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Archive for the ‘Chapter 13’ Category

Fully Complying with Your Chapter 13 Case

March 12th, 2018 at 7:00 am

Besides fulfilling the terms of your Chapter 13 payment plan, you may need to make other payments and meet other requirements. 

 

The bankruptcy court’s approval of your payment plan (at the Confirmation Hearing) happens about 2-to-4 months after filing your case. At that point your Chapter 13 case is fully on its way. You likely have about 3 to 5 years altogether to finish the case. Having gotten to this crucial point, there are a few other crucial steps you need to fulfill to successfully finish your case.

Last time we got into three of these:

  • Do your “debtor education”
  • Avoid or defeat “nondischargeability complaints”
  • Pay your Chapter 13 plan payments

Today we lay out two other crucial steps.

Pay Any Obligations NOT Within Your Plan Payment

In many Chapter 13 cases you pay nothing to your creditors except the single plan payment each month. The trustee divides that payment among your creditors as laid out in your court-approved plan. You pay nothing else to any creditor.  

But in other cases, you pay one or more creditors directly. This may be referred to paying “outside the plan.”

To be clear, you are not paying these secretly. Your plan clearly refers to these debts and their payments. So the bankruptcy court approves these payments. They’re just not included within the single monthly plan payment, for various possible reasons. (See the explanation in paragraph 3.1 of the official Chapter 13 Plan form.)

Often these are ongoing payments on secured debts such as home mortgages or vehicle loans. Direct payments are more likely used when you’re current and are simply continuing to make the regular payments. In some jurisdictions it’s considered easier for everybody that you continue to pay such straightforward payments directly to the creditor. Paying them through the trustee is seen as causing too much delay and accounting confusion.

Naturally it’s essential that you know whether all of your creditors are being taken care of through the single plan payment, or whether there’s a creditor or two you need to pay directly. Your income and expense schedules should make that clear, as well as the plan itself. But if you have any doubt, be sure to ask your bankruptcy lawyer.

Do Anything Else Required

Two documents combined—your plan and the Order Confirming Plan signed by the judge—are the law of your case. These documents contain requirements beyond making payments. They include some standard ones that apply to just about all consumer debtors. There may also be some special requirements for you.

The standard requirements usually include:

  • providing the trustee with copies of your annual income tax returns (paragraph 2.3 of the official Chapter 13 Plan form)
  • turning over to the trustee “income tax refunds received during the plan term” (paragraph 2.3 of the official Chapter 13 Plan form)
  • avoid using credit without prior Chapter 13 trustee or bankruptcy court permission

Special requirements can include:

  • a specified deadline to sell an asset
  • permission for you to use an income tax refund for a specific expense, such as a vehicle repair
  • a requirement to report when an unemployed spouse gets employed

Notice that these special requirements often relate to anticipated changes to your income, expenses, or assets. These changes can directly affect your future obligations under your Chapter 13 case. They may well require you to adjust the payment terms of your plan in the future.

Conclusion

It does take consistent effort to complete a Chapter 13 case successfully. But that effort is worthwhile because it gains you tremendous benefits. Chapter 13 provides many tools that Chapter 7 cannot. Through those tools you can likely meet some otherwise impossible goals. Once you’ve decided that these goals are worthwhile, usually the effort will be worthwhile as well. 

 

“General Unsecured Debts” in Chapter 13

December 13th, 2017 at 8:00 am

You pay your general unsecured debts only as much as you can afford during a Chapter 13 plan, with the rest then legally written off forever.  

 

Our last blog post was about how Chapter 7 “straight bankruptcy” deals with “general unsecured debts.” Mostly, they are discharged—legally, permanently written off. There are some exceptions. At the end of the last blog post we said we’d talk next about those exceptions. But before we do, today we want to give the Chapter 13 “adjustment of debts” side. What happens to “general unsecured debts” in a Chapter 13 case?

“Priority” and “General Unsecured” Debts

First, let’s remind you about the difference between these two kinds of unsecured debts. The difference is crucial because of how they completely differently they are treated in a Chapter 13 case.

Remember that priority debts are specific categories of debts that the law says must be treated very specially. They are all on a list at Section 507 of the U.S. Bankruptcy Code. The main “priority” debts in consumer Chapter 13 cases are past-due child and spousal support and certain recent income tax debts.

If an unsecured debt is not on the list of priority debts then it’s a general unsecured debt. They are by far the most common kind of debt.

The Difference in Treatment under Chapter 13

You must pay priority debts in full during the course of the 3-to-5-year Chapter 13 payment plan. You usually only have to pay general unsecured debts to the extent you have money available to pay them.

So, priority debts have to be paid 100%. General unsecured debts are often paid only a small percent, often only 5-10%, sometimes maybe even 0%.

