Chapter 13 Bankruptcy
As the Sacramento Bankruptcy Attorneys at Eason & Tambornini will explain, Chapter 13 Bankruptcy is generally the cheapest, easiest, and for most people, the preferred reorganization bankruptcy to file when you have an option. It is generally a fraction of the cost of a Chapter 11 bankruptcy.
The three most common reasons seen by our Sacramento Bankruptcy Attorneys for filing a Chapter 13 Bankruptcy are: to provide individuals an opportunity to get caught up on the arrears on a secured debt over time; in some situations to strip off (remove) junior/second deeds of trust and home equity loans; and/or to obtain a discharge for someone who does not otherwise qualify for a Chapter 7 bankruptcy.
Chapter 13 bankruptcies are sometimes referred to as a “wage earners” bankruptcy, or a consumer reorganization bankruptcy. The primary reason is because the plan of reorganizations in a Chapter 13 are tailored to meet the needs of employees or other people on fixed income who have fallen behind on debts such as their home mortgage, and need a reasonable time frame to get caught up. The paperwork prepared in a Chapter 13 bankruptcy looks similar to the paperwork prepared in a Chapter 7 bankruptcy with the major addition of a plan of reorganization. The plan is effectively the consumer’s new contract with their creditors on how they intend to get caught up on their debts.
Frequently Asked Questions about Chapter 13 Bankruptcy
Chapter 13 bankruptcy first became popular for individuals who had a temporary loss of income and as a result became delinquent on their home loan. In these situations, individuals usually made enough money to pay their bills, but they had just fallen behind and the creditors were not cooperative. A Chapter 13 Bankruptcy allows these individuals to make their regular monthly payments and then pay off the arrears over a period of time, often up to five years. This type of payment program is not available in a Chapter 7 Bankruptcy without the voluntary cooperation of a creditor.
In the current economic climate, the Sacramento Bankruptcy Attorneys at Eason & Tambornini are finding that the majority of Chapter 13 Bankruptcies are motivated by individuals who are seeking to strip off second deeds of trust and home equity lines of credit. While bankruptcy laws are complicated and subject to many nuances, individuals in California who owe more on the first deed of trust on their home than the home is worth, can often “strip off” or eliminate junior deeds of trust in a Chapter 13. For example, if your home value is $150,000, but you owe $175,000 on a first deed of trust and $60,000 on a second deed of trust, our Sacramento Bankruptcy Attorneys can usually eliminate the second deed of trust in a Chapter 13 Bankruptcy. Without a doubt, this has become a powerful tool in reorganizing finances for the long-term in the current economy.
A third common reason seen by our Sacramento Bankruptcy Attorneys for filing a Chapter 13 Bankruptcy is that an individual simply has too much income to qualify for a Chapter 7 Bankruptcy, or otherwise does not meet one of the income exceptions. Generally, if you earn more than the median income for your state, and do not qualify under the Means Test or one of the other exceptions, Chapter 13 becomes a very powerful alternative to dealing with creditors.
Determining the amount of your plan payments in a Chapter 13 Bankruptcy is particularly complicated and requires a very detailed analysis by one of our Sacramento Bankruptcy Attorneys of your income, expenses, and debts.
If one of the purposes of a Chapter 13 is to get caught up on a home loan, then at a minimum you will need to pay back those arrears. Those arrears can usually be paid over a period up to 60 months. In cases with home loan delinquencies filed in Sacramento, you are generally required, as a minimum, to pay monthly (to the trustee) the regular monthly payment, plus 1/60th of the arrears. In addition to those amounts, you pay the trustee an additional 10% as his fee. For example, if you were $6,000 behind on a monthly mortgage with a regular monthly payment of $1,400, your minimum plan payment if you wanted to spread the plan over 60 months would be approximately $1,650 ($1,400 payment, plus 1/60th of $6,000 arrears ($100), for a total of $1,500. Then add a 10% trustee fee ($1,500 * 10%).
As one of our Sacramento Bankruptcy Attorneys will explain, another factor that can go into determining the amount of plan payments is whether you have any secured debts that would normally be paid in full within 60 months. In many of these situations, the amount of debt is stretched out over 60 months, and paid as part of the plan with the customary trustee fee.
