chapter 13 faq
Chapter 13 bankruptcy enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make payments to creditors over three to five years. If the plan is approved, you make payments to the Chapter 13 trustee who then distributes the payments to the creditors. When approved by the court, the plan binds all creditors to accept its terms as payment in full of their claim. At the end of the plan, you resume normal payments to secured creditors such as your mortgage lender, and the remaining unsecured debts (e.g. credit cards) are discharged.
- Lien stripping your second mortgage or HELOC: If you have a home with a second mortgage or home equity line of credit (HELOC), and the fair market value of the home is less than first mortgage, you may be able to “strip” off that second mortgage or HELOC. This is because that second loan is no longer secured in light of the fact that the fair market value is less than the first mortgage. The first mortgage has a senior lien and priority over the second mortgage and HELOC that have only a junior lien. For example, assume you bought your home in 2005 for $600,000. You then took out a $150,000 HELOC in 2007. The current fair market value has dropped to $400,000 and you are now underwater. Chapter 13 may permit you to strip the HELOC and it will be re-categorized as an unsecured creditor. Therefore, after the completion of the Chapter 13 repayment plan, the HELOC will be discharged along with your other unsecured creditors.
- Foreclosure: Chapter 13 offers individuals an opportunity to save their homes from foreclosure. Individuals can stop foreclosure proceedings and may “cure” delinquent mortgage payments over time. Nevertheless, they must still make all future mortgage payments that come due during the Chapter 13 plan on time.
- Co-signer Protection: Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers.
- Single payment: Individuals make the plan payments to a Chapter 13 Trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.
- Delinquent Taxes: Chapter 13 can be a powerful weapon against overdue taxes because it allows repayment of non-dischargeable taxes over 5 years.
- Realistic payment schedule: Payment of tax debts through the plan is based on financial reality: monthly payments reflect what is actually available in the Debtor’s budget after current living expenses.
- Old taxes and all penalties discharged: Non priority taxes and all tax penalties are relegated to the same status as other unsecured debts and may be paid pennies on the dollar.
- Tax liens frozen: Future appreciation of assets subject to tax liens is put beyond the reach of the lien, since the value of the secured lien claim is fixed with reference to the value of the property at the filing of the case.
- Other creditors discharged: Non tax creditors are stayed from collection action during the pendency of the case, thus protecting the Debtor’s cash flow for payments into the plan.
- Discharge unconditional: All tax liability that is discharged at the completion of the case is gone forever; in contrast to offers in compromise, there is no condition on the discharge tied to future tax filing.
- No added tax consequences. Discharge of debt in bankruptcy does not trigger cancellation of debt income.
- Committed to payments: You are committed to payments for three to five years. The flipside is that this a good way of imposing control and order.
- Debt ceiling: If you have too much debt, you are precluded from filing under Chapter 13. A Debtor cannot have more than $1,184,200 in secured debt and/or $394,725 in unsecured debt. That secured debts ceiling in particular is a problem in the San Francisco Bay Area given the cost of housing.
- Paying unsecured debt: If you qualify for Chapter 13 bankruptcy, and have enough disposable income left over after paying secured debtors, you will likely pay unsecured creditors such as credit cards and medical bills over the three to five year period more than you would in Chapter 7 bankruptcy. Chapter 7 permits you to shed the debt upon the discharge and walk away with a more immediate “fresh start”. That said Chapter 13 has many powers and benefits a Chapter 7 does not as seen in the next FAQ.
In order to file for a Chapter 13 you must:
- Before filing, complete the credit counseling class.
- Have sufficient regular income to meet monthly living expenses allowed by the Chapter 13 Trustee and IRS to make a plan payment.
- Have less than $1,184,200 in secured debt and $394,725 in unsecured debt (as of April 1, 2016, and adjusted every three years).
- Not be a corporation, partnership, stockbroker, or commodity broker. Note that individuals with ownership interests in these entities can still file for bankruptcy. For example, debtors who are self-employed.
- The debtor may not have received a discharge in a Chapter 7 in the previous four years, or another Chapter 13 in the previous two years.