In most situations the result is that during your Chapter 13 payment period you must pay your priority debts in full before paying your general unsecured debts anything.

General Unsecured Debts during a Chapter 13 Case

So during a Chapter 13 case you pay your general unsecured debts as much as you can pay them. But that’s after paying your living expenses, and your secured and priority debts. You usually even get to pay the costs of your case (your bankruptcy lawyer’s fees) and trustee fees ahead of your general unsecured debts.  

In fact, if your income goes down or expenses go up during your case, you may even be able to amend your payment plan to reduce what the general unsecured debts get paid because you can no longer afford to pay them as much as you originally expected.

General Unsecured Debts at the End of a Chapter 13 Case

After all this, what happens to your general unsecured debts at your successful completion of a Chapter 13 case? After paying these debts as much as you can afford to pay them (as specified in your court-approved payment plan), the remaining balance, no matter how much, is discharged—legally written off.

At that point you’ve paid your priority debts in full. To the extent you are taking care of secured debts (home mortgage, vehicle loan, furniture debt, etc.), you’ve paid all you need to pay them, leaving them current or paid off. You’ve paid the general unsecured debts whatever percentage (if any) your plan provides, with the rest discharged. You are now current on one or two long-term secured debts you’ve chosen to keep (if you had any), and otherwise you’re completely debt-free.

 

Chapter 13 with a Judgment Lien, HOA Lien, or Child/Spousal Support

December 6th, 2017 at 8:00 am

Chapter 13 can work much better than Chapter 7 if you have a judgment or HOA lien on your home, or get behind on child or spousal support.  


You may need the extra help of Chapter 13 if you have any of the following liens against your home:

  • Judgment lien
  • Homeowner association lien
  • Unpaid child or spousal support

Or you may not need that extra help. Two blog posts ago we showed scenarios where Chapter 7 “straight bankruptcy” could handle these situations well. If you’re current on your mortgage but have any of these three issues, check out that earlier blog post.

But even if you are current on your first mortgage, if you do have any of these 3 debts/liens in some circumstances Chapter 13 could definitely be better for you. Today we show you how.

Judgment Liens

When we got into judgment liens two blog posts ago, we ended by saying that having a judgment (or “judicial”) lien is not a deciding factor in choosing between Chapter 7 and 13. That’s because judgment lien “avoidance” is available under both, with the same rules for qualifying for it. (That’s in contrast to a number of legal benefits only available under Chapter 13.)

However, getting rid of (“avoiding”) a judgment lien may be procedurally easier under Chapter 13. And arguably the judgment creditor is less likely to respond and object.

To avoid a judgment lien in Chapter 7 your bankruptcy lawyer has to file a Motion for Avoidance of Lien. It’s filed at bankruptcy court along with a formal Notice of that Motion. For example, see these Local Bankruptcy Forms 717 and 717.05. Both have to be formally served on the judgment creditor. So the creditor receives these documents that no other creditor receives.

In contrast, under Chapter 13 the judgment lien avoidance language is buried within the multi-page proposed payment plan. See page 4 of the bankruptcy court’s 8-page Official Form 113 Chapter 13 Plan. All creditors receive a copy of this proposed plan. So, there’s more of a tendency for a judgment creditor to not notice the lien avoidance. And if it does notice, it’s more likely to just shrug it away if the resulting unsecured debt is being paid anything under the plan.

(Please see our earlier blog post for the rules about qualifying for judgment lien avoidance, applicable to both Chapters. Also see the applicable Section 522(f)(1)(A) of the U.S. Bankruptcy Code.)

Homeowner Association Lien

Homeowner association liens are special, and especially dangerous, for a number of reasons. In certain circumstances they can be superior to your mortgage lender’s lien. (That means it comes ahead of the mortgage itself on your home’s title.) State laws differ but generally HOAs have unusually aggressive collection powers. So you need be especially attentive if you fall behind on your HOA dues or assessments. Doing so can result in serious risks for your home, both from the HOA and your mortgage lender.                          

You can protect yourself from those risks much better in a Chapter 13 case. In a Chapter 7 case, if you’re behind on any HOA obligation you essentially have to work it out with your HOA. And you may well have to placate your mortgage lender at the same time. You don’t have much leverage with either.

In contrast, in a Chapter 13 case you and your home are protected while you catch up on your HOA arrearage. You do need to keep current on any ongoing dues and/or assessment payments. But as far as the past-due payments, you’d generally have up to 5 years to bring them current. As long as you stick to the court-approved payment plan you won’t have to worry about the HOA. Nor your lender.

Child/Spousal Support

In most circumstances, being behind on support creates a lien against your home. (This is usually the result of the legal judgment arising out of your divorce decree).