Besides the above factors, some of the other common potential factors taken into account by one of our Sacramento Bankruptcy Attorneys (that go into determining the amount of plan payments) include: whether you have significant assets that are not exempt; whether your income is higher than the median income; whether you have excess income using the means test; whether you owe priority claims such as taxes; and whether you want to defer your attorneys’ fees over the course of the bankruptcy rather than pay them upfront. A plan in a Chapter 13 Bankruptcy is a very technically-driven and complicated document that can have long term implications. Individuals who try to do it without a Bankruptcy Attorney are rarely successful, and even in those situations, “success” is usually a misnomer (as they are generally overpaying).
Properly completing a Chapter 13 Bankruptcy is significant endeavor. Our Sacramento Bankruptcy Attorneys are often asked to file Chapter 13 Bankruptcies on very short notice because of a pending foreclosure; however that is not the ideal situation. Chapter 13 Bankruptcy filings should be properly planned out in advance if at all possible. Ideally, our Sacramento Bankruptcy Attorneys like to work with a client for at least two weeks prior to filing.
Once a case is filed, the length of the plan, and thus the length of the case, can vary significantly based on the client’s needs and preferences. However, to reduce the financial burdens, most Chapter 13 Bankruptcy plans are prepared so as to be completed in 60 months. However, many cases are able to be completed in as little as 36 months. While rare, there are even some cases that are completed faster than 36 months.
As our Sacramento Bankruptcy Attorneys will explain, in a Chapter 13 Bankruptcy, creditors have very little say in the confirmation of a plan of reorganization. If the plan meets certain minimum requirements, it will be confirmed over the objections of creditors, and getting creditor approval is not required. This is significantly different than the process in a Chapter 11.
However, confirmation of a plan of reorganization is only the first step to a successful Chapter 13 Bankruptcy. The real key to success in a Chapter 13 Bankruptcy reorganization case is creating a budget that is not only sufficient to cover the bankruptcy plan payments, but that is practical and sustainable over the life of the bankruptcy.
If you would like to learn more about a Chapter 13 Bankruptcy, please do not hesitate to call one of our Sacramento Bankruptcy Attorneys.
If you live in the following counties, the general rule is your case would be filed in the United States Bankruptcy Court for the Eastern District of California, Sacramento Division: Alpine; Amador; Butte; Colusa; El Dorado; Glenn; Lassen; Modoc; Mono; Nevada; Placer; Plumas; Sacramento; San Joaquin; Shasta; Sierra; Siskiyou; Solano; Sutter; Tehama; Trinity; Yolo; and Yuba. If you recently moved within the District, you may be required to file in the district from which you moved, or may want to wait until you have been in this district for the majority of the last 180 days and then file here.
What is the purpose of a Chapter 13 Bankruptcy? The general concept of a Chapter 13 bankruptcy is to give individuals and small business owners the same ability to reorganize their debts that large businesses and entities have with a Chapter 11 bankruptcy. Chapter 13 is intended to be very similar to a Chapter 11, but is less complicated. Chapter 13 bankruptcies have been simplified to make the confirmation of a plan of reorganization easier to accomplish. Unfortunately, with simplicity comes loss of options, so it is often good to discuss both Chapter 11 and Chapter 13 bankruptcy with an attorney.
Chapter 13 is a great way to restructure your debts. While it has its limitations, it does allow debtors the ability to cure and reinstate secured debts such as mortgages, notes, deeds of trusts, and car loans. This can allow a debtor to save a home or car that is about to be lost through a creditor action such as foreclosure or repossession.
Chapter 13 may also allow you to lien strip certain debts by stripping the unsecured portion. Lien stripping can be sometimes be done by splitting the claim into two parts, secured and unsecured, and then paying the secured portion in full over time. The unsecured portion is paid much less, if anything.
The typical goal of a Chapter 13 bankruptcy is to reorganize certain debts over a period of time and to discharge as many of the other debts as legally possible. There are certain exceptions to the discharge process. A debt that is excepted from discharge is one that will still be owed after the bankruptcy. Some examples of exceptions to discharge in all bankruptcies included child support, spousal support, and student loans. A Chapter 13 allows a “super discharge.” This does not mean that you can discharge the items above, but rather that the list of items that can be discharged is larger than in a Chapter 7 bankruptcy. As of 2014, types of debts that can be discharged in a Chapter 13 but not a Chapter 7 include marital property equalization debts from a divorce or settlement agreement (this does not include support debts); debts incurred to pay a nondischargeable tax debt; court fees; homeowners’ association fees incurred after the bankruptcy filing date, and debts that couldn’t be discharged in a previous bankruptcy.
