 Federal Judicial Center Orientation Series for United States Bankruptcy Judges. Overview of Chapter 13 with the honorable Charles N. Clevert Jr., Chief Bankruptcy Judge for the Eastern District of Wisconsin, and the honorable Mary Davies Scott, Bankruptcy Judge for the Eastern and Western Districts of Arkansas. Judge Clevert was appointed to the court in 1977. He received his BA degree from Davis and Elkins College in 1969, and his JD from Georgetown University Law Center in 1972. Judge Scott was appointed to the court in 1987. She received her BA degree from Trinity University in 1968, and her JD from the University of Arkansas School of Law in 1978. The Eastern District of Wisconsin, where Judge Clevert serves, has a moderate Chapter 13 case load. Milwaukee is the primary place of holding court, but the four authorized bankruptcy judges may conduct hearings in five other locations in the district. The Eastern and Western Districts of Arkansas, where Judge Scott serves, have heavy Chapter 13 case loads. Three authorized bankruptcy judges who are appointed in both districts hear cases at a number of locations throughout the state. Today we begin our discussion of Chapter 13 with its four primary players. The debtor, the proponent of a rehabilitation plan, the creditor that seeks payment on secured or unsecured claims, the trustee, the appointed fiduciary, who receives and distributes funds and assures compliance with the plan, and lastly, the court that issues judicial rulings and decisions affecting the plan and other aspects of the case. Other topics we're also going to cover will include legislative history, congressional policy. We'll also discuss the statutory framework of the law, all of the elements of the Chapter 13 plan, which include the confirmation process, filing and allowance and disallowance of claims. We'll also try to talk about dismissal and conversion, and finally the super or full compliance discharge and possible exceptions. The legislative history and congressional policy behind Chapter 13 provide for adjustment of debts for an individual with regular income. It's available only to individuals and it is purely voluntary. Corporations and partnerships are not eligible and there's no provision for an involuntary petition. It is an alternative form of relief and a flexible vehicle for rehabilitation of individuals who happen to be sole proprietors of small businesses. The congressional purpose was to enable individual debtors to formulate and execute plans of repayment. It arose from a concern for individuals who normally meet their obligations but failed to prepare for unexpected emergencies. Congressional policy was to encourage individuals to pay debts rather than discharge them under Chapter 7. A quid pro quo exists. Debtors completing three to five year plans may keep non-exempt assets and creditors receive more than they would under a Chapter 7. Key elements of Chapter 13 include the automatic co-debtors stay, voluntary dismissal by the debtor as a matter of right unless the case was previously converted from Chapter 7, a broad super or full compliance discharge to which some Section 523a exceptions to discharge do not apply, the inapplicability of Section 727 objections to the general discharge and the availability of repetitive filings to qualify debtors. Chapter 13 enables debtors to keep possession of exempt and non-exempt property. It contemplates continued use and redemption of personal property. Although different rules apply to cases filed before October 22, 1994, Chapter 13 allows debtors to cure defaults on mortgages on which the last payment is not due until after completion of the plan. Criminal restitution is not dischargeable. Neither are fines and cases filed after October 22, 1994. In addition, property taxes must be paid in full unless taxing authorities otherwise agree. Who may file a Chapter 13 case? It must be an individual with regular income who owes on the day of filing non-contention liquidated unsecured claims totaling less than $250,000 and non-contention liquidated secured claims totaling less than $750,000. These limits are not doubled in the joint case of husband and wife. Also, an unemployed spouse may file a joint petition with a spouse who has earnings. Dollar limits refer to non-contention liquidated unsecured and secured claims. Liquidated debt is not a term defined by the code. Most courts, however, conclude that a claim is sufficiently liquidated if it is ascertainable. Also, a claim can be considered liquidated even if the debtor disputes liability. Certain claims may be listed as secured on the petition that are in fact undersecured. For example, assume a car loan with a $10,000 debt but the collateral securing the debt only has a $7,000 value. For eligibility purposes, most courts conclude $7,000 is secured debt and $3,000 is unsecured debt. Most courts accept the debtor's statements on the petition. A judicial inquiry only occurs when eligibility is actually challenged. Property of the Chapter 13 estate includes the debtor's interest in real and personal property wherever located. It also includes property-acquired post-petition, especially the debtor's earnings. Federal law determines what is property of the Chapter 13 estate, but state law usually defines property rights. The automatic stay of Section 362 goes into effect upon filing. It is not permanent, and relief from the stay may be obtained for cause as determined on a case-by-case basis. Alternatively, stay of an act against property may be obtained by showing the debtor does not have an equity in the property. This burden rests on the party filing the motion. The debtor has the burden of showing the property is necessary for an effective reorganization. The Section 1301 co-debtor stay goes into effect upon filing. It insulates the debtor from indirect pressure of creditors against family and friends who have cosigned a debt. This stay is