Filing a Chapter 7 case doesn’t freeze the collection actions of any support obligations. The “automatic stay” is the usual protection from creditor collections during bankruptcy. There is an exception in the “automatic stay” for the collection of support. See Section 362(b)(2) of the Bankruptcy Code.

However, filing a Chapter 13 case DOES freeze the collection of PAST-DUE support. (The collection of ongoing monthly support payments can continue, but you’d want to pay those anyway.) Because support collections can be extraordinarily aggressive, this can be a crucial benefit of Chapter 13. You DO need to fastidiously keep current on any ongoing support, and maintain your Chapter 13 commitments. But as long as you do so you’d have up to 5 years to get current on the past-due support.

 

Chapter 13 with a 2nd Mortgage, Property Taxes, or Income Tax Lien

December 4th, 2017 at 8:00 am

Chapter 13 can work much better than Chapter 7 if you have a second mortgage, get behind on property taxes, or have a tax lien on your home.


The last two blog posts were about situations in which a homeowner is current on the mortgage but has other debts on the home.  We showed how Chapter 7 “straight bankruptcy” can work well enough in the 6 debt situations we covered.

But Chapter 7 is often not the best option when you have a lien on your home. Chapter 13 comes with better tools for dealing with such debts against your home. Even if you’re current on the mortgage itself, these tools may make Chapter 13 highly worthwhile for you.

We’ll show how Chapter 13 helps in the same 6 debt situations covered in the last two blog posts about Chapter 7. We’ll cover the first 3 today and the other 3 in a couple days.

Here are the first 3 debt situations:

  1. Second or third mortgage
  2. Property tax
  3. Income tax lien recorded on your home

1. Second or Third Mortgage

Chapter 13 helps in two major ways with a second or third mortgage that aren’t available under Chapter 7.

First, you may have the option to “strip” a junior mortgage from your home’s title. If so, that debt would no longer be secured by your home. You would not have to pay your monthly 2nd/3rd mortgage payment. You would only pay on the 2nd/3rd mortgage balance during your Chapter 13 payment plan to the extent you had available funds to pay it, if at all. Then at the end of your case the remaining balance would be “discharged”—legally, permanently written off.

Your home qualifies for a 2nd mortgage “strip” if it is worth less than your first mortgage debt balance. Then Chapter 13 allows you to have the bankruptcy judge declare that the second mortgage debt is unsecured. After all, then there’s no remaining equity for the second mortgage. (This also works with a third mortgage if the home is worth less than the combination of the first and second mortgage debt amounts.)

The second way that Chapter 13 works better on a second or third mortgage is if you’re way behind on the monthly payments. Chapter 7 is fine if the lender will give you enough time to catch up at a reasonable pace. But second and third mortgage lenders usually have more exposure than first mortgage lenders. They have less equity protecting them. They could lose their entire debt by being foreclosed out by the first mortgage lender. So second/third mortgage lenders tend to be more demanding and less flexible about catch-up payments.

Chapter 13 is a great way to force them to give you more time—up to 5 years if needed. Plus, your Chapter 13 catch-up payments can work around other important debts that you need to pay.

2. Property Tax

If you fall behind on your home’s property taxes, your mortgage lender will become quite unhappy very quickly. Even if you’re current on your mortgage, falling behind on property taxes is a separate basis for your lender’s foreclosure. It usually takes years of being behind before your property tax authority itself would do a tax foreclosure. But your mortgage lender gets very nervous because if that were to ever happen it would lose rights to the property as well. Plus, your lender sees falling behind on property taxes as a sign you’re not financially responsible or capable. For these reasons it’s a breach of your mortgage contract.

After falling behind on property taxes it’s difficult to catch up in the midst of your other financial pressures. Chapter 13 can help tremendously through a combination of two benefits. First, you get up to 5 years to catch up, making doing so more feasible. Second, you are protected from BOTH a tax foreclosure and your lender’s foreclosure. So using Chapter 13 to bring our property taxes current is often the best way to do so.

3. Income Tax Lien

Chapter 13 can be the best way to deal with an income tax lien on your home, in various scenarios.

First, consider if there’s no equity in the home covering that tax lien and the tax itself is dischargeable. (There’s no equity because the mortgage and any other prior liens total more than the home’s value. The tax itself is discharged usually because it’s old enough.) If so, then in Chapter 13 that tax is treated as a general unsecured debt. It’s lumped in with your other general unsecured debts, usually not increasing how much you pay into your plan.

Second, if equity in your home covers the full amount of the tax lien, Chapter 13 provides a flexible and safe way to pay the tax. The IRS/state loses most of its scary leverage over you. You simply arrange to pay the tax (and interest) over the 3-to-5-year life of your Chapter 13 payment plan. You protect your home while fitting that tax obligation into your budget and around any other urgent debts.

