Chapter 13Debt Reorganization
Chapter 13 Information
Chapter 13 is also a form of bankruptcy, but it is a reorganization of your debts. In Chapter 13, you make a monthly payment to a trustee appointed by the court. He, or she turns around and distributes this money to your creditors. You do not always have to pay everyone in full. You must pay your priority unsecured debts (recent back taxes and back child support), and if you include arrearages on a home, or a debt for a car in the plan, these debts must be paid in full.
Contrary to popular opinion you do NOT have to repay all of your general, unsecured debts in full, unless you are able to do so.
You have between three and five years, depending on your level of income and how YOU formulate your plan. The payments are based on a combination of what you owe, what you earn, and what you spend to meet your basic living expenses before making a plan payment. The Chapter 13 filing fee as of April 9, 2006, is $274 and the attorney fees are based on the work done. Like Chapter 7, you must take the pre-filing and post-filing bankruptcy classes and we do want you to obtain a credit report. Attorney fees must be approved by the Bankruptcy Court, but we can provide you an estimate, when you come to us for your FREE consultation.
Why Chapter 13?
- Sometimes Chapter 13 is better than Consumer Counseling.
Credit Counselors cannot always lower payments, or lower the interest rates that people are charged by credit card companies. Some companies will not even work with them, and they will come after you and sue you, even though you are trying to make good faith efforts to pay them through a credit counselor. Chapter 13 puts YOU in the drivers’ seat and gives the creditor no choice. When you’ve tried everything else, it’s time to stop being nice.
- Moral obligation.
Many clients come to a bankruptcy office with feelings of guilt, shame, and embarrassment about being forced to file bankruptcy.These feelings are wrong, and you should GET OVER IT! Your CREDITORS need to assume responsibility for their own actions and stop making loans that cannot be repaid. Your creditors charge too much money for interest, anyway. Most people who file bankruptcy do so because of unforeseen circumstances: divorce, unexpected medical bills, unemployment, a death in the family, etc. But yes, I agree that it is a good thing to try and pay back ones debts – if it is possible. Please consider Chapter 13, if it is right for you.
- A previous Chapter 7.
A debtor may file a Chapter 7 bankruptcy and receive a discharge once every eight years. 11 U.S.C. Sec. 727(a)(8). Sometimes people who file bankruptcy continue to experience financial problems, either because of continued illness, joblessness, or other unforeseen circumstances. In this instance, a sort of “Chapter 20” (Chapter 7 followed by a Chapter 13) may be in order. This opportunity has been reduced by the new amendments to the Bankruptcy Code, but it still may be possible to do. I do have to warn you that, if you have filed Chapter 7 in the past four years and obtained a discharge, you will not be able to obtain a discharge in Chapter 13. Likewise, if you have filed Chapter 13 in the past 2 years and obtained a discharge, you cannot obtain a discharge in a new Chapter 13.This is complicated and it is PRECISELY why you need to come talk to me. Before the bankruptcy amendments took effect, a person could file bankruptcy on their own, without a lawyer. You still can! But Congress has made this so complicated, it seems like an invitation to disaster.
- Repaid or gifted money to a relative within a year of filing bankruptcy.
If you have given property, or money to relatives, or repaid them in the past 12 months, a Chapter 7 trustee may be able to get the money or property back from them. Filing Chapter 13 will prevent this: so long as the general, unsecured creditors are paid at least as much as they would have received in the Chapter 7, the Bankruptcy Court will be satisfied with your plan.
- Non-exempt property.
Some clients own property that is not “exempt” under state law. If the property is valuable enough, the Chapter 7 trustee would want to take it and sell it and get money out of it to give to your creditors. Chapter 13 prevents this. So long as the general, unsecured creditors are paid at least as much as they would have received in a Chapter 7, they will be satisfied and you need not sell any of your personal possessions. Click here to learn about what property is or is not “exempt.”
- The “Super discharge”.
There are a number of debts that are not be dischargeable under Chapter 7, which would be dischargeable under Chapter 13. These include the following: Debts incurred to pay non-dischargeable tax obligations will still be dischargeable in Chapter 13 (11 U.S.C. Sec. 523(a)(14)). Debts for a property settlement to an ex-spouse (11 U.S.C. Sec. 523(a)(15)). Let’s say you owe your spouse the obligation of paying off a credit card debt in a divorce decree. This would not be dischargeable in Chapter 7. If you failed to pay it, he or she could sue you in divorce court, even after you filed bankruptcy, for the money. These debts are dischargeable in Chapter 13.Because Chapter 7 is ineffective against these debts, Chapter 13 may be the right way to satisfy these debts. Click here to learn more about what sort of debts are “non-dischargeable” in Chapter 7.
- Repayment of non-dischargeable debts.
Back taxes and back child support can be paid in Chapter 13, whereas, you must make arrangements on your own to pay them, if you only file Chapter 7. Chapter 13 has its own set of “non-dischargeable” unsecured debts. Eleven U.S.C. Sec. 1328 denies a discharge in Chapter 13 for the following types of debts: Alimony, maintenance, or support (11 U.S.C. Sec. 1328(a)(2)); Student loans (11 U.S.C. Sec. 1328(a)(2)); Personal injury debts incurred while operating a motor vehicle under the influence of drugs or alcohol (11 U.S.C. Sec. 1328(a)(2)); Restitution or criminal fines (11 U.S.C. Sec. 1328(a)(3)). Repayment of “Priority” Debts.The Bankruptcy Code requires “priority” debts listed in Section 507 to be paid in full in a Chapter 13 Plan. 11 U.S.C. Sec. 1322(a)(2). This includes back child support, back alimony, and recent back taxes that would otherwise not be dischargeable in Chapter 7.