not permanent and may be lifted upon motion if the debtor received the consideration. The plan does not propose to pay the claim or the creditor will be irreparably harmed by continuation of the stay. In his introduction, Charles mentioned the players. What do they do? The Chapter 13 trustee or standing trustee is not like a Chapter 7 panel trustee. He or she is a full-time principal administrator with statutory duties. She must appear and be heard at confirmation and valuation hearings. She must also appear at any hearing on proposed modifications of the debtor's plan. Many, if not the majority of case disputes, are resolved by settlement. The Chapter 13 trustee works behind the scenes. Many potential problems are worked out at the Section 341A first meeting of creditors. The debtor also has rights and powers, and these are specifically set out in Section 1303 of the Code. The Code is not clear, however, as to whether the debtor has the same avoiding powers of the trustee under Sections 544, 547, and 548. There's a split in the courts. The majority view is that the Chapter 13 debtor has standing. In any event, whether the debtor or the trustee brings the action, any lawsuit to avoid transfers must be brought within two years after entry of the order for relief. The debtor does have the power to avoid judicial leans to the extent they impair certain exemptions. Before October 22, 1994, courts had problems with this issue. Now there is a simple arithmetic test. Ordinarily, representation of the debtor is by counsel, or they may represent themselves. New Section 110 was added to the Code by the 1994 legislation to allow for non-lawyer, bankruptcy petition preparers who assist debtors in filing petitions. They must now identify themselves on all documents. They may also be fined and held liable to the debtors for actual and punitive damages if they act outside the Code requirements. Can you give us an overview of Chapter 13, Charles? Upon filing a Chapter 13 case, automatic stays go into effect and an estate is created. Afterward, a standing trustee is usually appointed and a repayment plan must be filed by the debtor within 15 days of the petition. Plan payments should begin within 30 days and the Section 341 creditors meeting is to be held within 20 to 40 days of the petition date. Creditors file proofs of claim within 90 days following the first date set for the meeting of creditors. Often this date is after confirmation. If the plan meets the requirements of Section 1325 and if no objections are sustained, the plan will be confirmed. A debtor may modify the plan after confirmation, but prior to substantial consummation. The trustee makes plan payments as soon as practicable, even if the claims bar date has not passed. The discharge is granted after all plan payments are made. Mary, would you please tell us about the elements of the plan? There are both mandatory and optional elements of a Chapter 13 plan. The debtor must contribute income and assets to a plan of repayment. The debtor must also pay priority claims in full. These include taxes and administrative expenses. Interest is not required. Child and spousal support are also priority claims if filed after October 22, 1994. No unfair discrimination is permitted. Creditors of a similar class must be placed in the same class and receive the same treatment under the plan. This issue comes up often now in cases when particular unsecured debts are non-dischargeable, for example, student loans. Courts are split. Some allow these unsecured claims to be classified separately and paid ahead of or faster than other unsecured creditors. Other courts say no and do not permit discriminatory classification. There are many optional elements. Debtors may include in a plan payment of unsecured claims when a non-filing co-debtor is also liable. For example, a situation where parents have cosigned notes for adult children. The debtor could provide that creditors on this claim receive 100 cents on the dollar while other unsecured creditors receive only 70 cents. If these creditors do not receive 100 cents on the dollar under the debtor's plan, they would be entitled to relief from the automatic study to collect the difference. Before that, a debtor may modify creditors' rights unless the obligation is secured only by an interest in the debtor's principal place of residence. The debtor may provide for a cure of a pre-petition default. The primary defaults of most debtors are past due house or car payments. The plan may provide for payment of an arrearage over a reasonable period of time which will cure the default and reinstate the underlying contract obligation. For cases filed after October 22, 1994, a debtor can provide for curing a default unless a sale of the collateral has been completed. For filings before that date, a split of authority exists. Some courts concluded no cure was possible if a foreclosure had taken place. Most courts held according to the 1994 amendments to the code. In addition, for cases filed after October 22, 1994, pre- and post-confirmation interest must be paid if the underlying agreement provided for this interest and the agreement was entered into after October 22, 1994. Concurrent payments to secured and unsecured creditors is another permissible option in certain situations. Ordinarily, administrative and priority claims are paid first, or along with secured creditors. Finally, unsecured creditors are paid. But in certain circumstances, these concurrent payments may be made. For example, ongoing child support or alimony payments are unsecured, but debtors will be permitted to continue making these payments along with other higher priority debts. Debtors may also provide for curing defaults on any claim in which the final payment will not come due until after the plan would be completed. For example, a 30-year home mortgage. Payment of allowed claims that arise after the case is filed may also be