Chapter 13
Under Chapter 13 of the Bankruptcy Code, a debtor who is an individual with regular income and who owes less than prescribed amounts of debt (see Bankr. Code 109(e)) can force creditors to accept a payment plan, with a duration of as much as 5 years, if the plan complies with requirements of the Bankruptcy Code. The plan is generally funded entirely by the debtor's future income. Creditors may not invoke Chapter 13 (i.e. there is no such thing as an involuntary Chapter 13) and only the debtor may propose a payment plan.
Here we summarize the requirements imposed by Chapter 13 for a plan's treatment of allowed secured claims.
Unless a creditor's claim is secured only by a security interest in real property that is the debtor's principal residence, a Chapter 13 plan may modify an allowed secured claim. See Bankr. Code 1322(b)(2). But, absent the secured creditor's consent to less, the plan must at a minimum provide: (1) that the secured creditor receive, over the period of the plan, a stream of payments totalling an amount that will have the same value to the secured creditor as would a lump sum payment of the allowed secured claim at the time of the effective date of the plan; and (2) that the secured creditor retain a lien on the collateral to secure the stream of payments. See Bankr. Code 1325(a)(5).
Suppose, for example, that a debtor owes $10,000, secured by an automobile worth $8,000. (In Associates Commercial Corporation v. Rash the Supreme Court has considered the question of how to value collateral for purposes of a Chapter 13 modification of a secured creditor's claim.) To be confirmed by the bankruptcy court, the debtor's plan must propose to pay over time, on account of the allowed secured claim, a stream of payments that has the same value to the secured creditor as would a lump sum payment of $8,000 at the time of confirmation of the plan. Notice that Chapter 13 thus affords a debtor a form of installment redemption that is not generally available to debtors in a Chapter 7 case.
If a creditor has both an allowed secured and an allowed unsecured claim (as in the example in the preceding paragraph), the debtor may also have to pay some portion or all of the allowed unsecured claim ($2,000 in the example above). The amount that a debtor must pay on account of unsecured claims depends on the debtor's disposable income, the amount of non-exempt property owned by the debtor at the time of filing a Chapter 13, and on the bankruptcy court's assessment of the good faith of the debtor's plan. Further exploration of these Chapter 13 requirements is beyond the scope of these materials.
With one important exception, a debtor may not alter the payment terms of a claim secured only by a mortgage or deed of trust on the debtor's principal residence. See Bankr. Code 1322(b)(2). For example, if a debtor's mortgage payment is $1500.00/month for the remaining term of a 30 year mortgage, that mortgage payment (and the lender's rights on default) cannot be altered by the debtor's use of Chapter 13.
However, suppose the debtor has defaulted on residential mortgage payments prior to filing of the Chapter 13 petition. In such a case, if the debtor can henceforth timely pay the mortgage, the debtor may prevent a threatened or pending foreclosure on the residence by proposing a plan to cure the default within a reasonable period of time. See Bankr. Code 1322(b)(5) and (c). For example, suppose the debtor referred to in the preceding paragraph is on the eve of foreclosure following the creditor's acceleration of the debt after the debtor failed to make two mortgage payments. Suppose the debtor has no financial ability to tender $3,000.00 (plus interest and other expenses, such as attorney fees, payable under the note upon default - - say $600.00) or, even with such financial ability, no further power under the contract or state law to de-accelerate and reinstate payments on the debt. But the debtor can now afford to maintain the $1500/mo. mortgage payments and afford to pay the $3,600.00 arrearage in $100.00 installments over a period of 36 months. Under Chapter 13 of the Bankruptcy Code, the automatic stay will preclude the foreclosure and the debtor may force its installment cure on an unwilling creditor, thus in effect giving the debtor a right to reinstate even if not available under the state remedies system. This right to cure arrearages, one of the key features of Chapter 13, is not available to a debtor who has filed a petition under Chapter 7 of the Bankruptcy Code.