- How does Chapter 13 work?
- Who is eligible for a Chapter 13?
- What is the Role of an Attorney in a chapter 13 bankruptcy?
- What is the role of the bankruptcy trustee?
- Important Deadlines and Timeline for chapter 13.
- What is the Means Test?
- What Classes Must be Taken before and During the Bankruptcy?
- What is an Automatic Stay?
- Exemptions in Chapter 13
- What happens if I own property that is not exempt?
- The cost of Chapter 13.
- How does filing bankruptcy affect my credit rating?
- Will news of my bankruptcy be published?
- Must my Employer be told about my bankruptcy?
- By filing bankruptcy do I lose any of my rights, such as the right to vote?
How does Chapter 13 work?
The Debtors file documents called Petition, Schedules, Statement of Affairs, along with some other documents with the Bankruptcy Court. These documents are reviewed by the Chapter 13 Trustee and other creditors. In addition to the documents the Debtors also file a Plan of Reorganization. This is called debt adjustment. The intention is that over the next 3 to 5 years the Debtors will pay all the disposable income (income minus allowed expenses- some trustee have expense guidelines and Census Bureau and IRS Data) to their creditors by way of the Bankruptcy Trustee. At the end of their Plan period their remaining debts will be discharged, unless they are non-dischargeable.
Chapter 13 varies widely from district to district depending on the custom and attitudes of the local trustees and judges about what is “reasonable” and in “good faith”. A successful Chapter 13 case always requires an experienced bankruptcy lawyer familiar with the prevailing judicial attitudes in the district and the myriad of unwritten local rules. The failure rate for those who try their chapter 13 case without an attorney is at least 98%.
Who is eligible for a Chapter 13?
In order to file for a chapter 13 you must:
•Before filing complete the Credit Counseling for Consumers Class.
•Have sufficient regular income to meet monthly living expenses allowed by the chapter 13 Trustee, as allowed by the IRS and make a plan payment. [§109(e), §101(30)]
•Have less than a certain amount of unsecured debt, and secured debt. [§109(e)].
•Not be a corporation, partnership, stockbroker, or commodity broker. [§109(e), §101(30)]
You may file Chapter 13 and obtain a discharge, so long as you did not receive an earlier discharge in a 7, 11 or 12 in the last 4 years, or another chapter 13 in the last 2 years, but that is an issue to discuss with your attorney. (§1328(f)
A liquidated debt is one where the amount the debtor owes is known, or capable of easy calculation. For example, a loan is a liquidated debt; the damages owing in an auto accident are usually unliquidated until judgment is entered.
A strategy frequently used is to file Chapter 7 to discharge those debts that are dischargeable, and file a subsequent Chapter 13 to repay those debts that were not discharged in Chapter 7, or that cold not be dealt with in a chapter 7 (such as paying arrears on houses, etc).
What is the role of an attorney in a chapter 13 bankruptcy case?
The Bankruptcy Court tells me that less than 2% of those filing without an attorney can ever be successful in a chapter 13. This statistic pre-dates the 2005 Reform Act, which dramatically increased the complexity of filing for bankruptcy protection. Many people ask me if they “can file their own bankruptcy”. I always answer “Yes, anyone has the legal right to do their own open heart surgery, so why not not their own bankruptcy!” (Thank you Judge Baum for the quote). The laws were complicated before they changed in 2005, now I believe that only an fool would file their own bankruptcy, no matter “how simple”. In fact, after the law changed many lawyers stopped doing any bankruptcy law because it had become so complex; event fewer will help with chapter 13. Never listen to the advise of someone who filed their own bankruptcy. They had a “fool for a client” and probably committed at least one federal crime, but did not get caught. The new laws are being aggressively enforced and the Attorney General’s Office is actively pursuing bankruptcy fraud.
Do not use those who advertise on TV – you will end up paying their advertising costs. Also, do not use “legal document preparers”. These are folks who want to be attorneys, but decided not to go to school. Instead, they pretend to know the law, or, worse yet, are disbarred attorneys or other scum who prey off the innocent who do not know better. Always check out your lawyer with their state bar. Ask for references from the lawyer. Most people find good lawyers by asking friends or relatives for referrals.
The debtor’s attorney will normally do the following things in a chapter 13 consumer case:
•Analyze the amount and character of the debts owed by the debtor to determine whether bankruptcy is the best remedy for the debtor’s financial problems.
•Assist the debtor in preparing his estate for bankruptcy, so that a minimum amount of property will later have to be turned over to the Trustee.
•Review the Debtor’s history of payments and transfers to determine possible exposure to Debtor and others.
•Assemble the information and data necessary to prepare the bankruptcy schedules and statements for filing.
•Assist the Client in understanding their duties in a chapter 13.