paid. Generally, debtors will have to modify the plan to pay post-petition claims. The debtor may also provide for assumption or rejection of executory contracts and unexpired leases. Payment of all or part of the claims ordinarily comes from the estate property. For example, the debtor's wages. The debtor may, however, sell exempt property and use the sale proceeds for payments. Neither the trustee nor the creditors, however, can compel such a sale. The plan may also provide that property of the estate vests in the debtor upon confirmation. This property will not be subject to post-petition claims. There are courts, however, that do not permit this provision. Finally, debtors may include any provision not inconsistent with the bankruptcy code. Debtors can be creative here. For example, some debtor's wages are insufficient to pay a claimant full over the life of the plan. The debtor's plan might provide for a small, affordable monthly payment over the three to five years of the plan, then provide for the sale of the property or refinancing of the debt in the last six months of the plan. Section 1323 of the code provides for modification of the plan prior to confirmation. A significant number of cases require major or minor modification. Most fall into three categories. Valuation of collateral, fixing the amount of creditors' claims and fixing interest rates or discount factors. Modification cleans up imperfections and assures a plan is capable of being confirmed. Section 1324 states, the court shall hold a hearing on confirmation. Compliance with this provision differs from court to court. For example, I hold an actual hearing in every case, although uncontested confirmations are handled in summary proceedings where only the trustee appears. If an objection to confirmation is filed, the case is handled as a contested matter in which the federal rules of evidence apply. Mary, can you tell us about your procedures? We have thousands of Chapter 13 cases in Arkansas as do many of the states in the south and the southeast United States. It would be almost impossible to hold a confirmation hearing in every case. So we don't. All creditors are given notice of the debtor's proposed plan and a time period in which to object. If no objection is filed by the trustee or a creditor which would trigger a hearing on confirmation, orders are simply stamped by the clerk with the judge's signature. Can you now tell us about confirmation requirements? The court shall confirm a plan if it meets six requirements. Even if no objection is filed, the court has an independent obligation to ensure that it meets these requirements. The plan must comply with the provisions of Chapter 13. This is a catch-all to ensure the plan is presented within the statutory period and in accordance with the Chapter 13 provisions. All fees, charges, and court costs must also be paid. The only exception is for filing fees that are to be paid in installments. The plan must be proposed in good faith and by no means forbidden by law. Good faith, however, is not a term defined by the bankruptcy code. Debtors voluntarily submit to the bankruptcy court's jurisdiction and propose to contribute wages and assets according to a plan proposal to repay debts. The courts must make a factual determination as to whether the proposal is made in good faith or whether the debtor is not doing his or her best. Most courts use the Uniform Commercial Code definition of honesty in fact. Examples of difficult cases involving a determination of good faith or bad faith include debtors who are attempting to use Chapter 13 to discharge debts that could not be discharged in a Chapter 7. For example, debts for fraud or willful and malicious injuries inflicted by the debtor. The plan must be in the creditor's best interest. They must receive no less than they would under a Chapter 7 case. This requirement has resulted in some extremes. Courts have approved zero payment or one tenth of one percent payment plans to unsecured creditors. But these courts must also find that that amount is all that creditor would have received if the debtor had filed a straight liquidation or Chapter 7. Holders of secured claims must have accepted the plan or must receive the full benefit of their secured claim. In other words, a secured creditor may have accepted the plan by not filing a formal objection because the claim will be paid in full or the debtor may have surrendered the collateral to the creditor or the debtor may have proposed payment of the secured claim only up to the value of the collateral. Any deficiency claim will receive no rat a share along with the rest of the unsecured claims. If the secured creditor is secured only by the debtor's principal residence, the value of the collateral cannot be stripped down in this way, however. Finally, the plan must be feasible. The debtor should have sufficient income to meet monthly expenses and be able to make the plan payment to the trustee. This determination is most difficult for the courts. There's just no way to know if the debtor will stay healthy and remain fully employed. Most courts use common sense judgment and let the honest debtors try to carry out the proposed plans. If the trustee or unsecured creditor's object, there is one additional confirmation requirement. The debtor must provide all disposable income for three years. This is the so-called best effort test. Disposable income is funds in excess of what is needed for support in a reasonable fashion. What constitutes a reasonable fashion is subject to debate. But ordinarily, courts do not require debtors to reduce their standard of living. If the debtor's plan complies with the code's requirements, the court enters a confirmation order. In many districts, the court order contains planned payment schedules, unique provisions, attorney's fees, and fixes the debtor's obligations and the creditor's rights. The confirmation order thereby