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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. 

 

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.

 

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.

 

Plan Modification Before It’s Approved

August 21st, 2017 at 7:00 am

Sometime you and your lawyer don’t know everything you need to know to put together a perfect Chapter 13 plan. So then you can modify it. 

 

Last time we got into how important it is to know that your Chapter 13 payment plan can be adjusted later. It’s important because when you enter into a 3-to-5-year Chapter 13 case you need to know that it’s flexible.

But you also need to know that flexibility has some limits.

It’s not easy to summarize how flexible a Chapter 13 plan will be. It’s hard to say how much you can adjust your Chapter 13 plan because plans can be SO different. Some plans have tremendous flexibility; some have very little. We’ll give some examples to help make sense of this.

Plan Modification BEFORE Court Approval

In a Chapter 13 case everything revolves around your formal payment plan. So, during the first couple months of your case most of the focus is on getting that plan approved by the bankruptcy court. A lot is up in the air until that point when the court or “confirms” your plan. Then once the court confirms the plan, you’re on your way. Everybody knows the rules you and the creditors are operating under in your Chapter 13 case.

Because of this focus on confirmation of your plan, it makes sense that there’s a difference between changes made to your plan before and after the court confirms it. Today we focus on pre-confirmation plan modification.

Ambiguities in Preparing Your Chapter 13 Plan

Sometimes when you and your bankruptcy lawyer put together your Chapter 13 plan, you have all the information you need. But often you don’t. For example, if you’re behind on your mortgage, you might not know exactly how much. Or you owe income taxes for last year but the tax returns are not yet due and still being prepared.

Or sometimes part of your payment plan is based on a debatable fact. For example, the amount you pay on a vehicle loan “cramdown” depends on the vehicle’s value. You and your lender may disagree on that value. Or similarly, whether you can strip away a second mortgage depends on the home’s value.

The plan may even be based on goals that aren’t fully firmed up at the time the plan is filed. For example, your vehicle may have gotten repossessed right before filing your case. You may have access to a replacement vehicle from a relative but aren’t yet sure. So you need to file the case quickly to get back your repossessed vehicle in case you can’t get another one.

In all these situations your lawyer prepares your Chapter 13 plan based on some imperfect information and/or debatable assumptions.

Tying up the Loose Ends

In the first few weeks after your Chapter 13 case and plan are filed, these loose ends start getting tied up. Using the above examples:

  • Your mortgage lender provides an itemization of your missed payments, late charges, and all other fees.
  • You or your tax preparer prepare your current income tax returns and firm up those numbers.
  • Your lawyer contacts your vehicle lender or its lawyer to settle on the value of your vehicle for the “cramdown.”
  • Your lawyer files a motion to strip the second mortgage and you learn whether your home valuation will stand.
  • You find out that your relative’s vehicle is available and reliable so you decide to surrender your repossessed one.

The Pre-Confirmation Modifications

Chapter 13 law says that you “may modify the plan at any time before confirmation.” See Section 1323 of the U.S. Bankruptcy Code on “Modification of plan before confirmation.” That modified plan understandably just needs to meet the usual requirements of a Chapter 13 plan. See Section 1322 on “Contents of plan.”

Generally, the sooner you modify your plan the better because that increases the likelihood it will get approved faster.  

Practically speaking, there are two important events that often drive when your plan is modified.

About a month after your lawyer files your case you have a meeting with the Chapter 13 trustee. The trustee administers your case, receives and distributes your plan payments, and has some oversight responsibilities. Creditors can also come to this meeting, the so-called Meeting of Creditors. It’s an opportunity to exchange information and come to agreement about any loose ends.

Then another month or so later is the Confirmation Hearing (which you almost never attend). By then all the loose ends need to be tied down or the judge does not confirm (approve) the plan. So everybody has an incentive to cooperate in getting it done.

Informal and Formal Plan Modifications

If the change in your plan is very minor, your lawyer may not need to prepare an entire new plan. The change can just be put into the Order Confirming Chapter 13 Plan. If so your creditors get notice of this change and an opportunity to object. They get this opportunity usually before, but sometimes after, the Confirmation Hearing.

Most of the time a change in a plan requires your lawyer to prepare a full modified plan. It’s filed at court along with supporting documents.

Either way, once the bankruptcy judge signs the Order Confirming Chapter 13 Plan that modified plan essentially becomes the law of your case. If you comply with it you will get all of its benefits.

Next time: Chapter 13 plan modifications AFTER confirmation, to address changes in your circumstances.

 

Chapter 13 Plan Modification

August 18th, 2017 at 7:00 am

Before committing to a Chapter 13 “adjustment of debts” it’s good to know that its plan can likely be “modified” if your situation changes. 

 

The Chapter 13 Plan

Chapter 13 is all about the payment plan. The point of Chapter 13 usually is to radically reduce most debts so you can afford to pay special debts. The Chapter 13 payment plan describes the details of how this is to happen.

