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Archive for the ‘Chapter 13 trustee’ tag

Resolve Mortgage Accounting Disagreements

October 21st, 2019 at 7:00 am

Chapter 13 gives you valuable power to force your mortgage lender to be up front about how much you owe, and to efficiently dispute the amount. 

 

Catching Up on Your Mortgage over Time

A Chapter 13 case gives you the power to catch up on your home mortgage(s) over an extended period.  This “adjustment of debts” type of bankruptcy can give you up to 5 years to catch up.

This power is found in the U.S. Bankruptcy Code language allowing you to cure “any default within a reasonable time.” Section 1322(b)(5). That amount of time is interpreted to mean, in most circumstances, the length of your Chapter 13 payment plan. Most payment plans are between 3 and 5 years long. If you need more than 3 years, usually you can extend your plan longer, up to 5 years.

The Mortgage Accounting Challenge

If you fall behind on your mortgage it can be ridiculously difficult to get accurate information from your lender about the amount you owe. If you don’t have accurate information, you can’t fulfill your desire and responsibility to cure the arrearage.

This problem is aggravated over the course of the case when the mortgage payment amount changes over time. This could be from normal changes in the interest rate, property tax and insurance, or the addition of fees.

You can’t cure the arrearage or maintain monthly payments if you aren’t timely told the amounts you owe. You can’t efficiently dispute the stated amounts if the lender does not respond in good faith.

This accounting confusion had been a serious problem for millions of homeowners trying to save their homes. In 2011 a new procedure was created within Chapter 13 to efficiently resolve mortgage accounting disputes. It’s contained in Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. It gives you the power to force your lender to work with you to determine how much you owe.

How the Procedure Works

The procedure focuses on changes to the ongoing mortgage payment amount.  You can’t catch up on the arrearage if that arrearage increases because you’re not paying the right monthly payment. 

Your lender “shall file and serve on” you, your bankruptcy lawyer, and your Chapter 13 trustee “any change in the payment amount.” This includes “any change that results from an interest rate or escrow account adjustment.” This notice must be given “no later than 21 days before a payment in the new amount is due.” Rule 3002.1(b) of the Federal Rules of Bankruptcy Procedure.

You or your lawyer can object to the change in the lender’s notice. You must do so before that new payment is due. If you don’t object on time, the lender’s payment change goes into effect.

If you do object, the bankruptcy judge determines whether the lender’s proposed new amount is appropriate or not.

This procedure forces the lender to be up front about changes in how much you owe. It allows you to dispute those changes, and to get a quick court determination about who is right.

 

Scenario: Filing Chapter 13 Now Shortens a Case by Two Years

December 24th, 2018 at 8:00 am

Here’s a scenario showing how the timing of your Chapter 13 filing can shorten your payment plan from 5 years to only 3. 

 

In our last blog post we explained how your last 6 calendar months of income can determine whether your Chapter 13 payment plan lasts 3 years or instead 5 years. We showed how even relatively small shifts in the money you receive can cause this huge difference.

How this can happen will make more sense after reading through the following scenario.

Our Facts about “Income”

Remember from last time that your “income” includes money from just about all sources, except Social Security. Also, the only money that counts is that which you received during the 6 FULL CALENDAR months before filing. This means that money received DURING the calendar month of filing DOESN’T count. For example, if you file your Chapter 13 case on January 31 you count the income from the previous July 1 through December 31. You don’t count any income received in January.

In our scenario assume you worked a second job during the holidays. Your monthly paycheck for December from this job is arriving on January 4, 2019. The anticipated gross income amount is $2,500. This money could also come from just about any other source. For example, your ex-spouse may be able to catching up on some unpaid child support owed because he/she received an annual bonus. It could be from just about any source. The point is that there’s an extra $2,500 arriving in early January.

In addition you receive $3,600 gross income every month from your regular job.

You received no money from any sources other than your regular job from July 1, 2018 through December 31, 2018. You expect to receive no money in January 2019 other than the $3,600 gross income and the additional $2,500.

So, assume that your bankruptcy lawyer files your Chapter 13 case between January 1 and January 31, 2019. The income that counts is what you received during the 6 prior full calendar months. That’s from July 1 through December 31, 2018. That is $3,600 per month times 6 months, or $21,600, or $43,200 for the annualized amount.