•Draft the Plan of Reorganization, based on the debtor’s situation, the law and the practical solutions available.
•Prepare the proper petitions, schedules, and statements for filing with the bankruptcy court.
•Determine whether the education classes are necessary. If so, file the required certificates with the court.
•File the bankruptcy petitions, schedules, and statements with the court and obtaining the necessary injunctions and restraining orders.
•Address issues related to redemption, surrender or reaffirmation.
•File and notice the Plan of Reorganization.
•Attend the Meeting of Creditors with the debtor.
•Address issues raised by the Bankruptcy Trustee and creditors related to the Plan and other documents filed with the Court.
•Attend Plan Confirmation hearings.
•Address modifications of the Plan, as circumstances change during the life of the Plan.
•Prepare and file amended schedules as required by the Debtor’s change of circumstances and/or the court.
What is the role of the Bankruptcy Trustee?
The Trustee acts as the disbursing agent for the payments made into the plan. The Trustee also reviews the plan and challenges those plans that don’t, in the Trustee’s opinion, meet the tests for confirmable plans set out in the Bankruptcy Code. An experienced bankruptcy attorney will be able to predict most of the Trustee’s objections and address them them in the Plan, or amended Plan. The 2005 Reform Act puts much of this into question. It will take several years to work out what the new law really means. If the Trustee and the debtor can’t agree on the terms of the plan, a judge will decide if the plan can be confirmed.
Once the plan is confirmed, the trustee pays creditors regularly from the payments made by the debtor. The 205 Reform Act permits the Trustee to make adequate protection payments before the Plan is confirmed. These would be payments to the lender on your vehicle, etc.§1326(a)(1)(B)Generally, all debts existing at the beginning of the case must be paid through the trustee; current mortgage payments and some leases are among the exceptions.
What is the Means Test?
The means test was explained in the Chapter 7 FAQ. In a chapter 13 it is complicated because of a change in the definition of “disposable Income”. §1325(b)(2) The form used is Official form B22C. The problem is that the disposable income test, under either 7 or 13 median income approach, will not be an accurate measure of future ability to pay in the Plan. The test is a look back, not forward in time. In addition to other deductions, charitable contributions, up to 15% of gross income, is included §1325(b)(2)(A)(ii). Our firm will provide you a form for calculating the means test.
What Classes Must be Taken before and During the Bankruptcy?
Every consumer who files Chapter 7 or 13 bankruptcy is required to take a credit counseling “briefing” within 180 days PRIOR to filing their bankruptcy and file a certificate of compliance. There is also a financial management class a “budget” class within 45 days after filing your bankruptcy. Failure to do so will result in additional fees and costs in order to get your discharge in your bankruptcy. There will be fees charged for those classes, unless you cannot afford to pay such fees. Ms. Drain will explain the process.
Warning about all these credit counseling companies – their information regarding bankruptcy is often not accurate. You must talk to a bankruptcy attorney in your State.
Before filing bankruptcy you must take one class called credit counseling: Ms. Drain recommends Institute for Financial Literacy Their fees are reasonable. BEWARE: YOU MUST TAKE THIS CLASS BEFORE FILING YOUR BANKRUPTCY. If you cannot afford to pay the fee then contact them for a waiver. Bring a copy of all documents to your meeting with Ms. Drain.
After filing your bankruptcy you must take a class called Personal Financial Management. Ms. Drain highly recommends a class presented by Dave Ramsey. Credit Counseling and Debtor Education (US Trustee’s Office)
What is the Automatic Stay?
The filing of the petition creates an automatic stay under 11 U.S.C. §362 prohibiting all collection actions. 11 U.S.C. §§ 301, 302, 101(42) – unless the Debtor has filed a prior bankruptcy in the last 12 months. Stay good for only 30 days if filed one prior case in last 12 months. §362(c)(3)(A). No stay at all if 2 or more cases in last 12 months. §362(c)(4)(A)(i) A dismissed case is a filed case. No excuse for failure to understand the requirements. A motion to extend the Stay must be filed within 30 days
The Debtors must file a Plan of Reorganization.
A copy of the plan will be mailed by BNC to all creditors and (in some cases) appear at a Plan Confirmation hearing that is usually between 20-45 days after the meeting of creditors. The contents of the Plan are dictated by §1322 – which requires the Debtor submit all “disposable income” income, minus certain allowed expenses, to the Chapter 13 Trustee for the next 3-5 years. (§1325(b)(2)) “Disposable Income” is not defined the same in a chapter 13 as in a chapter 7. The length of the Plan is dictated by several issues too numerous to list in this brief outline of duties.
Exemptions in Chapter 13
The bankruptcy code allows each individual who files bankruptcy to keep basic assets deemed necessary for the debtor’s “fresh start” after bankruptcy. That property is the debtor’s “exempt property“.
