October 18, 2017

Chapter 13 Bankruptcy

 

Chapter 13 is a form of personal bankruptcy, which is in effect a repayment plan.  A debtor’s debt is reorganized into one monthly payment made to the Chapter 13 trustee.  The debtor’s plan is paid off their debt over a three to five year period and at the completion of the plan the debtor receives a discharge of all dischargeable debts owed at the time the case was file.

A Chapter 13 bankruptcy is also used to prevent or stop a foreclosure by setting up a payment plan to catch up or curing the mortgage arrearage, i.e. the payments the debtor is behind on their home at the time the case is filed.  It may also be used to prevent repossession of a vehicle or other personal property.  In some cases Chapter 13 can also lower vehicle or other personal property payments.  A Chapter 13 plan can also provide a repayment plan for back taxes.

 

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SECURED DEBTS UNDER A CHAPTER 13 PLAN:

In a Chapter 13 cases secured claims are treated in one of two ways.  The first type of treatment is propose a plan in which the past due payments, the arrearage is cured over the life of the plan while the regular payment are maintain on a current basis.  These payments to the secured creditor are, are made from the monthly payments the debtor makes to the Chapter 13 trustee.  If the debtor is past due on a secured debt at the time of filing all payments that come due after the filing for bankruptcy must be paid through the Chapter 13 office.  If the debtor is current on his first mortgage at the time of filing, then if he so wished, he can continue to pay the first mortgage payment directly to the secured creditor.  All other payments and claims secured and unsecured must be included in the plan payment and paid through the Chapter 13 Office.  When the bankruptcy plan is completed the debtor remains liable on the debt, that is it is not discharged, and he must continue to make all of the payments remaining due on the secured debt.

All secured debt other that a first or second mortgage is paid through the debtor’s chapter 13 plan as required by the bankruptcy code.  It is the debtor’s attorney’s responsibility to advise the debtor how these other secured debts are treated under the proposed plan.

BAPCPA places certain limitations on a Chapter 13 debtor’s ability to strip down certain secured debts secured by an automobile.  These are referred to as 910 Claims.  If the owns a vehicle that serves as collateral for the loan that financed the purchase of the vehicle and the vehicle is used for personal use of the debtor and was incurred within 910 days (approximately 2.5 years) of the filing for bankruptcy, then the debt cannot be stripped down to the value of the vehicles but must be paid in full over the term of the plan.  This prohibition against cram-down applies to other collateral if the debt was incurred within one year prior to filing for bankruptcy.

 

Chapter 13 Myths

• Chapter 13 requires that all unsecured debt be repaid in full.  A Chapter 13 Plan can pay less than 100% of unsecured debts and in fact a majority of Chapter 13 plans pay a 0% dividend to the unsecured creditors.

• Although a Chapter 13 bankruptcy is a repayment plan, you will still have a bankruptcy filing on your creditor report. This is true.  A chapter 13 bankruptcy is reported for 5 years on your credit report after the plan is completed.

• Filing Chapter 13 bankruptcy will not lower your mortgage payments.  In almost all cases this is true.  There are a few situations where this may not be the case, but these types of cases are rare.

 

Chapter 13 is also referred to as a “wage earner plan.”  Under a Chapter 13 bankruptcy case the debtor propose a Chapter 13 plan in which the debtor show that he/she have sufficient income to pay all of their current living expenses, e.g., rent, food, utilities, transportation, clothes, etc., and have sufficient money remaining to pay a portion of their debts. A Chapter 13 filing requires a detailing listing of the debtor’s take-home pay and monthly living expenses. The excess income paid to the Chapter 13 trustee is disbursed to the creditors.  Determining the amount of the Chapter 13 plan payment is complicated, especially after the enactment of BAPCPA in 2005. The most important aspects of a Chapter 13 Plan are itemized below:

 

1.         The term of the plan cannot exceed more than 60 months.

2.         The amount paid over the term of the plan must be enough to pay certain debts in full.  These include the following:

a.         Income taxes due that have been filed more than three years prior.

b.         Property ad valorum taxes debt due for prior years.

c.         Withholding taxes (941 and 940) and sales taxes regardless of age.

d.         Past due child support and alimony also referred to as domestic support.

e.         The amount necessary to bring a secured loan current if the debtor is keeping the collateral.

f.          All secured debts, such as vehicle loans, that are proposed to be pay by the plan.

g.         the balance of approved attorney’s fees not paid prior to filing.

h.         The Chapter 13 Trustee’s administrative claim

3.         Under the means test required by BAPCPA, the amount of paid to the general unsecured claims depends upon a rather complex calculation based upon the debtor’s income for the six months prior to filing the bankruptcy, the debtor’s expenses both actual and as allowed under the law, and the amount of non-exempt assets, if any, that the debtor owned at the time the case was filed.

4.         The vast majority of Chapter 13 cases filed since BAPCPA was enacted do not require the payment of a dividend to the unsecured creditors.  These plans are referred to a zero (0)% plans.