Third, if equity in your home covers a portion of the tax lien, you only pay that portion as a secured debt. And as just stated, you pay this through your plan safely and flexibly. This is much better than being leveraged into paying the full amount at the risk of losing your home.

 

Good Timing Can Shorten Your Chapter 13 Case by 2 Years

October 11th, 2017 at 7:00 am


We show how wise timing in your filing of a Chapter 13 “adjustment of debts” case could shorten your payment plan from 5 years to 3 years.  


Chapter 7 vs. Chapter 13

Two days ago we showed the importance of timing in the filing of a Chapter 7 case. The timing can affect whether you can qualify to be in a Chapter 7 “straight bankruptcy” case. If your income is too high you may not pass the “means test.” If you can’t pass this test you’d instead have to go through a Chapter 13 “adjustment of debts” case. That requires you to pay for 3 to 5 years into a payment plan, instead of being able to “discharge” (write off) all or most of your debts within about 4 months.

But what if you need a Chapter 13 case? It can be the much better option in certain circumstances. If you have debts that can’t be discharged like recent income taxes or child/spousal support, or debts you want to catch up on like a home mortgage, Chapter 13 buys you time to take care of those special debts. There are many other reasons Chapter 13 may be better for you than Chapter 7.

So assume you want to file a Chapter 13 case. One important question is how long you will be required to pay into your payment plan. Sometimes you’d want to have as much time as possible to stretch out and lower your plan payments. But in other circumstances you’d just want to get it over with as soon as possible. Then you can get on with life, and if you want start rebuilding your credit.

Your “Income” Dictates the Length of Your Chapter 13 Case

There is no “means test” under Chapter 13. Yet the same unusual way of calculating income in the Chapter 7 “means test” is used in Chapter 13. That same unusual calculation of income determines whether your payment plan can be 3 years long or instead must last 5 years.

So let’s look briefly again at how income is calculated.

The Chapter 13 Calculation of Income

To calculate your income for this purpose:

  • includes almost all sources of money other than from Social Security (not just taxable income)
  • total all gross amounts received precisely during the 6 FULL calendar months prior to filing your case
  • multiply this 6-month amount by 2 for the annual “income” total
  • compare that annualized amount to the “median income” for your state and family size

You may finish your Chapter 13 case in 3 years instead of 5 if your income is no larger than the applicable “median income” for your state and family size.

The “median income” amounts are adjusted regularly and are available online. You can find those state-by-state amounts for cases filed starting May 1, 2017 and for several months thereafter here. (And if you’re reading this well after this date, check here to see if this table has subsequently been updated.)

If you want you can go through each of the specific steps in this calculation right on the official bankruptcy court form. Download or print the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (effective 12/1/15).

How Smart Timing of Filing Can Make Such a Difference

See our last blog post for an example how even just a day or two difference in the date of filing a case can put you over or under your applicable “median income” amount.

This is even more crucial in Chapter 13 than in Chapter 7. In Chapter 7 the income step is just the first step of the “means test.” Even with higher-than-median income you may be able to pass the “means test” based on your expenses or other considerations. But under Chapter 13 your income as calculated above determines whether or not you’re required to be in it for 5 years.

Important Practical Notes

Even if your income ALLOWS you to finish in 3 years you can usually take longer if you want. As mentioned above, you may want to stretch out and so reduce your monthly payments. But in this situation you’d not be REQUIRED to go the full 5 years. And you generally don’t pay any more to your creditors while doing so.

Also, if you ARE required to go the full 5 years based on your income that doesn’t always hurt you. To pay everything you want and need to pay may take that long, without necessarily paying more to your creditors.

However, there ARE situations in which based on your budget you could finish your payment plan in 3 years. Or other situations in which you could finish sometime between 3 and 5 years. In these situations being required to go the full 5 years means paying more to your creditors—sometimes much more. And it delays getting to that point in time when you can actually start your fresh financial start.

 

A Sample Completed Chapter 13 Case

September 13th, 2017 at 7:00 am

What does the completion of a successful 3-to-5-year Chapter 13 case look like? What happens to your assets and debts? 

 

The Sample Chapter 13 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. We focused on the benefits you get at the tail end of your case, and on the case’s final events.

But like so many other bankruptcy procedures, Chapter 13 completion makes much more sense when tied to tangible facts.

So imagine a Chapter 13 case filed to catch up on a home mortgage, “strip” a second mortgage, catch up on some property taxes, and deal with some IRS income taxes.

