The Law Offices of Ken McCartney P.C.

PT Chapter 13

 

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Chapter 13 Creditors

1. ARE THERE ALTERNATIVES TO STRAIGHT BANKRUPTCY (CHAPTER 7 LIQUIDATION)?

Yes, for individuals, husbands and wives, and some sole proprietorship businesses, Chapter 13 is a viable alternative. Chapter 11 is still another. Chapter 11's complexity reserves its use to large businesses. Individuals often find Chapter 13 an attractive option. Partnerships and corporations cannot seek relief under Chapter 13.

 

1a.  WHAT ARE THE TWO KINDS OF CHAPTER 13 AFTER BAPCPA OF 2005.

For persons who do not fail the means test, Chapter 13 is to much different than before, although the budgeting process is impacted more by the IRS expense standards than it was before.  it is still possible to file a 36 month plan.

        For persons not eligible for Chapter 7 (abusive filings ie. means test failures who have excess income) the Chapter 13 process now requires 60 monthly payments.  It is not possible to do a 36 monthly payment plan. 

 

2. ARE THERE ADVANTAGES TO CHAPTER 13?

Sure, even after the BAPCPA of 2005 took away the bulk of the super discharge and restricted the cramming down of car loans not 910 days old.  It can be filed after waiting only two  years from the the last Chapter 7 petition.  Although there is some stigma associated with any bankruptcy, a Chapter 13 debtor ends up with a lesser stigma by paying some portion of his bills. The stigma is lessened as the percentage of unsecured debt paid is raised. Certainly the least credit damaging bankruptcy is a 100% repayment Chapter 13.  The creditor's benefit is lost as the percentage of debt the plan proposes to pay is reduced. Chapter 13 plans do not have to pay 100 cents on the dollar. They require good faith, a significant effort, must pay at least as much as a Chapter 7 bankruptcy would pay creditors, and, where requested by the trustee or a creditor, must commit all of the debtor's disposable earnings to the repaying of debts during the period of the plan. There are also certain types of obligations discharged in Chapter 13 but not in Chapter 7.

 

3. ARE THERE DISADVANTAGES TO CHAPTER 13?

Yes, the stigma of having filed is less and debtors are, therefore, more likely to be persuaded to file bankruptcy this way.

 

4. WHAT IS CHAPTER 13?

Chapter 13 is a bankruptcy procedure where a salaried person or wage earner (now including a commissioned salesperson) or even a welfare recipient who is temporarily overwhelmed by his debts but believes he could and would like to pay his debts from future earnings within a reasonable period of time (normally not more than three years) is given the opportunity to do so without harassment from creditors.  Under this chapter of the bankruptcy code, the debtor files a plan whereby he agrees to pay a certain percentage of his future earnings to the bankruptcy trustee to pay debts. If the court confirms the plan after finding it in order and feasible, the debtor has the protection of the court while he pays off his debts and thus lessens the stigma of being adjudged a bankrupt.

 

5. HOW DOES CHAPTER 13 WORK?

The plan for a debtor with regular income, called the Chapter 13 plan, is something about which any experienced bankruptcy lawyer can advise a debtor. There is no magic involved. The plan is simply a proposal to take as much of the debtor's disposable income as is necessary to pay the desired percentage of the debtor's total debt in the time necessary to do so.  The benefit of this program is that the debtor receives all the protection from harassment and litigation a Chapter 7 debtor receives from the bankruptcy court, while he makes payments. During this period of time, the debtor is under the supervision and protection of the federal bankruptcy court presided over by a bankruptcy judge. The bankruptcy court will not permit creditors to garnish or otherwise "hound" the debtor while he is paying off his debts under court supervision.

 

6. WHAT DOES A TYPICAL CHAPTER 13 PLAN PROVIDE?

Typically - "To pay the trustee $100 (or $20 or $2500 as the case may be) per month for 36 months (no longer than 60 months) to be used to pay first priority creditors, then for secured loans to mortgage companies, and if anything is left over for it to go to unsecured creditors." Unsecured creditors may receive 100% of their claims or they may receive a very small percentage of their claims. There are other provisions in a plan to meet other code requirements.

 

7. HOW MUCH IS PAID MONTHLY UNDER CHAPTER 13?

If the plan is to pay 100% of all debts, the payment is simply their sum plus 10% to cover administrative costs divided by the number of months of the plan. If the plan is not to pay 100%, it must be "in good faith" and the debtor's "best effort." These rather vague directives allow the court considerable discretion in deciding what is an acceptable payment percentage.

If 70% of all proven claims are paid, under the Chapter 13 plan, Chapter 7 relief can be obtained without waiting six years. It is hard to imagine a 70% pay plan not being confirmable if it meets all other code provisions and the debtor earns a reasonable wage in order to fund it.

 

8. WHAT DOES A CHAPTER 13 TRUSTEE DO?

The Chapter 13 trustee:

     1. presides at the 341 meeting,

     2. reviews a debtor's plan for compliance with the

bankruptcy code requirements,

     3. makes a recommendation to the court about feasibility,

workability, good faith, best effort, and does a

Chapter 7 comparison analysis,

     4. accepts and distributes the debtor's payments,

     5. reports delinquencies in payments,

     6. keeps records and files interim and final reports

for the court.