Our Facts about “Median Family Income”

Your income, as just discussed, determines whether your minimum payment plan length is 3 vs. 5 years. If your income is less than the designated “median family income,” your minimum plan length is 3 years. If your income is the same as or more than “median family income,” your minimum plan length is 5 years. Section 1322(d) of the U.S. Bankruptcy Code.

The “median family income” amounts (Section 39A of the Bankruptcy Code) come from the U.S. Census Bureau. This source data is adjusted annually, and is also adjusted more often to reflect changes in the Consumer Price Index. (The CPI comes from the U.S. Bureau of Labor Statistics.) The U.S. Trustee conveniently gathers this information at this webpage. From there the most recent median family income amounts (as of this writing) are compiled in this table.

For our scenario assume that you are single and live in Kentucky. According to the above table the median family income for a single person in Kentucky is $44,552. (You can find your own median family income by finding your state and family size in the table.)

Filing a Chapter 13 Case in January 2019

Under the facts outlined above, if you filed a Chapter 13 case during January 2019, your case could last 2 years less than if you filed the case in February, conceivably just a few days later.

Why? Because if you file in January you don’t count the income from that month. That means that you don’t count the $2,500 in income from the holiday job. You only count the $3,600 per month you received July through December from your regular job. As calculated above, that means an annualized income of $43,200. That is less than the applicable median family income amount of $44,552. So you’d be allowed to have a Chapter 13 payment plan that lasts only 3 years, and not be required to pay for 5 years.

Filing a Chapter 13 Case after January 2019

But if you file in February 2019 (or any of the following 5 months) your Chapter 13 plan would be required to last 5 years.

Why? Because if you file in February (or during the next 5 months) you do count the income from that month. That includes the $2,500 in income from the holiday job. When filing in February, for example, you count the income from August 1, 2018 through January 31, 2019. That includes the $3,600 per month from your regular job, plus the $2,500 from the holiday job. Six times $3,600 is $21,600, plus $2,500 equals $24,100. Multiply this by 2 gives you an annualized income of $48,200.

That is more than the applicable median family income amount of $44,552. So you’d be required to pay into your Chapter 13 plan for a full 5 years.

Next week we’ll discuss the financial and other consequences of this, and some other very important considerations.


Filing Chapter 13 in December (or January!) May Greatly Shorten Your Case

December 17th, 2018 at 8:00 am

Do you need a Chapter 13 case? WHEN you file it can mean the difference between a payment plan that takes 3 years and one that takes 5.  

 

In two blog posts last month (November 12 and 19) we showed how filing bankruptcy by the end of December 31 might allow you to file a Chapter 7 “straight bankruptcy” case instead of being forced into a Chapter 13 “adjustment of debts” one. You could have your debts discharged (legally written off) within just 3 or 4 months under Chapter 7. Otherwise you may have to go through a 3-to-5-year payment plan under Chapter 13. Besides likely costing much more, you’d only discharge your remaining debts if you successfully completed your payment plan.

But What If You Need a Chapter 13 Case?

The benefits of Chapter 7 won’t matter much to you if you need a Chapter 13 case in the first place.

Yes, Chapter 13 takes so much longer than Chapter 7.

And Chapter 13 is much riskier. Most Chapter 7 cases—especially one in which the debtor has a bankruptcy lawyer—get completed successfully. Chapter 13 comes with longer odds. A lot can happen in the 3 to 5 years that they usually take. Chapter 13 is a flexible tool, one that you can often adjust to changing circumstances. But the truth is that a significant percentage of them do NOT get completed successfully.

Notwithstanding the extra time and risks, Chapter 13 could still be by far the best tool for you.  That’s simply because it can accomplish many things that Chapter 7 can’t. For example, Chapter 13 can:

  • give you time to catch up on home mortgage and/or property taxes
  • buy you time and save you money if you owe lots of income taxes, especially if you owe on more than one tax year
  • give you time to catch up on child or spousal support while protecting your income, assets, and license(s) from suspension while doing so
  • allow you to keep assets that are otherwise not protected in a Chapter 7 case
  • lower your monthly vehicle payments and reduce the total amount on the loan
  • hold off on student loan payments and collection until you qualify for an “undue hardship”

And these are just some of the ways that Chapter 13 can deal with your creditors more powerfully than Chapter 7.

A Shorter Chapter 13 Payment Plan

So, what if you’ve learned that you really need a Chapter 13 case? What if you also learned that filing your Chapter 13 case in December instead of January would allow you to finish your case in 3 years instead of 5 years? Or what if that was true if you filed your case in January instead of February?