The debtor’s attorney may do the following things in a Chapter 13 consumer case (this is not an exhaustive list):
- Analyze the amount and character of the debts owed by the debtor to determine whether bankruptcy is the best remedy for the Debtor’s financial problems.
- Assist the Debtor in preparing his or her estate for bankruptcy.
- Review the Debtor’s history of payments and transfers to determine possible exposure to Debtor and others.
- Assemble the information and data necessary to prepare the bankruptcy schedules and statements for filing.
- Assist the Client in understanding his or her duties in a Chapter 13.
- Draft the Plan of Reorganization, based on the Debtor’s situation, the law and the practical solutions available.
- Prepare proper motions, and/or adversarial proceedings for lien stripping.
- Prepare the proper petitions, schedules, and statements for filing with the bankruptcy court.
- Determine whether the education classes are necessary. If so, file the required certificates with the court.
- File the bankruptcy petitions, schedules, and statements with the court.
- Address issues related to redemption, surrender or reaffirmation.
- File and notice the Plan of Reorganization.
- Attend the Meeting of Creditors with the debtor.
- Address issues raised by the bankruptcy Trustee and creditors related to the Plan and other documents filed with the Court.
- Attend Plan Confirmation hearings.
- Address modifications of the Plan, as circumstances change during the life of the Plan.
- Prepare and file amended schedules as required by the Debtor’s change of circumstances and/or the court.
The court’s filing fee is $310.00 for a Chapter 13, whether you are filing bankruptcy individually or jointly with your spouse. In addition to the court filing fee there are also two classes each individual must take (pre and post bankruptcy filing credit and budget classes. The cost for the two classes combined is approximately $50.
Attorneys’ fees are charged in addition to the fees required by the court. It is impossible to quote an exact fee without first reviewing your situation. A bankruptcy lawyer from JC Law Group PC will assess the facts of your situation and provide you with quote. Please call us at 415-963-4004 to schedule an appointment.
After a Means Test is performed to evaluate the Debtor’s prospects for qualifying for a Chapter 13 bankruptcy, the plan must meet two other tests:
- Best interest of creditors test: The plan must give unsecured creditors at least as much on their claim as they would have received if the debtor filed Chapter 7; and
- Best efforts test: All projected disposable income (the amount left after payment of allowed expenses) must be paid into the plan for the “applicable commitment period” which could be 3 to 5 years.
The plan must also provide for payment in full of priority claims (important claims like recent taxes or child support) and generally provide for payment of the value of secured claims on cars, etc., in full over the life of the plan. Debts such as home mortgages, that exceed the length of the plan, do not need to be paid in full in the life of the plan, though the plan may cure any defaults on long term debt (arrears).
Payments can be the same over the life of the plan, or they can start low and increase at intervals (step-up plans), or they can vary with the seasons. Plan payments must reflect a change in income. Therefore, it is possible that if the Debtor receives a substantial raise and does not have any allowed increase in expenses, the additional monies from the raise may paid to the Trustee.
It is not unusual that the taxes, arrears on the mortgage and the car are all paid, but the credit card companies see little, if any money. Despite this, at the end of the plan, the credit card debts are still discharged.
You must make the first payment on the plan within 30 days of the filing of the plan and each month thereafter. Payments continue even while objections to confirmation are pending. Payments must be made in certified funds, such as money orders or cashier’s checks, or by voluntary wage deduction or by electronic bank account deduction.
If you stop making plan payments, the Trustee will ask that your case be dismissed. Making your payment every month, and on time is critical.
It depends on your income. If your current monthly income is less than a certain amount, the plan will be for three years with the option to extend it for five years. If your income is over a certain amount, the plan must last five years. Under no circumstances can you propose a Chapter 13 plan to last longer than five years. In some cases, your plan will end early. For example, sometimes creditors fail to file claims and share in the monthly payment. You can find yourself paying off everyone sooner than you expected.
Yes, but normally creditors’ objections are limited to the value of the secured item or the dollar amount you are scheduled to pay through the plan. They can object only if they contend the plan does not meet the best interests of creditors test and the best efforts test, or if they contend the debtor has not proposed the plan in good faith. Other grounds for objections exist, such a debtor that files bankruptcy repeatedly and is misusing the bankruptcy process.