For example, in your Chapter 13 plan you’ll pay a bunch of recent income taxes that can’t be discharged (written off) in a Chapter 7 case, while paying very little to the rest of your debts.

The most important practical aspect of such a plan is how much you will be paying each month—your plan payment. That payment generally covers all of your debts, although sometimes you’ll continue paying a mortgage or other secured debt directly.

The other main part of the plan describes which debts get paid, how much, and maybe when. Some debts are referred to by name in your plan, others just by category of debt. For example, the plan specifically lays out payment amounts going to a “priority” debt like the income taxes. But “general unsecured” debts are not named individually; the plan just states the anticipated percent-of-debt this category will be paid.

Here is a sample Chapter 13 plan form.

The Usual Procedure

A lot goes into preparing and getting approval for your plan, and then making it work.

Basically, your bankruptcy lawyer prepares a proposed Chapter 13 plan based on the information you provide him or her. He or she reviews and explains it to you in detail, making whatever changes are appropriate. The creditors have an opportunity to review the plan and raise objections based on alleged noncompliance with legal requirements. Often no creditors object, or only one or two do, and usually any objections are resolved. The Chapter 13 trustee carefully reviews the plan for legal compliance, and raises any concerns. This is usually done at the so-called Meeting of Creditors about a month after you file your case. Again, any objections are usually worked out.

Then the plan goes before the bankruptcy judge at the “confirmation hearing,” usually around two months after filing your case. If there were no objections or they’ve been resolved by then, the judge virtually always approves the plan. If there is a lingering objection sometimes the judge resolves it at that hearing. Or the judge may give the parties more time to resolve things by the time of an “adjourned confirmation hearing.”

Once the judge approves the plan through an Order Confirming Plan, that plan is essentially the law of your case.

Important to Know that Your Plan Can Be Modified

It’s important to realize that a lot goes into putting together and getting a Chapter 13 plan approved. But it’s also important to understand that the plan can usually be changed, or “modified.”

Most Chapter 13 plans last 3 to 5 years. That’s a long time to be living under one particular budget. So it helps to know that you’re not stuck with your original plan terms throughout this time.

Candidly, some Chapter 13 plans are put together with some doubt about whether a certain intended goal can be achieved. For example, you believe you can find a better job and increase your income during your Chapter 13 case. So you tie keeping your home (and catching up on the mortgage) onto that belief within your Chapter 13 plan. You need to know that if that higher income does not materialize that you can modify your plan (although you may also need to modify your goals).

Sometimes the goals themselves change. In the example of the better job, that job may unexpectedly come requiring a move to a different state. So now you may want to sell your home but remain in your Chapter 13 case because of other debts. It’s good to know that Chapter 13 gives you the flexibility often to adjust to even major life changes.

Limited Flexibility

Your Chapter 13 plan can stretch but that has limits. It’s good to get a feel of how much a plan can and cannot bend. We’ll explain this more in our next blog post or two.

 

The Chapter 13 Plan

July 24th, 2017 at 7:00 am

Chapter 13 revolves around your payment plan, which you propose based on your budget, and possibly negotiate with creditors and the trustee. 

 

In our last two blog posts we introduced Chapter 13 “adjustment of debts” bankruptcy. We explained how to qualify for it and how it can buy you extremely valuable time. Today we get to the heart of this option: the Chapter 13 payment plan.

The Length of the Plan

A Chapter 13 case almost always requires a 3-to-5-year payment plan. That may sound like a long time, but the length itself is often an advantage. That’s because your Chapter 13 plan often has you paying special debts that you want or need to pay, and the more time you have the less you have to pay each month. That makes achieving your plan goals easier and more realistic.

Whether a plan has to be at least 3 years long vs. 5 years depends on two main factors. First, your income plays a major role. Without explaining this in detail here, relatively lower income results in a minimum 3-year plan. Higher income results in a 5-year plan. 

Second, even if your minimum plan length is 3 years, you may want to stretch it out longer. You’d do that to reduce how much you pay each month into the plan. 

Your Chapter 13 Plan

Your plan is a blueprint for how you will deal with your debts for the 3 to 5 years of your Chapter 13 case. It must meet a list of requirements. See Section 1322, “Contents of plan,” of the U.S. Bankruptcy Code.

The core of the plan states how much you will pay to ALL of your creditors each month, and who gets paid from that amount. There are other provisions in the plan that don’t directly involve money. We’ll cover these in more detail in upcoming blog posts.

The Plan Approval Procedure

You and your bankruptcy lawyer prepare and then present your Chapter 13 plan to the bankruptcy court. This is usually done at the same time as your lawyer electronically files your case. But sometimes the plan is filed a week or two later, especially if your case was filed in a hurry.

Your creditors receive a copy of your plan and are allowed limited kinds of objections to it. If your plan follows the legal requirements the creditors usually don’t have much room for objection.