 

At the end of the Chapter 13 plan, i.e. when the debtor(s) complete making all of the payments required by the confirmed plan, the amount still owing on the listed unsecured debts is discharged.  It is very important that all debts, secured and unsecured, be listed in the initial petition when filing a Chapter 13 case because any debts not listed are not discharged at the end of the case.  Chapter 13 cases also allow a debtor to lower (cram down) the principle balance due and/or the interest rate on certain secured loans.  Chapter 13 also provides a mechanism to catch up the amount a debtor may be behind on a secured debt over the life of the plan.  Secured loans are home loans secured by a mortgage or deed of trust, car loan and other types of loans secured by collateral.  A Chapter 7 case does not offer this option.

 

Chapter 13 FAQ 

What is Chapter 13 Bankruptcy and how does it work? 

Chapter 13 is one form of bankruptcy in which a debtor obtains relief from his creditors by submitting a plan to pay the debts over a period of generally not less than 36 months or more than 60 months.  The Bankruptcy Court prohibits the debtor from the creditors’ attempts to collect money or recover property from the debtor during the time the Chapter 13 plan is in effect.

 

How are the Chapter 13 Plan payments made and to whom are they made? 

The first plan payment is made by bank check, cashier’s check, or Postal Money Order to the Chapter 13 Trustee within 30 days after the chapter 13 case is filed.  Thereafter the regular plan payments are made by payroll deduction or by the debtor directly to the Chapter 13 Trustee.  The money received by the Chapter 13 Trustee is disbursed to the  creditors that file a proof of claim as provided by the bankruptcy code and in accordance with the plan as confirmed by the Court.

 

What fees are charged in Chapter 13? 

The Clerk of the Bankruptcy Court charges a filing fee of $274.00 when the case is filed.  Attorney fees in Chapter 13 cases are set by the court.  At the present the attorney fee set by the court is $3,000.00 for all basic or “base fee” services rendered by the attorney during the term of the plan.  These fees are established by federal law and local court rules.  Additional during the plan the court may award the attorney additional fees for legal work performed by the attorney that is not considered part of the base fee.  Such additional fees are also paid under your plan.  The attorney will explain when such additional fees will be incurred.  The professional fee arrangement will be set forth in a Fee Agreement that is signed by the client and attorney prior to filing and a copy provided to the client.  The Chapter 13 Trustee receives an administrative fee of up to ten percent (10%) of the amount paid under the plan.

 

May I change to Chapter 7 if my Chapter 13 is still open?

Yes.  A Chapter 13 case may be converted to a Chapter 7 case at any time.  The client should contact the attorney and discuss this action if he thinks he should considering converting the case.  There are additional attorney fees and court filing fees before a case can be converted to Chapter 7.

 

May I repay some of my creditors and not other under Chapter 13?

No.  A debtor cannot selectively pick and choose or favor one particular creditor over another.  All of debts must be dealt with through the Court and pursuant to the provisions of the bankruptcy code.  If the debtor is current on the first mortgage at the time the case is filed, then generally the court will allow the debtor to continue to make the first mortgage payment directly to the creditor.  All other debts owed at the time the case is file must be paid through the Chapter 13 trustee’s office and as provided for by the court order confirming the plan.

 

Are student loan debts dischargeable?

Almost all student loans are not discharged in bankruptcy.  Any question about a student loan should be discussed with the attorney at the first consultation.

 

How are debts that have been co-signed or guaranteed by another person handled under Chapter 13?

Co-signed debts are treated one of two or three ways under a Chapter 13 plan.  If a debtor has a consumer debt which has been co-signed or guaranteed by another person the plan can propose that this debt can be paid off in full under the Chapter 13 plan to protect the co-debtor.  In such a case, the automatic stay that was entered when the case was filed will prevent the creditor from collecting the debt from the co-debtor.  However, if the debtor cannot afford to pay the claim through the plan, then the plan will propose that this claim be released from the plan and allow the creditor to collect the amount due directly from the co-debtor.  A plan can also provide that a portion of the debt be paid through the plan leaving the co-debtor to pay that portion of the debt that will not be paid under the plan.

 

What is required for court approval of Chapter 13 plan?

The Court will confirm a Chapter 13 plan if:

(a) The plan complies with the requirements of Chapter 13.

(b) All required fees, charges, deposits and payments have been made.

(c) The plan has been proposed in good faith.

(d) Each secured creditor is allowed to retain hits lien on the collateral and is paid the full     amount of the secured claim under the plan.

(e) Each unsecured creditor receives under the plan at least as much as the unsecured creditors would receive if the debtor had filed Chapter 7.

(f) It appears the debtor will be able to make the required payments and to comply with the plan.  This is referred to a proposing a feasible plan.

 

When must the Chapter 13 payments begin and how often must they be made?