Paying into a Chapter 13 payment plan for 2 years less could save you many thousands of dollars. Plus, that would get you out of bankruptcy 2 years sooner. You’d be that much ahead of the game in rebuilding your credit.  You’d have the emotional relief of finishing and getting on with life sooner

Here could filing a Chapter case a month sooner shorten the case so much? Here’s how.

Your Last-6-Full Months of Income Determines How Long Your Chapter 13 Lasts  

Our blog post of November 12 described an unusual way of calculating your income for the Chapter 7 “means test.” (That’s a test to qualify for filing a Chapter 7 case.)   That way of calculating income also determines whether your Chapter 13 plan lasts a minimum of 3 years or 5.

Income is calculated as follows:

1) Consider almost all sources of money coming to you in just about any form as income…. .  Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case.

The 6-month amount is multiplied by 2 for the annual “income” total to be compared to the “median income” for your state and family size.

When you combine the above two considerations, monthly changes in your “income” can make a big difference.  That’s especially true if your money coming in is more than usual in either December or January.  (That would most often be from more overtime, a seasonal job, a monetary gift from family, and/or an employer’s bonus.)

Because of the way “income” is calculated there’s a higher risk that it would be larger than the “median income” for your state and family size. If it is larger, then you must pay your Chapter 13 case for 5 years instead of 3 years.

What’s My Applicable “Median income”?

The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. Here’s a table showing the “median family income” amounts for cases filed on or after November 1, 2018. It shows the amount for each state, by family size. (The amounts are adjusted about three times a year; see this webpage to see if there has been an update.)

(For the actual steps used in this calculation, see the official form, Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period.)

So if your “income” as calculated above is larger than your applicable “median family income” than your Chapter 13 case gets pushed to 5 years.  If it’s smaller, your case can last as short as 3 years. (That 3 or 5 years is the “commitment period” referred to in the official form in the paragraph above.)

If your “income” is larger because of unusual money you received in December and/or January, it may make sense to file your Chapter 13 case in either December or January so that the income of that month would not count. (Remember, that’s because you only count income of the PRIOR 6 FULL calendar months before the filing date.)

In next week’s blog post we’ll put all this into an example to make better sense of it for you.

 

“Preferences” Around the Holidays

December 3rd, 2018 at 8:00 am

Do you feel like you should pay on or pay off a certain debt now, even though you’re behind on all your debts?  It may be dangerous to do so. 

 

Last week we explained how giving a significant gift before bankruptcy could cause problems during bankruptcy. This also applies to selling something for much less than it is worth. Such a gift or sale might possibly be considered a “fraudulent transfer.”

A similar problem could arise from paying a creditor before you file bankruptcy. That’s especially true if it’s somebody you want to favor or maybe don’t even see as a regular creditor. This payment might possibly be considered a “preference,” or a “preferential payment.”  This is today’s topic.

Your Desire and Ability to Pay a Special Creditor

Especially around this time of year you may be extra motivated to pay on or pay off a special debt. A relative, or a friend, may really need of the money. He or she may be pressuring you to pay.

You might be thinking about filing bankruptcy and you don’t want it to affect this person. So you pay him or her off thinking that would help. Or you do so because you don’t want the person to know about your bankruptcy, for whatever personal reason.  

Besides wanting to, you may be able to pay on a special debt this time of year more than usual. For many people because of the expenses of the holidays money is especially tight. But, as mentioned a couple weeks ago:

The month of December is the month that people receive more income than any other month of the year. [F]or at least the past 9 years U.S. personal income was the highest in December… .

You may be getting a bonus from work or more income from working extra hours or part-time job during the holidays. So you might be able to pay a special debt now more than at any recent time.

So you may have the desire and ability to pay a debt now, before filing bankruptcy. But it may not be a smart thing to do.

What Makes a “Preference”?

If during the 365 day-period BEFORE filing a bankruptcy case you pay a creditor more than you are paying at that time to your other creditors, then AFTER your bankruptcy is filed that favored creditor could be forced to surrender to your bankruptcy trustee the money that you’d paid to this creditor earlier. See Section 547(b) and (c) of the U.S. Bankruptcy Code. 

This one-year look-back period is shortened to only 90 days for creditors that are not “insiders.” The Bankruptcy Code defines “insiders” basically as relatives and business associates, but the definition is open-ended. See Section 101(31). So it could include friends and just about anybody that you have a personal reason to favor. Your bankruptcy lawyer will advise you whether a potential preferential payment was to an insider or not.