The Trustee can raise any objection that a creditor could raise.
Objections to confirmation are usually resolved by negotiation between the debtor’s counsel and the objecting party, usually by some sort of compromise. If the parties cannot reach a compromise, the judge will decide the question.
The plan must meet the tests for plan confirmation. Sometimes, a creditor was mistakenly omitted or the amount of money to be paid into a plan must be changed. For example, you may have thought you owed the IRS a certain amount of money. But if it turns out you owed more, or that it had a lien, it could be that you have to pay more.
Once the plan is confirmed, it binds all the parties: the creditors must accept the payments provided; the values given in the plan for the secured portion of claims are fixed; and the debtor’s payments over the life of the plan are fixed, unless the debtor’s circumstances change and the plan is modified.
Unless you owe your employer money, usually not. There are two issues that may involve you employer. First, the bankruptcy Trustee will request that you provide copies of several documents (tax returns, bank statements, etc). One of these items will be copies of some of your paystubs before filing. If you fail to provide this information then the Trustee may send a form to your employer seeking information about your wages. Second, the basic foundation of a Chapter 13 is the monthly plan payment made to the bankruptcy trustee. You can opt to have the monthly payment deducted from your paychecks. But this is optional and not required.
Whereas Chapter 7 trustees actually may take and sell property, Chapter 13 trustees are more concerned with what you pay each month. The reason your assets and exemptions matter in a Chapter 13 is that a hypothetical Chapter 7 liquidation is one way your payment can be determined. For example, if we filed Chapter 7 and the trustee would recover $60,000 through selling your assets after exemptions, that would be $1,000/month in a 60 month Chapter 13 plan.
The other way you monthly payment is determined is more intuitive. We take your monthly income, and subtract your monthly expenses. If your net take-home after all expenses is $950/month that another way payments are calculated.
When you have positive numbers under both the hypothetical liquidation (here, $1,000/mo.), and monthly income/expense (here, $950mo.), you have to pay the higher of the two. In fact, we would have to reduce your monthly expenses by $50 or increase your monthly income by $50 to show we can pay the required $1000/mo. This is a term of art in bankruptcy called feasibility. We must show that you can afford to pay for the proposed monthly payment in your Chapter 13 plan, i.e., that the payment is feasible for you.
The Trustee acts as the disbursing agent for the payments made into the plan. She takes your monthly payment and, in turn, pays your creditors based on their priority. The Trustee also reviews the plan and challenges those plans that don’t, in the Trustee’s opinion, meet the tests for confirmable plans as required by the Bankruptcy Code. If the Trustee and the debtor can’t agree on the terms of the plan, a judge will decide if the plan can be confirmed.
Just continue to operate normally. But be prepared before filing to show profit and loss statements, cash flow and other financial documentation. Once your case is filed and a plan confirmed, it is like any other case insofar as you provide the trustee with an annual tax return. As of now, none of our trustees or courts require a monthly operating report as required in some other parts of the country.
Some of the restrictions you face during a Chapter 13 bankruptcy:
- Make all plan payments on time.
- Keep your mortgage payments current, and the car – if that these are being paid outside of the plan.
- If you owe child support or alimony/maintenance you cannot fall behind on any payments. At least by the end of the plan period all such payments must be current. You must file a certificate that these obligations are current; otherwise the Court will not enter a discharge.
- Do not fall behind on new tax obligations during the plan period.
- Do not incur significant new debt without court approval.
- Keep current insurance on any asset that is collateral for a debt.
- Provide the trustee with information about change in income.
- Provide the trustee with copies of annual tax returns.
You can move or change jobs, but must make sure to report any income changes to us. Court and/or trustee approval is necessary before obtaining a new car loan; incorporating a business that is an asset of the estate; or refinancing, selling or purchasing a home.
There are times that you may be unable to pay the monthly plan payments. This failure must be as a result of serious, short term changes in your income or some unusual, but necessary, expense. As stated before, your plan can often be modified to accommodate changes, but it requires examining your case as a whole to determine if it is possible, and whether it even makes sense.
