-5 year plan term
And finally, once the debtor completes all plan payments, the court will grant a discharge. And, notably, a slightly broader discharge of debts is available to Chapter 13 debtors as opposed to Chapter 7 debtors. For example, debts arising from property settlements in divorce or separation proceedings are dischargeable in a Chapter 13 case, but not in a Chapter 7 case.