Your favored creditor could be required to return the money (or other form of payment) that you’d paid. The money would usually not be given to you but to your bankruptcy trustee. The trustee would then distribute it among your creditors.

The result: instead of satisfying your favored creditor as you’d intended, you could have an unhappy one. This is not.

What’s the Point of All This?

Preference law is related to one of the most basic principles of bankruptcy—equal treatment of legally similar creditors. People or businesses which are financially hurting must be discouraged from favoring any of their creditors before filing bankruptcy. Otherwise they would—the theory goes—pay all of their last money or other resources to their favored creditors, leaving nothing for the rest of the creditors. Under preference law, if they do so within the 365-day/90-day look-back periods, those payments made to the favored creditor could be taken back from that creditor. This disincentive is supposed to make the situation fairer to all the creditors.

“Preferences” Can Be Frustrating, But They’re Avoidable

“Preferences” are relatively rare problems in consumer bankruptcy cases, partly because they are relatively easy to avoid. Next week we’ll give you a scenario showing a potentially preferential payment made during the holidays, and practical ways to avoid it.

 

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.

 

Your Voluntary Dismissal of a Chapter 13 Case

August 25th, 2017 at 7:00 am

The Bankruptcy Code explicitly says that, at the request of the person in a Chapter 13 case, the bankruptcy “court shall dismiss” the case. 

 

The last three blog posts have been about amending, or “modifying,” your Chapter 13 payment plan. But what if you don’t want to be in the Chapter 13 case at all? Can you just end it altogether?

Yes, almost always you can end a Chapter 13 case, by getting it “dismissed.”.

A Clearly Stated, Special Right

You can dismiss a Chapter 13 case easily because the Bankruptcy Code says you can, and says so very clearly:

On request of the debtor at any time… the [bankruptcy] court shall dismiss a case under this chapter [13].

(Section 1307(b) of the Bankruptcy Code.)

Two parts of this deserve to be highlighted:

  1. You can ask for a dismissal “at any time”—at any point in the life of a Chapter 13 case. So you can dismiss it soon after filing, if you realize you’ve made a mistake and change your mind. And you can dismiss your case after your payment plan has been approved by the court, for example, if your circumstances change and you don’t want to be in it any more.  
  2. The law says that “the court shall” dismiss the case whenever you ask. This seems to mean that the bankruptcy court doesn’t have any choice about it. The wording isn’t that the court “may” but rather that it “shall” dismiss your Chapter 13 case.

As a result if you ever want your Chapter 13 case dismissed, usually within a day or so of your bankruptcy lawyer filing a motion to dismiss your case will be dismissed.

Be aware that there isn’t a similar statute enabling the easy dismissal of a Chapter 7 “straight bankruptcy” case. So this is a powerful right special to Chapter 13.

Why Is This Reserved for Chapter 13?

Most likely Congress included this right to provide an incentive for people to file under Chapter 13. Naturally you’ll be more inclined to try a particular legal solution if you can always get out of it. The idea is to encourage people to pay part of their debts instead of writing them off under Chapter 7.

In fact Congress thought this right to dismiss so important that you can’t be forced to give it up. The statute finishes by saying: “Any waiver of [this] right to dismiss… is unenforceable.” (Section 1307(b)) You can‘t be forced to sign away this right by contract or otherwise.

The Importance of the Dismissal Option

A Chapter 13 case lasts a long time compared to a Chapter 7 case—usually 3 to 5 years. A lot can happen during that time. So it can be important to be able to get out.

The major reason you filed your case may no longer apply. For example, you may have filed to catch up on home mortgage payments but you get a job out of state. So now you decide to surrender or sell the home instead, and don’t need the Chapter 13 case.

Or your financial circumstances change so that you don’t need Chapter 13 help, or else it doesn’t help you enough. In the example of being behind on your mortgage, if you came into some money you might be able to quickly catch up and no longer need the time that Chapter 13 buys you. Or your income goes down significantly so that you can’t catch up even within the extended time Chapter 13 provides.

In these and countless other circumstances, it’s good to be able to get out if that’s your best option.

But IS Dismissal Your Best Option?

As easy as it is to do, simply dismissing the case is often not your best option. That’s because most likely you have debts which you would continue to owe. Chapter 13 does not result in a “discharge”—legal write-off—of your debts until its successful completion. So if you dismiss before then you will continue to owe those debts. It may be better to instead “convert” into a Chapter 7 case. But there are situations when dismissal is the best. We’ll address these issues in the next few blog posts.