- “Cram down” and “Stretch out” of secured creditors. In Chapter 7, the only real option for retaining a vehicle is to reaffirm on it and pay it, per its original terms. While debtors’ counsel may have some luck negotiating a better interest rate or a write off of the principal, this is unlikely. Bank examiners make it harder for banks to compromise with their debtors. In Chapter 13, a non-mortgage secured creditor must be paid at least the fair market value of its collateral, depending on when you purchased the collateral. If you are paying for a vehicle, and you purchased it in the past 910 days, you will have to pay the full debt you owe, plus interest on the fair market value of the vehicle. If the loan is older than that, you may only have to pay the current retail or “replacement” value of the vehicle. If you purchased furniture in the past 12 months – say, a computer from Dell, or household goods from Furniture Row – you will have to pay the full balance of the purchase in Chapter 13, if you include it in the plan. If the loan is older than that, then you may only have to pay the current “replacement” value to keep the items. All of this may lead my clients to keep newer cars outside their Chapter 13 plans. As to older loans, because nearly 40% of all new vehicle purchases are “upside down,” you may owe a lot more on your car than it is worth. So long as you pay “replacement value” on the vehicle, you can keep the car. You may be able to lower the interest rate you pay, as well. What interest rate do you have to pay? If you include a non-mortgage secured debt in the plan, typically the interest rate is prime plus 1 or 2 per cent.
The Bankruptcy Code provides protection for co-signors in Chapter 13 under the automatic stay. 11 U.S.C. Sec. 1301. The stay may be lifted if the debt is not being paid in the plan in full because of the lack of “adequate protection” for unsecured creditors who are not allowed to go after the co-signor during the Chapter 13 bankruptcy. A co-signor’s credit rating may be damaged until the debt is paid in the bankruptcy.
- High disposable income: 707(b) problems.
If you make too much money, you cannot file Chapter 7 and receive a discharge. Generally speaking, if you could pay a significant portion of your unsecured debts in Chapter 13, over a three to five-year period, you must file Chapter 13. If you make above the medium income for a family of your size in your state, you may not be able to file Chapter 7. Click here to learn more about income issues for filing bankruptcy.
- Curing defaults on home mortgages.
In Chapter 7, your only opportunity to keep a homestead is to reaffirm on the debt and keep making payments on it. In many instances, mortgage-holders will not reaffirm on a debt if your client is in arrears. At that point, the client faces foreclosure with no hope of keeping their home. In Chapter 13, you can “cure” these arrearages by repaying them over the three to five-year period.
There are other changes in Chapter 13 that you should be aware of.
- Annual financial statements.
Eleven U.S.C. Sec. 521(f)(4), as amended, requires annual financial statements to be filed with the court by a Chapter 13 debtor. Eleven U.S.C. Sec. 521(g)(1) specifies the information required.
- Tax returns.
Debtors must file annual tax returns with the court, but in addition to this, they will have to prepare and file tax returns that are due and owing within the four years before they filed bankruptcy. This means that delinquent debtors have to catch up and get their tax situation straight. If the taxes are “at the accountants,” debtor’s counsel may have to say, “Once the accountant has the tax returns done, come back and see me.” 11 U.S.C. Sec. 1308(a), as amended.
- Loans from pensions.
Here is a positive note. Currently, Chapter 13 trustees refuse to approve a Chapter 13 plan in which a debtor proposes to continue to repay a debt for a loan taken against a pension, unless the debtor is paying all unsecured debts, in full. Repaying a pension is simply “paying oneself.” This could create terrible tax consequences. Eleven U.S.C. Sec. 362(b)(19) and Sec. 1325, as amended, permits continued repayment of these loans in Chapter 13.
- Individual(s). No corporations or partnerships.
- Debt limits: 11 U.S.C. Sec. 109.
There are limits on how much debt you can owe and still qualify for Chapter 13. These change, annually, and are hundreds of thousands of dollars. Please contact us about this.
- “Disposable Income” requirements.
All disposable income must be used. This includes money from a pension plan, even if it is ERISA-qualified. Taylor v. U.S. (In re Taylor), 212 F.3d 395, 396 (8th Cir. 2000), cert. den’d, 531 U.S. 1010, 121 S.Ct. 564, 148 L.Ed.2d 484 (2000). Military retirement income is also “disposable income.” Regan v. Ross, 69 F.2d 81 (2d Cir. 1982); In re Morse, 164 B.R. 651, 655 (Bankr E.D. Wash 1994).
- 3-year vs. 5-year plans.
The minimum time that you must be in Chapter 13 is between three and five years, unless you could pay everything off, sooner. If you make above the median income in your state for a family of your size, you must pay for five years, unless you can pay everything off, sooner. Five-year plans may be necessary to permit funding of Chapter 13 cases. For those under the median income, A Chapter 13 plan is normally only for three years unless it is extended “for cause.” 11 U.S.C. Section 1322(d).
- “Pro rata” plans.
Please remember that a Chapter 13 plan does not have to pay all unsecured claims in full. Most plans pay a “pro rata” portion to the unsecured creditors. Many jurisdictions require at least a 10% dividend to unsecured creditors, especially if the case is going out for more than 3 years.