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 installments to creditors over three to five years. If the plan is approved, the Debtor makes payments to the 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.

Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7.

• 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: Even though you make lower payments spread out over a set period of time, the Debtor is committed to payments for three to five years.
• Debt ceiling: If you have too much debt, you are precluded from filing under Chapter 13. A Debtor cannot have more than $1,010,650 in secured debt and/or $336,900 in unsecured debt.
• 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”.

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 $1,010,650 in secured debt and $336,900 in unsecured debt.
• 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, 11 or 12 in the previous eight 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:

• 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 $281.00 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 petition credit and budget classes. The cost for the two classes combined is approximately $30 – $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 San Francisco bankruptcy lawyerfrom 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 (or maybe more).

The plan must also provide for payment in full of priority claims and generally provide for payment of the value of secured claims on cars, etc., in full over the life of the plan. The Bankruptcy Reform Act changed the amount necessary to pay on vehicles that were purchased in the 2 1/2 years prior to filing, or other personal property purchased within the year prior to filing. 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, 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 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.

The Debtor must make the first payment on the plan within 30 days of the filing of the planand each month thereafter. Payments begin before the first meeting of creditors (the §341 meeting) and 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.

If you stop making plan payments, the Trustee will ask that your case be dismissed.

It depends on the Debtor’s income. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” Otherwise, the plan will be for five years.

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.

The Trustee can raise any objection that a creditor could raise. Under the Reform Act of 2005 the creditors may have more grounds for objection (required payments, prior discharges, etc.)

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, the amount of money to be paid into a plan must be increased, where the claims that are actually filed and allowed are greater than estimated at the beginning of the case.

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.

Perhaps. 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 pay stubs 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. In some cases a wage assignment of those Plan payments may be required by the Court, the Trustee or your circumstances. Each situation is unique.

In Chapter 13, the Debtor selects exemptions just as in Chapter 7, although in the typical Chapter 13, the Debtor keeps all of his or her property, exempt or not. Exemptions in 13 are used to determine whether the plan complies with the requirement that a Chapter 13 plan must provide creditors at least the equivalent of what creditors would have gotten had the debtor filed Chapter 7. Thus, to apply the test, the Trustee calculates what property would be available for liquidation to pay creditors after the exemptions are deducted from the assets if the case were a Chapter 7.

The Trustee acts as the disbursing agent for the payments made into the plan. The Trustee also reviews the plan and challenges those plans that don’t, in the Trustee’s opinion, meet the tests for confirmable plans set out in the Bankruptcy Code. The 2005 Reform Act puts much of this into question. It will take several years to work out what the new law really means. 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.

Once the plan is confirmed, the trustee pays creditors regularly from the payments made by the debtor. The 2005 Reform Act permits the Trustee to make adequate protection payments before the Plan is confirmed. Generally, all debts existing at the beginning of the case must be paid through the trustee; current mortgage payments and some leases are among the exceptions.

Every debtor who is self-employed or operating a business must file a monthly financial report known as a “Business Operating Statement”. The term “self-employed” includes a person who operates a business, whether full or part time, or with another person. Also, a person who is an independent contractor, subcontractor, works on a contract labor basis, or any other work where taxes are not deducted from the pay received, is deemed self-employed for the purpose of filing the operating statement.

The first Business Operating Statement must be filed for the actual month in which the Debtor filed his or her Chapter 13 case. Then, on or before the 15th day of each succeeding month a new Business Operating Statement must be filed. These statements are filed with the Bankruptcy Court, with a copy to your attorney and the Trustee. The Business Operating Statement is a cash-based report. Do not use an accrual accounting method for this report. Make sure to account for all your expenses and income. See your attorney if you have any questions.

The restrictions on a Debtor in Chapter 13 bankruptcy:

• Make all plan payments on time.
• Keep your mortgage payments current, and the car – if that is being paid outside of the plan.
• Take the required personal financial management class early in your Plan period.
• 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. The Debtor 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.

The Debtor can move or change jobs, but must make sure to report any income changes to their attorney and the Trustee. Court 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. Getting that approval can take 30-45 days.

There are times that the Debtor may be unable to pay the monthly Plan payments. This failure must be as a result of serious, short term changes in the Debtor’s income or some unusual, but necessary, expense. A moratorium can be filed with the Court and served on all the creditors. There may be hearing, and the Trustee will need to approve the moratorium. Again, the entire length of the Plan cannot exceed 60 months, including any moratoriums.

Plans can be changed if there is an interruption of income, through job loss or ill health. Plan payments can be lowered or the percentage paid to creditors changed if the debtor’s income or expenses in the future won’t fund the plan as originally confirmed.

You must obtain permission from the Trustee and 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, in most circumstances all of your debts will be discharged except the following list, which is intended to be only an outline of most debts that are not discharged. The law governing Chapter 13 was dramatically affected by the 2005 Reform Act.

• Taxes due within the last three years or taxes not assessed because of fraud.
• Fraudulent tax returns.
• If the bankruptcy court so rules, 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.
• If the bankruptcy court so rules, debts for fraud, embezzlement or larceny.
• If the bankruptcy court so rules, debts for 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 be drastically reduced, and will remain on your credit report for up to ten years. A Chapter 13 is an open bankruptcy for 3 to 5 years. During this period, your credit score can increase so long you keep your Plan payments and monthly mortgage payments current. It is not unusual that a Debtor obtain a new loan during their Chapter 13 bankruptcy. Warning – you must obtain court approval for any new loans, sales of assets or purchase or new large-dollar assets. Make certain that the new loan does not cost you more than staying with your current obligation.

Only individuals, who have complied with the Bankruptcy laws and completed their Chapter 13 Plan, can receive a Chapter 13 bankruptcy discharge. An individual cannot receive a discharge in the 13 if they received a discharge in 7, 11 or 12 in the past eight years before filing the current case, or in a Chapter 13 bankruptcy in the last four years before filing the current case.

In short, yes. However, navigating the bankruptcy codes, particularly the 2005 amendments, can be extremely difficult. An unsophisticated debtor may have a plan confirmed, but unnecessarily pay excessive amounts to unsecured creditors. Worse, a debtor can make an innocent mistake that results in dismissal of the case.