Can You Definitely Dismiss Your Case If You Want To?

In spite of what we said about the clear language in the statute, there may be some extreme situations when a debtor could not dismiss a Chapter 13 case.

There has been debate among bankruptcy judges about this. Some have decided that in situations of serious debtor abuse or fraud, the debtor can’t escape the jurisdiction of the court by simply getting his or her case dismissed. There may be other statutes or legal principles that can defeat even the clearly stated right of dismissal.  So in limited situations a judge might prevent a Chapter 13 case from being dismissed. 

However, in the vast majority of situations, just about as soon as you ask your Chapter 13 case will be dismissed.

 

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.

 

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.

 

Using the Co-Debtor Stay of Chapter 13

August 4th, 2017 at 8:04 am

If protecting your co-debtor from having to pay your debt is a high priority, Chapter 13 has a remarkable tool for doing that.  

 

Chapter 7 Doesn’t Always Help

Our last blog post was about helping your co-signer through a Chapter 7 “straight bankruptcy” case. You discharge (legally write off) most or all your other debts. Then you may be able to afford to make payments on your co-signed debt.

But that doesn’t always work. What if:

  • discharging your other debts still does not leave you enough money to make the monthly payments on the co-signed debt?
  • you have other debts that you would continue to owe after a Chapter 7 bankruptcy—recent taxes, child support arrearage, non-support divorce debt, student loans—leaving you unable to pay your co-signed debt?
  • you are behind on the co-signed debt and can’t afford to catch up on the missed payments right away?
  • the creditor says it will start or continue to pursue your co-signer in spite of you filing bankruptcy?

Chapter 7 does not solve any of these problems. However, Chapter 13’s special co-debtor stay is a powerful and flexible tool that can cut through these problems in many situations.

Assumes You Want to Pay the Co-Signed Debt

All of this assumes that you are willing to pay the co-signed debt to protect your co-signer.

If you don’t want to for whatever reason then you don’t need the benefits of the co-debtor stay. Your relationship with your co-signer may not motivate you to pay the debt. Or your co-signer may have agreed to take care of the debt without your help. If so, then you don’t need the co-debtor stay. You can stop reading here. But check out our next blog post about protecting yourself in those situations.

The Special Chapter 13 Co-Debtor Stay

When you file either a Chapter 7 or a Chapter 13 case you get the “automatic stay.” That protects you and your assets from virtually all the collection efforts of your creditors. It stops lawsuits, garnishments of paychecks and bank accounts, foreclosures, vehicle repossessions, calls and letters from creditors, and such.

With Chapter 13 you also get the “co-debtor stay. “ This can protect your co-signer and his or her assets from the collection efforts of the creditor on the co-signed debt.  It acts somewhat like the automatic stay for your co-signer although in a more limited way.  So when you file a Chapter 13 case, there’s some immediate protection for your co-signer. Chapter 7 does not have a co-debtor stay.

How the Co-Debtor Stay Works

Chapter 13 gives you the opportunity to pay the co-signed debt in full during your 3-to-5-year payment plan. Its crucial advantage is that throughout this time your co-signer is protected from collection by the creditor.  

Your Chapter 13 payment plan must show you’ll pay the co-signed debt in full during the course of your case.

This can often be easier than you think because in most parts of the country you can favor a co-signed debt in a Chapter 13 plan. That means you can arrange to pay it in full while your other general unsecured creditors receive little, or maybe nothing. Focusing your financial resources on paying off that co-signed debt makes paying off the co-signed debt much easier.

You have to have your Chapter 13 plan show the co-signed debt is being paid in full. That’s because to whatever extent your plan does NOT show that the debt will be paid in full, the creditor can ask for permission to pursue your co-signer DURING the Chapter 13 case.

Also, you need to make sure that you comply with your Chapter 13 plan, actually paying off the co-signed debt.  To whatever extent the co-signed debt is not paid in full during the case, the creditor can pursue your co-signer AFTER the case. It can do so then without asking anybody’s permission.

So you simply have to make sure that your Chapter 13 plan is put together to pay that co-signed debt in full. And then make sure you make your plan payments so that actually gets accomplished.

Two Important Conditions

First, the co-debtor stay helps you only with co-signed CONSUMER debts, not business debts.

