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Chapter 13 - Wage Earners' Plan Individual Reorganizations

A chapter 13 reorganization has also been referred to as bill consolidation or a federal wage earners plan. It is designed for individuals (or married couples) with less than $871,550.00 in secured debts and less that $269,250.00 in unsecured debts. Only non-contingent debts are included in this test. Secured debts are those where there is collateral which secures the debt, such as a mortgage, car, or furniture. Unsecured debts are those that have no collateral such as gasoline credit cards and medical bills.

If you file Chapter 13 after October 17, 2005 you may not receive a discharge in a Chapter 13 case for 4 years if you received a discharge in a case filed under chapters 7, 11, or 12 during the past 4-years, or for 2 years if you received a discharge in a case filed under chapter 13 during the past 2-years. This does not mean that you cannot file a Chapter 13 case, but it does affect what you can accomplish in a second case.

In a chapter 13 plan an automatic stay goes into effect as soon as the case is filed. The automatic stay keeps creditors from foreclosing, repossessing, are making any efforts to collect the debt. In a chapter 13, unlike a chapter 7 case, even certain co-debtors can be protected. Under the law effective October 17, 2005 certain automatic say provisions may not protect property if you have previously filed a Chapter 7 or 13 within one to two years from the filing of the current case.

The following is a general analysis of how certain debts are handled in a chapter 13 plan:

Real Property: The back payments and other amounts in arrears can be paid out over the chapter 13 plan. The bankruptcy code provides for a 3 year pay out and can be paid out over 5 years with showing of good cause. The regular mortgage payment would also resume under the Chapter 13 plan. A debtor could also surrender the property and wipe out the secured portion of the debt.

Prior to October 17, 2005 debtors only had to pay the value of secured personal property with interest through the plan. Thus a vehicle worth $2,000.00 with a loan balance of $5,000.00 only receives the $2,000.00 plus interest under the plan. The $3,000.00 deficiency is regrouped as an general unsecured claim. After October 17, 2005 if you purchase or lease a car for personal use within the 910-days before filing, OR buy anything on credit within 1 year of filing you will be required to pay the full value under the plan.

IRS Debt: Treatment of IRS debt will depend on the type of debt and whether or not a federal tax lien has been filed. IRS debt is classified into 3 categories of debt:

Secured: If there has been a federal tax lien filed in the county where the debtor has property the IRS debt is secured up to the value of the real and personal property. Tax liens are generally valid for up to 10 years. Secured creditors are entitled to interest set by local court rules. Secured status applies to both priority and non-priority IRS debt. If they fall within this category.

Priority: IRS priority debt includes the trust fund portion (employees share) of payroll taxes withheld and not paid within the last 10 years. For all other IRS debts, if the due date of the tax return (including any requested extensions) is less that 3 years old and it has been less than 240 days since the assessment date the tax is considered priority. Priority debts which are secured by a federal tax lien are classified as secured and paid interest. If the debt is only priority it has to be paid without interest.

General Unsecured: If the tax is not secured by a federal tax lien, or if property is insufficient to secure the tax lien and the debt is not priority it is considered general unsecured and treated like any other unsecured debt which can be wiped out.

Disposable Income in Chapter 13

Effective October 17, 2005 payment to unsecured creditors is determined by the disposable income that you must pay into the plan using the same complex formula used in the Means Test. In comparison to the old law some people will come out better, some will come out worse. Expenses like cable TV and cell phones will be very limited. In general, if you have income at or above the Median State Income for your size family, you will probably pay more to the Chapter 13 Trustee on October 17, 2005 than you would have paid under the old law. If your income meets or exceeds the mean's test, then any Chapter 13 Plan must be for 5 years, instead of 3 years, unless the plan pays all claims in full over a shorter term.

No More Chapter 13 “Superdischarge”

Prior to October 17, 2005 a Chapter 13 discharge covers many debts that are not dischargeable in a Chapter 7 case.

Beginning OCTOBER 17, 2005 - A Chapter 13 discharge DOES NOT discharge claims resulting from:

1. unfilled, late-filed within two years of the petition date, and fraudulent tax returns (willful tax evasion);

2. liability for “trust fund” taxes, income taxes for 3 pre-petition tax years; and certain other taxes and duties.

3. credit extended under false pretenses or representations or actual fraud other than a financial statement;

4. credit extended under a written financial statement that the Debtor made with intent to deceive that was materially false and reasonably relied on by the creditor;

5. debts that were neither properly listed nor scheduled in the petition to permit timely filing of a proof of claim (and in the case of claims regarding luxury goods, fraud by a fiduciary, and willful injury, sufficient time to challenge dischargeability), unless the creditor had notice or actual knowledge of the case so as to permit a timely filed proof of claim;

6. fraud by a fiduciary, embezzlement, or larceny;

7. a domestic support obligation;

8. educational loans (absent undue hardship);

9. death or personal injury caused by unlawfully operating a motor vehicle, vessel, or aircraft under the influence of intoxicants;

10. criminal restitution or a fine included in a sentence on the debtor's conviction of a crime; and

11. civil restitution or damages as a result of willful or malicious acts resulting in personal injury or death of an individual;

Under the Act a Chapter 13 Plan DOES discharge three types of debt that cannot be discharged in a Chapter 7 case, claims resulting from:

1. property settlements [not support obligations];

2. willful and malicious injury to property; and

3. debts incurred to pay non-dischargeable tax obligations.

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