Henry and Heather had been $7,500 behind on their first mortgage and so at risk of foreclosure. The situation was worsened because they were also $3,000 behind on their home’s property taxes. They hadn’t paid on a $30,000 second mortgage in months, so that mortgage holder was also threatening foreclosure.

On top of this they owed $10,000 in income taxes from several years ago when they had to close down a business. That business had started their downward financial spiral. They also owed $5,000 for last year’s income taxes, plus $90,000 in a combination of medical and credit card debts.

Their Chapter 13 Plan

Three years ago Hannah and Henry’s bankruptcy lawyer had recommended they file a Chapter 13 case. Their Chapter 13 payment plan enabled them to do the following:

  • Catch up on the $7,500 in late mortgage payments over the course of those 3 years.
  • Catch up on their $3,000 in property taxes over the same period.
  • Keep current on their ongoing mortgage and property taxes by budgeting for these obligations.
  • Prevent either their mortgage lender or the county tax collector from foreclosing or taking any other action to collect.
  • “Strip” their second mortgage from their home by establishing that all of its equity was exhausted by the first mortgage.
  • As a result they could stop paying the second mortgage and did not have to catch up on the arrearage. The entire $30,000 balance was treated as an ordinary unsecured debt.
  • Treat the older $10,000 in income taxes as an ordinary unsecured debt.
  • Pay newer $5,000 income tax debt as a “priority” debt, but without any further interest or penalties. Prevent the IRS from taking any collection action while paying it as their budget allowed.
  • Pay only 2 cents on the dollar on all $130,000 in their remaining unsecured debts: the $30,000 second mortgage, the $10,000 in older income tax, and $90,000 in medical/credit card debts. They could pay only $2,600 on this $130,000 because that is all that was available in their budget during their 3-year payment plan after paying the debts above.

The Completion of the Case

Now after 3 years Henry and Hannah have finished paying enough into their Chapter 13 plan to accomplish the above. Their Chapter 13 trustee so informs them, their lawyer, and the bankruptcy court. Then the following happens:

  • The bankruptcy judge signs a discharge order. That discharges—legally writes off—the unpaid 98%—$127,400—of the $130,000 of ordinary unsecured debt. That debt is gone.
  • Hannah and Henry are now current on their first mortgage and property taxes.  
  • Their “stripped” second mortgage is completely off their home’s title. This puts them that much closer to building equity again in their home.
  • They are current on income taxes, having discharged most of the older taxes and paid off the more recent $5,000.  
  • The court closes their Chapter 13 case.
  • Henry and Hannah are completely debt-free except for their caught-up mortgage.

 

Getting Ready to Finish a Chapter 13 Case

September 11th, 2017 at 7:00 am

Finishing a Chapter 13 case successfully is a big deal. It’s rewarding financially and emotionally. Here’s how it happens.  


The End-of-Chapter 13 Benefits

Just because of the way Chapter 13 works, a lot of its benefit comes near or at its very end. For example:

  • “General unsecured debts”: In most cases most of the debts are neither secured nor “priority,” meaning they are “general unsecured” ones. Also, in most cases a major portion of those debts are not paid through your Chapter 13 plan but rather discharged—legally written off forever. But that doesn’t happen until you successfully finish the case.
  •  “Priority” income tax debts: You have to pay these taxes (usually because they too new to discharge) through your Chapter 13 plan. But you usually don’t have to pay interest or any ongoing penalties on these taxes. However, if you don’t successfully finish your case that interest and those penalties would be imposed again. Once you finish the case, that interest and those penalties disappear.
  • “Stripped” second/third mortgage:  Chapter 13 may give you the power to turn a second or third mortgage into an unsecured debt. This “stripping” of the mortgage from your home gives you tremendous immediate and long-term financial savings.  But this “stripping” requires you to successfully finish the case.
  • Curing first mortgage arrearage: If you are using Chapter 13 to stretch out your payments for catching up on your mortgage, you may well not catch up until close to the end of your payment plan. Under Chapter 13 your mortgage lender is prevented from foreclosing while you are under bankruptcy protection. But if your case gets dismissed before you completely catch up on the mortgage, your lender could start/resume foreclosure. You need to finish your case to ensure that you get current on your mortgage.

How Do You Know How Much Longer Your Case Needs to Go?

In some Chapter 13 cases you know exactly how many months it is supposed to take. Other cases are less clear. That’s because cases can be affected by events that unfold during the years that a case is active.

For example, your Chapter 13 plan may require you to catch up on your “priority” taxes or unpaid child support. You may not know precisely how much you owe in taxes or support at the time your bankruptcy lawyer calculates the length of your plan. Once the exact amount becomes known that may extend or shorten your case. That may be true of certain other kinds of debts, like the arrearage on a home mortgage that you’re curing.