The first payment must be made to the Chapter 13 Trustee within thirty (30) days of filing bankruptcy.  After the first payment, the monthly plan payments may be set up through a wage deduction from the debtor’s employer.  If the debtor is self employed or for some other reason a wage deduction cannot be set up, then it is the responsibility of the debtor to make the monthly plan payment directly to the Chapter 13 office.  The Chapter 13 office will provide information on how and where the payment should be sent.  It is advisable to keep some type of receipt for each payment that is made other than those made through a wage deduction.  Do not send payments to the Clerk of the Bankruptcy Court or to your attorney as this will only delay the payment getting to the Chapter 13 office and may result in the payment being lost.

 

What if I later decide that I no longer want to make payments and to continue with the Chapter 13 plan?

The bankruptcy law allows a debtor to either voluntarily dismiss a Chapter 13 case or to convert it to Chapter 7 at any time, unless the case has previously been converted from another chapter of the Bankruptcy Code.  No one is required to remain in Chapter 13 if they do not wish to remain.  It is strongly advisable to consult with the attorney before dismissing a Chapter 13 case.

 

What happens to creditors who were not listed on my schedules?

Failure to list a creditor at the time the case is filed can create potential problems later during the case or after the case is completed.  The case can be amended and omitted and creditors can be added if a creditor was inadvertently omitted.  There are generally two  types of unlisted creditors- those that were owed money at the time of filing but were missed or forgotten (“unlisted creditors”), and those creditors that became a creditor after the case was filed (“post-petition creditors”).  If you find an unlisted creditor, advise  your attorney immediately.

 

Can I incur new debt after I file my Chapter 13 plan?

Not without court permission.  Sometimes a debtor finds himself in a situation where he needs to incur additional debt after you have filed your Chapter 13 plan, for example the debtor’s vehicle breaks down and cannot repaired and the debtor needed to purchase and finance another vehicle.  The following are the guidelines on incurring additional credit provided by the Bankruptcy Code.

1. The debt must be for a consumer debt and for a property or services necessary for the debtor’s performance under the plan.

2. The debtor must demonstrate the ability to pay the new debt.

3. The Court must approve such additional credit before it is incurred.  To obtain court approval requires the filing of a motion, notice to your creditors and a hearing before the court.  While in chapter 13, do not incur debt and then ask the court to approve it after the fact.  Court approve must be obtained before singing the papers to incur the debt.  Always consult with the attorney if credit must be obtained during the Chapter 13  case. 

 

What happens when all payments have been completed?

Once enough money has been paid to the Trustee to complete all the Chapter 13 plan, the Trustee’s office will begin the process of closing your case and entering the discharge.  The closing process normally takes 6 to 8 weeks and is completed in the following order;

1. Court Audit. The Trustee’s office verifies that all claims filed in your case were paid correctly and all court orders were properly administered.  If any problem is discovered, the debtor and the attorney will be notified.

2. Stop Payment.  The Trustee’s office will advise the debtor to stop making plan payments.  This may not be done until after the Court audit is completed.

3. Final Report. The Trustee’s office prepares and files a final report with the court for the judge to review.

4. Court Date. The Trustee schedules the case for a final review by the judge.  The debtor generally does not need to appear for the final hearing.

5. Case Discharged. The judge signs an order discharging the debtor(s) from all scheduled debt.

 

WHAT DEBTS ARE NOT DISCHARGED?

The basic purpose of bankruptcy is to obtain a discharge of the debtor’s debts owed at the time of filing.   However, some specific types of debts are not dischargeable.  These types of debts are listed below.

In a Chapter 13 case:

1.  Any debt not listed in the schedule of creditors.

2. Tax due a taxing authority in which the tax returns or tax reports were not filed or were filed late and less than 2 years prior to filing for bankruptcy.

3.  Tax debts in which the debtor filed a fraudulent return or willfully attempted to evade the taxes.

4.  A claim based upon money, property, services, or credit obtained by fraud or false pretense.

5.  Consumer debt for more than $500.00 for luxury goods or services to a single creditor, and incurred within 90 days of filing for bankruptcy.

6. Cash advances of $750.00 or more and obtained within 60 days of filing for bankruptcy.

7.  Educational loans, except in cases of prolonged and severe hardship. As a practical matter undue hardship to discharge a student loan is almost impossible to establish.

 

IS IT POSSIBLE TO BE DENIED A DISCHARGE OF ALL MY DEBTS? 

CHAPTER 13

1.  The debtor has been granted a discharge in a prior Chapter 7 case filed within the last 4 years of filing the current bankruptcy case.

2.  The debtor has been granted a discharge in a prior Chapter 13 filed less than a year prior to the current bankruptcy.

3. The debtor fails to complete a required course in personal financial management following the filing of the bankruptcy case.

4. The debtor is the subject of a pending proceeding in which he may be found guilty of a felony, or he may be liable for a debt arising from the violation of federal or state securities laws, or he may be liable for other criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual within the proceeding 5 years

6. Notice of Discharge.  The Trustee sends a notice to the debtor, debtor’s attorney and to all of the creditors.  This tells everyone when your case was completed and discharged by the judge.

7. Refund. After the discharge is entered, any funds remaining with the Chapter 13 Office will be refunded to the debtor.

 

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