The Law Offices of Ken McCartney P.C.

Chapter 13

 

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This is the operative chapter of the bankruptcy code that the United States Congress favors.  By definition, a Chapter 13 must payout to creditors "at least as much as they would receive in Chapter 7."

For cases filed before October 17th, 2005,  the Chapter 13 discharge, extinguished certain debts, such as intentional tort damages or debt based on false financial statements, that could not be discharged  n a Chapter 7.  This "super discharge" was eliminated by congress for cases filed after that date.

The  basic process in a Chapter 13 is simple. As opposed to giving up non-exempt property, as in Chapter 7, a debtor (only individuals or husbands and wives with total unsecured debt less than $307,675, and secured debt of less than $922,975), makes payments to a Chapter 13 trustee, who distributes those payments pursuant to the terms of a plan proposed by the debtor(s) to the debtor's creditors. Plans that do not pay creditors one hundred cents on the dollar must last at least thirty-six (36) months and contribute all of the debtor's "disposable income."   Usually payments are monthly.

The rules are bit different for individuals whose income exceeds the mean income for the state  in which they reside.  For current numbers click here and review the paragraph about the means test.  Minimum plan length is 60 months for these fortunate few.

  • In Wyoming and Colorado, a debtor forfeits tax return refunds for the first three years of a plan in addition to the proposed plan payments. Means test failures loose their refunds for the full 60 months.
  • The plan form is adopted by the court (Wyoming and Colorado differ in form, but not substance). The debtor, however, proposes the plan particulars, including payment size, secured creditor treatment, unsecured percentage of repayment, and payout dates.
  • Creditors do not vote on a Chapter 13 plan. They may object as to "good faith" and "feasibility."  Secured creditors may contest the debtor's proposed value of their collateral.
  • An unsecured creditor is not guaranteed a specific percentage return. If the receipt is of "all of the debtor's disposable income" and at least the equivalent of a Chapter 7 payout, confirmation is possible.
  • A confirmed plan results in a discharge upon payment of the proposed payments (consummation).
  • The concept of a budget becomes very important, despite the vagaries associated with listing expected income and expenses in real life. On top of a budget being a "moving target" this standard of accountability is scrutinized by the bankruptcy court under a guideline expressed in terms of "good faith."
    • Can two debtors, one with a $1,200.00 per month house payment and one with a $600.00 per month house payment on identical incomes pay unsecured creditors different sums?
    • Can a debtor living away from home for work own a second home? How about a second home to vacation? Or a motor home?
    • In answer,  would it make a difference if the creditors are cancer victims,  versus abusers of credit cards? If your situation involves any extraordinaries, at all, there is no better choice than counsel with experience confirming and objecting to close calls in the court, where the ultimate discussion is largely discretionary.
  • Attorney's fees in Chapter 13 run two and three times those expected in a Chapter 7. The entire plan process is in addition to what occurs in Chapter 7. This office charges for the work done, up to and including filing the petition and plan, before filing.  Post-filing activity is charged  to the estate and payment is requested from  the Chapter 13 trustee. That sum actually allowed by the bankruptcy court from the estate is then accepted as payment in full.
  • A debtor may convert a Chapter 13 to Chapter 7, Chapter 11, or voluntarily dismiss at any time. The court may convert or dismiss for cause - mainly the failure to make payments or confirm a plan.
  • Chapter 13 is used by some debtors for moral reasons, "I want to pay my creditors." Counsel can determine how much moral gratification the client can afford through the budget process.
  • The two good reasons to consider Chapter 13 are to catch up on an existing  arrearage to avoid foreclosure (car, house, etc.) or to pay an under-secured creditor the value of its collateral rather than the value of its claim (J. D. Byrider). The BABPRA of 2005 limited severally the latter,  Now only loans over 910 old (2 and one half years) on vehicles can be stripped. 
  • A large string of Chapter 13 payments will protect a large amount of non-exempt personal property that would be lost in Chapter 7.  There may be better ways to protect non-exempt property than payments to a Chapter 13 trustee. Certainly there are lawful alternatives to explore.

  • Acceptable secured creditor plan treatment may include:

    • anything which the claimant accepts,
    • surrender of collateral, with a deficiency created according to applicable foreclosure  law, allowed as unsecured,
    • by a string of payments under the plan (maximum of sixty (60) months) which total is that of the claimant's collateral value,
    • or by commencing secured contract payments and curing an existing arrearage under the plan "in a reasonable time" --maybe, but not necessarily, the full term of the plan.
  • With only sixty (60) months to work with, one hundred twenty (120) month loans are not often remade  in Chapter 13.  In fact, the unsecured and secured jurisdictional limits set out in the third unnumbered paragraph in this section when divided by sixty (60) become impractical. Chapter 13's do not often involve large payouts. Corporations and L.L.C.'s cannot file Chapter 13's.
  • This office will not propose a Chapter 13 plan longer than fifty-five (55) months, with the maximum plan period of sixty (60) months.  Starting with more than fifty-five (55) months leaves no room to deal with contingencies.
  • Chapter 13 plans may be modified until confirmation. After confirmation the plan may be modified for cause:
    • to reduce the payment if collateral is sold,
    • to stop payments for temporary good reason,
    • to increase payments if the debtor's income increases.
    • the treatment of claims, however, cannot be restructured other than by surrender.
  • A Chapter 13 plan cannot be confirmed without filing all federal and state income tax returns, as a Chapter 13 discharge does not discharge these. Chapter 13 discharges are only available after taxes are paid by the plan or outside the plan.
  • A Chapter 13 discharge can only be had if all priority claims are paid. Child support is a priority claim. All arrearages must be brought current to receive a Chapter 13 discharge.

You may wish to check out Chapter 13 of Plain Talk About Bankruptcy for frequently asked questions and answers regarding Chapter 13.


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