Also, changes in your income and/or expenses can result in a plan “modification,” again potentially extending or shortening it.

So how do you know how long your case has to go while you are in the midst of it?

Your lawyer likely has the information to either very closely estimate or tell you exactly how long you have. He and she could also ask the Chapter 13 trustee to run this calculation. The trustee is likely set up to do that efficiently. (See our most recent blog post about the roles of this trustee.)

Case Completion Events

Once you’ve finished paying all you are required to pay into your Chapter 13 plan, the trustee tells you and your lawyer that you have done so. Your lawyer gets the opportunity for a final review of your case, to verify that everything went as it should.

Once the trustee is satisfied that you’re done, he or she informs the bankruptcy court. Then the court enters a discharge order. That discharges all (or virtually) all the debts that you have not paid through your payment plan. If your plan says you were to pay 20% of your “general unsecured debts,” the remaining 80% would be discharged. Unpaid income tax interest and penalties would be discharged. These creditors could never chase you for these debts. All of the other benefits of Chapter 13 would get finalized.

Simultaneous with the discharge order, the court would order the closure of your case.

You’d be done. It would make perfect sense for you to have a quiet little party to reward yourself for having successfully completed your case!

 

The Chapter 13 Trustee

September 8th, 2017 at 7:00 am

The Chapter 13 trustee is an important player in your “adjustment of debts” case so it helps to know how to deal with him or her. 

 

Chapter 13 Trustee vs. the Chapter 7 One

In a Chapter 7 “straight bankruptcy” case the bankruptcy trustee’s role is very different than in a Chapter 13 case.

Most Chapter 7 consumer cases involve a quick determination whether you can keep everything you own—whether it’s all “exempt.”  It’s the Chapter 7 trustee’s job to determine this. This would usually happen within about a month after you and your bankruptcy lawyer would file your case. If everything is exempt—as it usually is—your case is usually done 2 or 3 months later. The trustee has some other important roles but in most cases nothing comes of them. Within about 4 months of filing your case is finished.

A Chapter 13 case is very different and so the role of the trustee is as well. Your Chapter 13 case is based on a three-to-five-year payment plan. So a lot of it involves putting together, getting court approval for, and then implementing that payment plan. The plan usually greatly reduces what you need to pay to most of your creditors. It often allows you to pay much more to secured creditors and special “priority” creditors to achieve certain goals. Then by the end of your Chapter 13 case usually some of your debts have been paid off or else get written off then.

The Chapter 13 trustee is involved in every step of this process, and has various roles along the way.

Plan Requirements

The Chapter 13 payment plan you and your bankruptcy lawyer propose can have a fair amount of flexibility. But that plan also has to follow the law in many ways. The trustee’s first role is to ensure that your plan complies with legal requirements. So the trustee raises concerns about any aspects that he or she finds inappropriate. He or she works with you and your lawyer to adjust the plan accordingly. For example, the trustee tries to ensure you pay into your plan as much as the law requires you to. In this role the trustee acts on behalf of all the creditors, especially the unsecured ones. Usually these kinds of trustee concerns are resolved through compromise, or by having the bankruptcy judge decide the matter.

Monitoring the Plan

Your Chapter 13 plan is approved by the judge, usually about two or three months after you file your case. It’s approved, or “confirmed,” either as originally proposed or after it goes through some adjustments. After “confirmation” the trustee and his or her staff continues to monitor your case closely to see if you are complying with the plan throughout the three-to-five-years that it will likely take to complete. They make sure you’re making the monthly payments. They review your yearly income tax returns to see if your income stays reasonably stable. The trustee’s office contacts you and your lawyer about concerns that may arise. They can file a motion to dismiss your case if you don’t comply with your payment plan.

Disburse Payments to Creditors

The trustee collects payments from you and distributes the money according to the terms of the court-approved plan.  Related to this, the trustee’s staff reviews your creditors’ proofs of claim. These are documents filed by your creditors to show how much they claim you owe. The trustee may object to ones he or she believes are not appropriate. Then, when you have finished paying all that’s required under your plan, the trustee informs you and the bankruptcy court. Then the court discharges (writes off) the rest of your remaining debt (except for long-term debts like a home mortgage).

Final Comments

Both Chapter 7 and Chapter 13 trustees are not court employees but private individuals, carefully vetted and monitored. The Chapter 7 trustees are selected out of a “panel” of several trustees within each bankruptcy court. So your lawyer would usually not know which of the trustees from the panel would be assigned to your case. In contrast, there is usually only one “standing” Chapter 13 trustee assigned cases from each bankruptcy court or area. So your lawyer will usually know which Chapter 13 trustee will be assigned to your case.