binds creditors and debtors to the plan. It likewise dictates the trustee's fiduciary duties, including collection and distribution of funds in accordance with the law and the plan, and monitoring the debtor's performance. If that performance does not conform with the plan, a motion to dismiss may be filed. This often results in a post-confirmation modification. How does the trustee know what to pay the creditors? The general provisions of Chapter 5 apply in Chapter 13 cases. These provisions, as well as the bankruptcy rules, govern the filing and allowance of proofs of claim. Bankruptcy Rule 3002 sets out requirements for filing of proofs of claim. If there is no objection by the trustee or debtor to the proof of claim, the claim is allowed and will be timely paid by the trustee in accordance with the plan. Proofs of claim shall be filed on or before 90 days from the first date set for the first meeting of creditors. Untimely claims are generally disallowed. If there is an objection to a proof of claim, the objection triggers a hearing under Bankruptcy Rule 3007. At least 30 days' notice of this hearing must be given. Section 1305 governs the allowance of post-petition claims. Charles, what happens if the plan fails? Dismissal or conversion may have to be considered. A debtor has an absolute right to dismiss under Section 1307b. Under Section 1307c it states, a case may be dismissed for several reasons constituting cause. For example, unreasonable prejudicial delay, failure to make plan payments and denial of confirmation. When a case is dismissed, avoided transfers and liens are reinstated and all pending proceedings within the Chapter 13 are dismissed or become moot. If a debtor voluntarily dismisses a case while a relief from stay motion is pending, the debtor probably will be ineligible to refile within 180 days. If a debtor dies or becomes legally incompetent while a case is pending, bankruptcy rule 1016 applies and it is likely the case will be dismissed. The Chapter 13 case can also be converted to a Chapter 7 case. The debtor has an absolute right to convert from Chapter 13 to Chapter 7. Bankruptcy rule 1017 provides that a debtor may file simply a notice of conversion from Chapter 13 to Chapter 7. A court order is not required. This notice to convert may be filed at any time during the case. Section 1307c sets out the non-exclusive reasons or cause to convert. If the debtor is a farmer, however, conversion provisions do not apply unless the farmer consents. Once the case is converted, the court sets bar dates for creditors to file objections to discharge under Section 727 and complains to determine dischargeability of particular debts under Section 523. If the case is converted to Chapter 7, issues have arisen regarding property of the estate acquired after the filing. For example, funds held by the Chapter 13 trustee but undispersed. If cases filed after the October 22, 1994 legislation, property of the estate includes what would have been property of the estate if the case had been originally filed under Chapter 7. There is a split of authority for cases filed before October 22, 1994. Some courts held the Chapter 13 trustee should go ahead and disperse the funds according to the plan. Other courts concluded the debtor should get the funds. Still others found that the Chapter 13 trustee should turn the funds over to the Chapter 7 trustee. If the debtor incurs unpaid debts after the Chapter 13 case is filed, generally they will be subject to discharge in the subsequent Chapter 7 case, unless they are determined to be non-dischargeable. Charles, what is the super discharge? The super or full compliance to discharge is extremely broad but eroding. It appears to discharge all planned debts except long-term home mortgage and alimony and child support. Whole harmless divorce obligations are also non-dischargeable in cases filed after October 22, 1994. But if paying such obligations reduces income below what is necessary for support, the debt may be discharged. Student loans that become due less than seven years prior to the filing are also non-dischargeable. So, too, are debts for death or personal injury caused by driving while intoxicated. Additional exceptions from discharge include criminal restitution, criminal fines and cases filed after October 22, 1994, as well as past due child support obligations. After October 22, 1994, these obligations must be paid through the plan. According to the great weight of authority, Title 42 health education assistance loans are not dischargeable. There is also a hardship discharge provision under Section 1328b of the bankruptcy code. If it becomes impossible for a debtor to complete a plan due to illness, loss of employment or other emergency, a hardship discharge may be granted. The debtor must file a motion. Notice is sent to all creditors and interested parties. If the hardship discharge is granted, the non-dischargeable provisions in Section 523 apply. The debtor will not receive the super discharge if a creditor files and prevails on an objection to the dischargeability of a particular debt. Under the bankruptcy rules, the court fixes a bar date for creditors to file Section 523 dischargeability complaints. Lastly, a debtor's discharge may be revoked. Section 1328e provides for revocation of the debtor's discharge. Any complaint to revoke a discharge must be filed within one year of the date of the discharge and only if the discharge was obtained through fraud. This provision protects the court, the creditors, and the public from dishonest debtors. In conclusion, as a result of the plans we discussed, Chapter 13 trustees distribute hundreds of millions of dollars to creditors each year. These payments enable debtors to keep their homes, cars, and other personal property that might otherwise be lost. Chapter 13s are also gaining favor among creditors that usually receive less in Chapter 7, liquidation bankruptcies.