Usually. Much of this depends on the types of debts you are paying, and the reason for the change. Plans can be often changed if there is an interruption of income, through job loss or ill health. Plan payments can be lowered or the percentage paid to unsecured creditors changed if the debtor’s income or expenses in the future won’t fund the plan as originally confirmed. By the same token, a trustee or creditor can request an increase in the monthly payment if your financial situation improves greatly during you Chapter 13.
You must obtain permission from the Trustee and/or the Court before incurring any additional debt in your Chapter 13 – including mortgages. Consult with your attorney before applying for a mortgage.
In a Chapter 13, the discharge is not entered until all your plan payments are made and the terms of the Plan completed in full. If the debtor commits fraud, or fails to perform as required by law, the discharge can be revoked.
If your discharge in bankruptcy is granted, many of your debts will be discharged. The following list is intended to be only an outline of most debts that are not discharged. The law governing Chapter 13 was affected by the 2005 amendments, increasing the types of debts not dischargeable. Some of these debts are automatically not dischargeable, some require the creditor to timely file an adversary proceeding to make such a determination. In other words, if the creditor fails to take action, sometimes you can get rid of a debt that otherwise you would be stuck paying.
One noticeable distinction between Chapter 7 and Chapter 13, is that in a Chapter 7 you cannot discharge certain debts arising from divorce and marital settlement agreements that you can discharge in Chapter 13 (note that child support and alimony is not dischargeable under either chapter). But other commonly nondischargeable debts include:
- Taxes due within the last three years or taxes not assessed because of fraud.
- Fraudulent tax returns.
- Debts for obtaining money, property, services, or an extension, renewal, or refinancing of credit by means of false pretenses, fraud, or a false financial statement used with intent to deceive.
- Debts not listed on your bankruptcy papers, unless the creditor had knowledge of the case in time to file a claim.
- Fraud, embezzlement or larceny.
- Intentional injury.
- Debts for student loans, unless not discharging the debt would impose a severe undue hardship. This undue hardship must be properly pled to the Court and the judge will decide based on your unique situation. This is a very difficult burden for the debtor to prove.
- Debts that were or could have been listed in a prior bankruptcy case in which you either waived your discharge or your discharge was denied.
- Debt for personal injury judgments against you resulting from car accidents in which you were a drunk driver.
- Monies owed to a retirement, pension, profit-sharing, stock bonus or such other plan.
Unfortunately, we are not privy to the formulas used by credit reporting agencies. In all candor, the filing of a bankruptcy generally means that your credit rating will initially be reduced, and will remain on your credit report for up to ten years. A Chapter 13 is an open bankruptcy, usually for 3 to 5 years. During this period, your credit score can increase so long you keep your outside payments current (e.g., car and mortgage payment). It is not unusual for clients to obtain a new loan during their Chapter 13 bankruptcy. Warning – you must obtain court or trustee approval for any new loans, sales of assets or purchase of new large-dollar assets.
Only individuals, who have complied with the bankruptcy laws and completed their Chapter 13 plan, can receive a Chapter 13 bankruptcy discharge. Generally an individual cannot receive a discharge in the 13 if they filed Chapters 7 or 11 in the past four years, or Chapter 13 bankruptcy in the two years before filing the current case.
Moreover, if you have filed multiple cases, you can lose certain protections the bankruptcy process affords you, such as the automatic stay. Be very wary of serially filing cases.
In short, yes, but good luck. Navigating the bankruptcy code is extremely difficult. Bankruptcy practitioners and even judges with many years of experience are not always certain how tackle certain problems that arise in bankruptcy. The 341 meeting of creditors are open to the public; you can go and observe. Watching people that represent themselves is usually a painful event to witness.
From trying to understand what information you must provide in the bankruptcy filing, to dealing with creditors, the trustee and judge, it’s an extremely difficult process to understand both procedurally and substantively. Bankruptcy is comprised of tens of thousands of cases and statutes that are constantly changing. The analogy that is often given, and not that far from the truth, is that filing bankruptcy on your own is like performing surgery on yourself.
Please contact us to schedule a consultation to discuss your case.