 

A Second Mortgage “Strip” through Chapter 13

September 6th, 2017 at 7:00 am

If you own a home with a qualifying 2nd or 3rd mortgage, one of the best reasons to file a Chapter 13 case is to “strip” off that mortgage.  

 

Chapter 13 can help you keep your home in many powerful ways. Of those “stripping” a second or third mortgage can likely save you the most money. If you qualify, you can stop paying that mortgage immediately. And it can save you a tremendous amount of money in the long run.

Second or Third Mortgage Under Chapter 7 “Straight Bankruptcy”

If you file a Chapter 7 case you are not able to “strip” a mortgage. You simply have to pay any second and third mortgages on your home or lose the home. The mortgage is a lien on your home, so you have to pay it or the mortgage lender will foreclose on your home.

If your home is worth less than the combined balances of your first and second mortgages you may be able to sell your home through a “short sale.” In this situation the second mortgage lender accepts less than its full balance when you sell the home. But you may be left owing the balance. And in any event, this is not a way to keep your home.

The Chapter 13 Mortgage “Strip”

Only Chapter 13 gives you the possibility of “stripping” that junior mortgage lien off your home’s title. The key factor in qualifying is your home’s value. A second mortgage can be stripped from the home’s title if ALL of the home’s value is encumbered by liens that come ahead of the second mortgage lien on the home’s title. All of the home’s equity is taken up by the prior liens, leaving no equity for that second mortgage.

Under this situation the second mortgage debt is effectively unsecured. What’s special about Chapter 13 is that it provides a way for a court to declare this debt to be unsecured debt. Then that second (or third) mortgage is treated accordingly.

This means that in your Chapter 13 plan you no longer have to make your monthly payments on that mortgage. Instead, during life of your payment plan you pay it only as much as you can afford to pay. This means other special debts can be paid in full before that stripped mortgage debt receives anything. The mortgage balance is lumped in with all your other low-priority “general unsecured” debts. This usually means that you pay only pennies on the dollar on that mortgage debt. Then no matter how long you were contracted to pay that mortgage, at the end of the 3-to-5-year Chapter 13 case the unpaid portion is permanently written off. Your home gets much closer to having future equity through stripping away that second or third mortgage.

Here’s an example to show how this powerful tool works.

The Example

Assume that you’ve owned a home for 10 years now worth $300,000. It lost a lot of value during the “Great Recession” of 2008-2010 and hasn’t gained it all back yet. You owe a first mortgage of $310,000 and a second mortgage of $20,000. The second mortgage has monthly payments of $325, with a bit more than 8 years to pay on it. It has a high interest rate of 8%—your credit wasn’t the best when you got this second mortgage loan.

Let’s also say that you were unemployed for several months and so you fell behind on both mortgages. You are thousands of dollars behind. You also fell behind on other debts. You have found a new job but it doesn’t pay as well as the earlier one. So you need relief from your debts and need help in preventing your home from being foreclosed.

You really want to keep your home instead of walking away from it. It’s been the family home for a long time. It’s close to your new job, and to the schools your kids have been going to. Home and apartment rents are rising in your area, so any other housing would be expensive. Mortgage qualifying standards are tighter now than they were before the Great Recession. So you know that it would be quite a while before you could buy a home again.

So you need a Chapter 13 “adjustment of debts” to catch up on your home obligations and to deal with your other debts.

“Stripping” Your Second Mortgage

In this scenario you’d be able to “strip” your $20,000 second mortgage off your home’s title through Chapter 13. Your bankruptcy lawyer would file a motion in the bankruptcy court to do so. Those papers would show that the home’s value—$300,000—is less than the amount of the first mortgage—$310,000. So all of the home’s equity is fully taken up by this first mortgage lien, which is legally ahead of the second mortgage. So the bankruptcy judge would declare the second mortgage lien to be “stripped” off your home’s title. Then the debt you owe on the second mortgage—the $20,000—would be treated as an unsecured debt.

The Great Results

As a result:

  • You could immediately stop making the $325 monthly payments. This would make it that much easier for you to pay the monthly payments on the first mortgage.
  • You would not need to catch up on the second mortgage late payments. So during your Chapter 13 case you could concentrate on catching up on your first mortgage. If behind on 6 payments of $325 on your second mortgage, that’s $1,950 you would not have to pay.
  • Your now-unsecured $20,000 second mortgage balance is treated like any other unsecured debt. So you’d pay it only as much as you could afford to during the 3-to-5-year life of the plan. In most plans there is only a certain amount available to pay all unsecured creditors. So, adding the second mortgage balance often doesn’t increase what you pay into your payment plan.
  • When you get to the end of your Chapter 13 case the entire unpaid second mortgage balance is “discharged.” It is legally written off. The resulting savings would be substantially more than the $20,000 present balance. That’s because of the substantial amount of otherwise accruing interest that you would also avoid paying.
  • Stripping the second mortgage off your home’s title would get you substantially closer to building equity in your home.

