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Consumer Bankruptcy Changes in the CARES Act

April 13th, 2020 at 7:00 am

The massive $2.2 trillion coronavirus relief law also includes some legal relief for both Chapter 7 and Chapter 13 consumer debtors. 

 

If you’re thinking about filing a Chapter 7 “straight bankruptcy” case, the new CARES law may help, at least slightly. If instead you’re thinking about a Chapter 13 “adjustment of debts” case, the new law helps in more significant ways. That’s also true if you already are in a Chapter 13 case.

$1,200 Relief Checks Excluded as Income for the Means Test

To qualify to file a consumer Chapter 7 case you have to pass the “means test.” Part of that test is a rather complicated calculation of your “current monthly income.” That’s essentially the average of the last 6 full calendar months of income from virtually all sources. A single large payment—such as a $1,200 coronavirus relief payment—could pump up your “current monthly income” and make you fail the “means test.” Then you could be forced to file a multi-year Chapter 13 case instead of a 3-4 month Chapter 7 one.

The new CARES law solves that problem neatly. It simply excludes any coronavirus relief money from the definition of “current monthly income.” To be precise, the following is excluded:

Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A).

What Payments Are Included?

This statutory language is broad. It doesn’t refer only to the one-time $1,200 (or so) relief payments. It’s clearly broad enough that it could include other “Payments made under Federal law” related to the coronavirus national emergency. That is, other such payments may be excluded from “current monthly income” for purposes of the means test.

For example, CARES provides unemployment benefits of $600 per week extra beyond the usual state-calculated weekly amounts. (See our blog post last week about the unemployment benefits under CARES.) These $600 weekly extra benefits sure sound like they’re “Payments made under Federal law” related to [this] national emergency.” Since these $600 payments can last up to 39 weeks, they can amount to way more money than the one-time $1,200 payments. So if these $600 payments are also excluded in applying the means test, that would be quite significant.

But the law may not be clear on this. At this writing, CARES is just two weeks old. How it will be applied may shift quickly, as in so many things related to the pandemic. The law may well be applied somewhat differently in different parts of the country. Contact your local bankruptcy lawyer for current information as it applies to you.

$1,200 Relief Checks Also Excluded in Confirmation of Chapter 13 Plan

Chapter 13 generally requires you to pay all of your “projected disposable income” into your 3-to-5-year payment plan. This monthly amount goes through the Chapter 13 trustee to your creditors under the terms of your plan. Then at the end of the plan you are usually debt-free (except sometimes for certain agreed long-term debts).

Your “projected disposable income” is based on virtually all your income, minus certain legally allowed expenses. The income side of this is your “current monthly income” as discussed above—based on your last 6 months of income. If that income would include a one-time coronavirus relief payment, it would greatly increase your “disposable income” and thus your required Chapter 13 plan payment.

The new CARES law solves that problem in a way similar to the above section about the Chapter 7 means test. Using the exact same language, it excludes any coronavirus relief money from the Chapter 13 definition of “current monthly income.” To again be precise, the following is excluded:

… payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

CARES, Section 1113(b)(1)(B).

As in the section above on Chapter 7, it’s not yet clear what federal payments are excludable. Besides the $600 weekly unemployment payments mentioned above, there may be other future coronavirus stimulus payments approved by Congress. Again, talk with your bankruptcy lawyer to get current information and advice.

Changes to Ongoing Chapter 13 Plans

During the course of a Chapter 13 you can change, or “modify” your approved payment plan under certain circumstances.  CARES added a new circumstance: if you are “experiencing or [have] experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” CARES, Section 1113(b)(1)(C).

The bankruptcy judge still has to approve the modified plan, after the usual notice to creditors and opportunity for objection. The modified plan must comply with the usual requirements. (“Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) shall apply to any [such plan] modification… .” CARES, Section 1113(b)(1)(C).)

It’s unclear what this all adds to the plan modification rights you already have, except for one huge change. The law has been clear for a long time: Chapter 13 plans cannot last longer than 5 years. CARES extended this to a new maximum of 7 years for applicable modified plans.

Although you’d think you would want to finish your plan as fast as possible, longer plans often allow you to reduce your monthly plan payments. It can give you more opportunities to preserve certain assets or collateral—keep a vehicle, save a home. Given the financial challenges so many of us are facing, this greater flexibility can make the difference between completing your case case successfully or not.  

Important: Applicability to Cases

First, the Chapter 7 means test change and the Chapter 13 plan confirmation change “apply to any case commenced before, on, or after the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(i). But those changes have a sunset provision—they are deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).

CARES was enacted on March 27, 2020. That means that these two changes apply to all cases filed any time before that date but only through March 26, 2021. Be careful about this deadline.

Second, the Chapter 13 plan modification change applies “apply to any case for which a plan has been confirmed… before the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(ii). But, same as above, this change have a sunset provision—it is deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).

So this change applies to Chapter 13 cases which had a confirmed plan before March 27, 2020, and then successfully modified its plans by March 26, 2021. Be careful about this deadline as well.

Notice that by this language this change does not apply to cases either not filed, or already filed but not yet confirmed, as of March 27, 2020. This means that people in these situations appear unable to take advantage of the 7-year provision.

Bottom line all these changes to the Bankruptcy Code are temporary, currently lasting only this one year. Then they will be deleted and the Bankruptcy Code will revert to its prior language. 

 

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.

 

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210-342-3400

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