For this purpose tax debts are NOT considered to be consumer debts. The IRS and state tax agencies can keep pursuing your spouse/ex-spouse or business partner/ex-business partner.  The co-debtor stay does not work so the other person has to file his or her own bankruptcy case.  Or file jointly with you, in the case of a spouse.

Second, the creditor can challenge the co-debtor stay if YOU didn’t receive the benefit of the debt (either the cash borrowed or the item(s) purchased), but rather your CO-SIGNER did. The co-debtor stay still goes into effect at the filing of your Chapter 13 case to protect the co-signer. But then the creditor could ask the bankruptcy court for permission to pursue the co-signer. The creditor would need to convince the bankruptcy judge that the co-signer, not you, got the benefit of the debt.  If so, the co-debtor stay would not apply and the creditor could chase the co-signer for the full debt.

Conclusion

Look to Chapter 13’s co-debtor stay if protecting your co-signer from collection is a very high priority. It protects much better than Chapter 7 can.

Chapter 13 allows you to pay that co-signed debt in your plan on terms consistent with your budget. And it does so while fitting it in among other special debts like recent income taxes, back child support, or mortgage payments. Chapter 13 is a powerful and flexible way to satisfy your co-signed creditor and protect your co-signer.

 

Treatment of Different Types of Creditors in Chapter 13

July 26th, 2017 at 7:00 am

The laws about the treatment of different types of creditors can often be used in your favor to pay who you want or need to pay. 


Your Chapter 13 payment plan has to treat debts that are legally the same type of debts essentially the same way. But your plan can and must treat different types of debts quite differently. The laws related to this can be used to your advantage in many, many ways. Today we begin showing how this works with each of the three major types of debts.

Secured Debts

A secured debt is one which is legally tied to something you own. The secured creditor has rights against that property you own. Those rights usually include to repossess or foreclose on the property if you don’t pay the debt.

For example, your home mortgage(s), unpaid property taxes, judgments with liens on your home, income tax liens can all be debts secured against your home. And your vehicle loan is secured against your vehicle.

Debts may be secured because you directly agreed to make them secured, like a vehicle loan. But debts can also be secured involuntarily by certain creditors in certain circumstances. An involuntary example is an income tax lien on your home.

Secured creditors have rights against whatever property of yours secures their debt. That gives them leverage in a Chapter 13 case if you want to keep that property. You usually have to pay part or all of the debt to keep the property.

If you want to keep the property securing the debt, and it’s something reasonably necessary for you to keep (like your primary vehicle or your home), that creditor leverage actually helps you. It usually allows you to favor that creditor over most of your other creditors.  This means that you can pay your secured debt ahead of or instead of most other debts.

For example, you would usually be allowed to catch up on a vehicle loan in your Chapter 13 plan ahead of paying your unsecured credit cards. Often as a result your vehicle loan gets paid in full while your credit cards get only partially paid. Sometimes the credit cards (and other such unsecured debts) get nothing at all.

Priority Debts

Priority debts are simply those which the law has determine are worthy of more favored treatment over other debts. Each type of priority debt has a particular reason for being treated specially.

Some of the most common and important priority debts for consumers are child and spousal support and recent income taxes. Support obligations are treated as special because of the hardship nonpayment tends to cause. Taxes are treated as special because their nonpayment hurts everyone.

In a Chapter 13 payment plan, you must pay priority debts in full before paying other unsecured creditors anything. As with secured debts, you usually want and need to pay your priority debts. You may well have decided to file a Chapter 13 case because you are protected while paying your priority debt(s).

As with secured debts, being required to pay your priority debt(s) ahead of other unsecured debts means those other debts get less, and sometimes nothing. You are essentially paying the priority debts to the detriment of your other debts.

General Unsecured Debts

This third type includes everything else. These are debts that have no rights to anything you own, and are not on the list of priority debts.

A Chapter 13 plan may pay general unsecured debts anything from 0% of what you owe them to 100%, depending on the circumstances. How much you pay your general unsecured debts depends on many factors. Broadly speaking, these debts get paid whatever is left over after you pay the secured and priority debts.

Limited Flexibility 

In Chapter 13 you and your bankruptcy lawyer have to follow a detailed set of rules about treatment of creditors. But those rules come with a certain amount of flexibility. The rules give structure to a Chapter 13 plan. The flexibility can help make it work to fit your unique personal circumstances.

We’ll show specific ways that these somewhat flexible rules can help you in our next few blog posts.

 

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