 

Plan Modification After It’s Court-Approved

August 23rd, 2017 at 7:00 am

It’s good to know that your Chapter 13 payment plan can be changed during the 3 to 5 years the case lasts to address changing circumstances.  

 

Last time we discussed making adjustments in your Chapter 13 plan during the first couple months of the case. That’s when you and your lawyer may adjust your plan to get court approval, or “confirmation.” Today we get into changes you may make to your payment plan AFTER confirmation.

Why Modify Your Plan After Confirmation?

A lot can happen during your Chapter 13 case, which will likely last 3 to 5 years.

  • Financial changes: Your income could go up or down; your expenses could do the same. If the changes are modest, that may not require a change in the terms of your plan. If they are more significant you may either benefit from changing your plan or you may be required to.
  • Goal changes: One or more of the goals of your case may have changed, resulting in changes to the plan. For example, you no longer want to keep your home because you got a job in a different state.
  • Legal assumption changes: Your plan might possibly get approved before some legal issue is resolved. For example, you may not yet know whether you’ll be able to establish that a big student loan debt qualifies for a “hardship discharge.” Or it may yet be clear whether a particular tax qualifies as a “priority” debt. Your plan may have to be modified depending on how such issues are resolved.
  • Planned-for changes:  Sometimes your lawyer puts together your Chapter 13 plan with the intent of modifying it later. For example, you intend to sell your home as soon as your two young adult children finish their schooling. So a couple of years into your case you modify your case reflecting that.

How Plans Are Modified After Confirmation

Changes to the terms of your Chapter 13 plan are made as follows:

  • After some change in your circumstances you and your bankruptcy lawyer discuss your options and you decide to modify your plan.
  • Based on information you provide him or her, the lawyer prepares the modified plan and any accompanying documents. Those documents include amended schedules of your income and expenses showing how those have changed.
  • You review and sign the modified plan and other documents; your lawyer files them at court. Copies are sent to all creditors or to all which are still legally involved.  (Those are mostly the ones who’ve filed proofs of claim in your case, confirming you owe them money). 
  • Creditors have an opportunity to object to the proposed modified plan. If one does your lawyer either resolves the objection informally with the creditor or else there’s a court hearing. (You very seldom need to attend such a hearing, but always can if you want to.) Often no one raises objections.
  • Once the deadline for objections has passed, or any objections are resolved, your new plan becomes the official plan in the case.

See Section 1329 of the U.S. Bankruptcy Code, “Modification of plan after confirmation.”

How Much Flexibility to Modify Your Plan

As we said a couple of blog posts ago, how much you can change your plan after it’s been court-approved is different in each case. Some plans have a huge amount of flexibility, some have very little.

Understandably a modified plan has to meet all the requirements of a Chapter 13 plan. Original plans that are on the edge of meeting the requirements tend to be harder to modify. Ones that easily meet the requirements tend to be easier.

An example of a plan that may be harder to modify is one in which a debtor fell far behind on a mortgage and is paying all they can afford in their plan to catch up. What happens if a couple years into their case their income significantly decreases or expenses increase? It may not be possible to reduce their plan payment to match what they can now afford. That’s because a plan can take no longer than 5 years. See Section 1329(c) of the Bankruptcy Code. If the original plan stretched payments out as long as possible there’s no flexibility to stretch them any further.

But there are many, many types of Chapter 13 plans with a lot of flexibility.

Take this example of a person who owes $4,000 in “priority” income taxes. This means these taxes can‘t be discharged under Chapter 7 and must be paid in full during a Chapter 13 plan. The original 3-year plan had monthly payments of $350 per month (covering all creditors). This was based on how much the person could afford. The remaining money beyond what was earmarked for the taxes went to pay the remaining creditors 30% of their debts. After a year of paying the $350 per month the person lost her job and got another one with $250 less net income. Her original plan can easily be modified to pay only $100 per month for the final two years. Why? That’s a total of $6,600  being paid into the plan. ($350 for the first 12 months and $100 for the remaining 24 = $4,200 + $2,400 = $6,600.) That’s more than enough to pay off the $4,000 in income taxes. The remaining creditors would receive much less than 30% but still receive all that the person can afford to pay. Assuming that the modified plan would meet all the other Chapter 13 requirements, it would be approved.

There are countless other kinds of successfully modifiable Chapter 13 plan. When you and your bankruptcy lawyer set up your original plan ask how modifiable it would likely be. You should not enter into a plan without discussing the scenarios in which it might need to be modified, and how successfully that could be done.

 

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