Debtors often worry that they will lose personal possessions and household goods when they file bankruptcy. Most Chapter 7 cases are no asset cases. That means the debtors give up nothing to the trustee, unless they owe back child support or alimony/maintenance. In that case the Trustee can sell all assets owned by the Debtor, whether or not they are exempt. If the Debtor has assets over the exemption list then a chapter 13 is a good idea, assuming the Debtor wants to retain those assets. In the Plan the Debtors will pay the resale value of the assets that were not included on the Arizona exemption list. Once this is done the Debtors may keep those assets, unless the taxing authorities, or secured creditors have the right to pursue the same assets.
What happens if I own property that is not Exempt?
If your case involves assets which are not exempt, then you must pay the fair market value of those assets through your Chapter 13 Plan. In other words, your creditors have the right to receive the amount they would have received if you liquidated those assets through a Chapter 7. You are obligated to protect those assets until the Trustee can make arrangements to pick them up. Your creditors will be notified by the Trustee to file a proof of claim. The Debtor, Trustee and other creditors have the right to examine the proof of claims and object to those they deem to be improper. All claims not objected to by the Trustee, you, or another creditor will be approved by the court and the creditors will receive a pro-rata share of whatever the Trustee has distributes, after paying other specified debts (child support, secured debts, etc).
The cost of Chapter 13:
Attorneys fees in Chapter 13 are usually paid in part before the case is filed, with the unpaid balance, if any, paid by the Trustee from the payments the debtor makes into the plan. In Arizona the normal flat fee for a consumer chapter 13, without any issues, is $4,500 for the 3-5 year Plan. If the case is more complex or there are excessive objections to confirmation, claims, or you fail to keep the on-going house payments or Trustee payments current, then there will be additional attorneys fees. The debtor’s attorney may charge for their services by the hour. It is important to talk to the attorney about this issue.
The court must consider requests for additional attorneys fees, and if the request is approved, the additional fees will be added to the debts paid through the plan.
I am told by other clients that my fees are a lot less than those charged by other firms (especially Phillips & Associates who charge more than double in fees and who use strong-armed tactics to bully people to retain their services). Why? I can do this only if my clients gather information in an orderly fashion by filling out as much of the requested information as pertains to their situation. If a client provides me with only part of the requested information, then my fees will have to increase for that client because I am forced to do more of the client’s work. So, the client who fails to provide the names, dates, addresses, and/or amounts on the questionnaire will be charged more for the additional attorney time than the client who does their portion of the work without my intervention. That does not mean you should not ask questions. Thoroughness and accuracy are of utmost importance in a properly filed bankruptcy. Inaccurate paperwork can cause you to lose your bankruptcy protection, cost you more in attorney fees defending fraud claims and you may face jail time for bankruptcy fraud. My job it to help you avoid all those problems. So, thoughtful and organized questions are encouraged.
The filing of a bankruptcy generally means that your credit rating will most likely go to 480, but each person situation is unique. A chapter 13 is an open bankruptcy for 3 to 5 years. During the pendency of that bankruptcy your credit score can increase so long you keep your Plan payments and monthly mortgage payments current. It is not unusual that a Debtor obtain a new loan during their chapter 13. Warning – you must obtain court approval for any new loans, sales of assets or purchase or new large-dollar assets. Make certain that the new loan does not cost you more than staying with your current obligation.
Will news of my bankruptcy be published?
When your bankruptcy papers are filed, they become public records. The record of your filing may be published by some credit-reporting agencies. In addition, your name will be published in one newspaper in Arizona, and possibly more. However, your name will be listed on a page with hundreds of other debtors, so your name will probably not stand out.
Must my employer be told I am filing for Bankruptcy?
Typically – no. There are two issues that may involve you employer. First, the bankruptcy Trustee will request that you provide copies of several documents (tax returns, bank statements, etc). One of these items will be copies of some of your pay stubs before filing. If you refuse to provide this information then the Trustee may send a form to your employer seeking information about your wages. Second, the basic foundation of a chapter 13 is the monthly Plan payment made to the Bankruptcy Trustee. In some cases a wage assignment of those Plan payments may be required by the Court, the Trustee or your circumstances. Each situation is unique. The law prohibits your employer using the mere filing of a bankruptcy to deny you employment, unless you work in financially sensitive areas (securities, brokers, etc).
By filing bankruptcy do I lose any of my rights, such as the right to vote?
No. Bankruptcy is a civil, not a criminal proceeding. You do not forfeit any of your civil or constitutional rights by filing a bankruptcy. Also, neither a utility, a governmental unit, nor your employer may discriminate against you because you have filed bankruptcy. But, if you discharge a utility bill then you may find that you are charged a very large “deposit” when you apply for new utility service.