     For this, the trustee receives actual costs (up to 5% of all sums paid to creditors) and fees for up to 5% of all sums paid creditors. There is a limit, the fees cannot cause the trustee's compensation to exceed certain statutory maximums. These maximums approximate judicial salaries and are triggered only in large districts.  Their role is not that of representative of the debtor, nor of the creditors, nor should it be a friend of the court. Ideally the trustee's motivation should be similar to a real estate broker putting together the "deal" = confirmation. Trustees vary in degree of sophistication, willingness to provide service, compassion and enthusiasm. Generally speaking, they are courteous, more clinical than personally concerned, and do very good work. The author's district has had excellent, hard-working people in the position of trustee, since the program began under the current code.

 

9. HOW DOES THE COURT DETERMINE WHAT AMOUNT MUST BE PAID IN ORDER TO CONFIRM A CHAPTER 13 PLAN?

The code requires the debtor to make his "best effort" in "good faith." Where Chapter 13 is used merely because the discharge of several kinds of debts not discharged in Chapter 7 is possible (there are some), the court scrutinizes "best effort" more rigorously. The bankruptcy court has rather broad discretion here. It weighs all the important factors in each case and decides every case on an individual basis. Basically, however, the amount to be paid is proposed by the debtor.

It needs to be an amount equivalent to pay at least what would be paid creditors under Chapter 7, an amount in "good faith" and whatever the debtor chooses to pay secured creditors to retain secured creditor's collateral. In the author's district, plans paying less than 30% to unsecured creditors require evidence showing that the debtor can do no more.(1)

 

10. DOES CHAPTER 13 HAVE ANY OTHER USES?

Another reason Chapter 13 is used is to "cram down" (require a secured creditor to accept) market value for collateral over a period of time.  BAPCPA protected new car loans (those not in existence for more than 910 = 2 and 1/2 years) from this very useful treatment of under secured motor vehicles.  It makes possible a simple arithmetic determination of the required payment and forces a creditor to continue financing. A plan with this provision is an option when a creditor will not voluntarily agree to a reaffirmation.

 

11. HOW MAY SECURED CLAIMS BE PAID UNDER CHAPTER 13?

A Chapter 13 plan may be confirmed with any proposal that a creditor will accept. If the creditor does not accept, the plan may, nonetheless, be confirmed if the treatment proposed is any one of the following:

     a. the holder of such a claim retain its lien and receives

the value of its claim in property (usually payments)

under the plan,

     b. the debtor surrenders the property to the creditor; or

     c. the debtor cures the existing deficiency under the

plan, and continues contract payments outside the plan.

 

 11a.  HOW CAN HOME MORTGAGES OR DEEDS OF TRUST BE TREATED D IN CHAPTER 13.

The home lending lobby has influence.  Unlike claims secured by anything other than a home mortgage, most home collectivized loans cannot be modified.  An existing arreage in monthly payments can be caught up over a reasonable period in the plan and done so without interest on the arreage if the mortgage note was made after 1992.

 

12. HOW MUCH PROPERTY CAN A DEBTOR POSSESS AND FILE A CHAPTER 13?

One significant requirement of Chapter 13 is that the payments under a Chapter 13 plan must pay unsecured creditors at least what they would receive if the debtor filed a Chapter 7 and his assets were liquidated. Obviously Chapter 13 will not allow the retention of valuable property unless the plan pays unsecured creditors an equivalent value. A debtor who pays 100% of his debt to his creditors can always keep all his property.

 

13. HOW DOES CHAPTER 13 DIFFER FROM CHAPTER 7 PROCEDURALLY?

The meetings and filings are very similar, although the recommended forms are slightly different. There is one additional court hearing presided over by the bankruptcy judge. It is called a confirmation hearing and is held to determine if the plan is both workable and consistent with the code. Attendance at this hearing or a prearranged acceptable plan is in a debtor's best interest. An unsecured creditor has no vote on confirmation, so attendance is not as important for unsecured creditors.

 

14. WHEN DOES THE TRUSTEE DISTRIBUTE CHAPTER 13 PAYMENTS TO THE CREDITORS?

Claims cannot be prorated until the time limit for filing claims expires. Various courts set different time limits for this purpose. Typically claims may be filed anytime during the 90 days after the first date set for the 341 meeting. If claims are not objected to and no hearings are required on those issues, disbursements can begin shortly thereafter. The frequency of distribution after the first distribution is left to the Chapter 13 trustee's discretion, and will depend on the amount of money involved and the number of creditors.  In almost every instance the debtor's original schedule with the creditor is completely ignored.

 

15. WHAT HAPPENS AFTER ALL THE REQUIRED CHAPTER 13 PAYMENTS HAVE BEEN MADE?

The debtor receives a discharge very similar to that received by a Chapter 7 filing. A Chapter 13 discharge discharges all debts other than child support and alimony payments, which are fewer exceptions than there are to a Chapter 7 discharge.

 

16. LIST FIVE GOOD REASONS TO FILE A CHAPTER 13 INSTEAD OF

CHAPTER 7.

     1. The broader discharge (some DSO's might be included but gone are the good old days with intentional torts covered),(2)

     2. the lesser stigma,

     3. moral gratification of making some pay back,

     4. retaining secured property in the presence of a serious

contract arrearage,

      5. not losing personal property.

 

Do you have a question about Chapter 13 or bankruptcy in general?

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1. 1See 11 USC 1325(a)(3) & (b)(1)

2. 2See 11 USC 1328(a)

 

 

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