The Chapter 13 trustee also has a role in determining whether the plan meets the appropriate rules. The trustee suggests changes, usually in the form of objections. Usually these are resolved informally between the trustee and your lawyer. They often involve only minor tweaks in the plan terms, so that it’s still meeting your intended goals.

The bankruptcy judge resolves any disagreements about the plan between you and your creditors, or between you and the trustee, as needed. This usually happen quite quickly, although can delay the approval of your plan for several weeks.

The approval of a plan is called its confirmation, and usually takes place at a confirmation hearing. Your lawyer usually attends, but you almost never need to. The confirmation hearing usually happens about two months after your lawyer files your case. But it can be postponed (“adjourned”) once or even more often if there are objections which take time to resolve.

The judge approves your plan by signing a confirmation order. Your confirmed plan plus the confirmation order together largely govern your relationships with your creditors throughout the rest of your Chapter 13 case.

Next…

In our next blog post we’ll cover how a Chapter 13 plan deals with the different categories of your debts.

 

“General Unsecured” Debts Discharged in Chapter 13

August 8th, 2016 at 7:00 am

To the extent you do not pay off your debts during a Chapter 13 payment plan, the remaining balance is usually legally written off forever.

 

Our last two blog posts were about how Chapter 7 “straight bankruptcy” deals with “general unsecured” debts. But how about Chapter 13 “adjustment of debts”?  What happens to those simple debts, which are neither secured by a lien on something you own nor are not a “priority” debt?   

“Priority” and “General Unsecured” Debts

Let’s go back and distinguish these two kinds of debts. The distinction is crucial because of how they are treated under Chapter 13. You have to pay “priority” debts in full during the course of the 3-to-5-year payment plan. You generally only have to pay “general unsecured” debts to the extent you have money to pay them.

So what’s the difference? Simply, “priority” debts are specific categories of debts that Congress has decided must be treated specially. They are debts that the law says that in a Chapter 13 case you must pay in full before paying the “general  unsecured” debts anything.

The “priority” debts are all on a list in the Bankruptcy Code. If a debt is not one of the kinds on that list, then it’s a “general unsecured” debt. The main “priority” debts in consumer Chapter 13 cases are recent income taxes and past-due child and spousal support.

The Discharge of “General Unsecured” Debts

People file Chapter 13 usually not because of their “general unsecured” debts. Chapter 13 provides extremely helpful tools for dealing with secured debts like home mortgages and vehicle loans. And it gives you time to pay “priority” debts while being protected from creditors like the IRS or state tax department, and from your ex-spouse or the support enforcement agency.  

Still, what happens to your “general unsecured” debts in a successful Chapter 13 case? What happens is that after paying these debts as much as your budget allow you to pay them (after paying any secured and “priority” debts), the remaining balance, no matter how little or how much, is discharged—legally written off.

Here’s how this works in practice.

An Example

Assume that, based on your income from a steady job, you qualify for a 3-year Chapter 13 bankruptcy. You have $110,000 in a combination of credit cards, medical bills, and personal loans. As long as there is no collateral tied to any of those debts, they are very likely “general unsecured” debts.

You are also $8,000 behind on your home mortgage on a home you want to keep. That’s a secured debt you must pay. Under Chapter 13, the home mortgage lender is usually required to let you catch up on the mortgage over the 3-year life of the payment plan.

And you owe $6,000 in income taxes for the last two tax years. That’s a “priority” debt you must pay. The IRS/state is required to give you that time to pay the “priority” debt. Plus, as long as the IRS/state has not recorded a tax lien, you don’t pay any ongoing interest or penalties.

In this example, based on your budget, after paying your monthly mortgage and all other reasonable living expenses, you can afford to pay $450 per month to all your creditors.

$450 per month for 36 months totals $16,200 paid into your Chapter 13 payment plan. That is enough to catch up on the $8,000 mortgage arrearage and pay off the $6,000 tax debt. There’s $2,200 left over.

(The Chapter 13 trustee (who administers the distribution of money to the creditors and otherwise oversees the case) gets paid a certain percentage. And if you didn’t originally pay your bankruptcy lawyer in full you can pay the balance through the plan payments. But to simplify the math here, let’s exclude these “administrative fees.”)

The End Result

So what happens to the $2,200 left over after you catch up on the mortgage and pay off the taxes? It’s paid on your “general unsecured” debts, distributed pro rata based on the amount of each debt. Overall you would pay $2,200 of the $110,000 owed on these debts, or 2% of the “general unsecured” debts.

And what would happen to the remaining 98% of those debts? After you successfully complete the 36-month payment plan, the bankruptcy judge enters a court order legally discharging those debts.

You’d have caught up on your mortgage, paid off the tax debt, and paid 2% of the “general unsecured” debts. Other than the regular payments on your mortgage, you’d be debt-free.

 

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