Generally, you do not receive a Hardship Discharge in a Chapter 13 Bankruptcy until you have made all of your plan payments. However, when debtors incur certain hardships during the pendency of a Chapter 13, they may be eligible for a hardship discharge even if they did not complete all of their plan payments. The situations giving rise to a hardship discharge are relatively narrow, and the hardship discharge is not as broad as a full discharge, but it can still be a useful option for many debtors. If you have problems during the pendency of your Chapter 13 bankruptcy, you should discuss the options of a hardship discharge with an attorney.
Unlike a Chapter 7 or a Chapter 11, a debtor cannot be the subject of an involuntary Chapter 13 bankruptcy. The decision to file or participate in a Chapter 13 bankruptcy is purely voluntary. However, if a debtor has too much income and does not qualify for a Chapter 7 bankruptcy, the court can force a debtor to make an election to have their Chapter 7 case dismissed or converted to a Chapter 13.
A Trustee serves a few different purposes in a Chapter 13 bankruptcy. First and foremost, they act as a watch dog for the creditors and the court. They are charged with examining the debtors’ schedules and related documents, as well as examining the debtor as to the truthfulness and completeness of those documents.
A plan of reorganization is filed in almost every Chapter 13 bankruptcy. The Chapter 13 trustee also acts as the first reviewer of the feasibility of a plan of reorganization, and whether it meets the statutory requirements. If not, the trustee will typically file an objection to the plan with the court.
The trustee also is the administrator of the Chapter 13 plan. The debtor makes payments to the trustee on a monthly basis, and then the trustee distributes those payments in accordance with the terms of the plan. The trustee also performs accounting related functions including identifying claims made, claims paid, and things of that nature.
If the debtor stops making plan payments, the trustee will usually also file a motion to dismiss the case.
In a Chapter 13, the debtor remains in possession of the assets absent a court order. A court order removing the debtor from possession of the assets is very unusual. Although the debtor retains the assets, and can continue to operate his/her business in a Chapter 13, the ability to do so comes with certain responsibilities and limitations as set forth in the law and in the confirmed plan of reorganization.
Just like a Chapter 7 or Chapter 11 bankruptcy, the automatic stay applies to creditors’ actions against the debtor. While the automatic stay is broad and sweeping, it is not absolute. There are exceptions to the automatic stay such as criminal proceedings or upon certain repeat filing situations. The stay can also be “lifted” or “terminated” upon the happening of certain events. While the automatic stay is very useful, it is not something that should be abused, and is something you should discuss with a Chapter 13 bankruptcy attorney.
Generally speaking, all of the assets of a debtor become the property of “the bankruptcy” estate when a bankruptcy is filed. While they are technically property of the estate, the debtor traditionally remains in possession of that property during the pendency of the Chapter 13 case. Most Chapter 13 plans of reorganization provide that the property of the estate is revested in the debtor.
One difference between a Chapter 7 and a Chapter 13, however, is with regard to property acquired after the bankruptcy petition is filed. In a Chapter 7, post-petition earnings and most after acquired properties do not belong to the bankruptcy estate. In a Chapter 13 bankruptcy, post-petition earnings and after acquired properties do become property of the estate.
As with most answers in the law, there are exceptions and variances, but generally speaking claims against a Chapter 13 debtor must be filed within 90 days after the date initially set by the court for the first Meeting of Creditors. The Meeting of Creditors is usually 30-45 days after the petition is filed, so it is important that the date is accurately calculated or claims could be waived.
In a Chapter 13 bankruptcy, the right to file a plan of reorganization is exclusively vested with the debtor. Unlike a Chapter 11 bankruptcy, a creditor cannot file a plan of reorganization in a Chapter 13 bankruptcy.
Unlike a Chapter 11 bankruptcy where creditor consent can be a critical issue and challenge, creditors do not have to consent to a Chapter 13 plan. As long as the plan meets the statutory requirements, it will be confirmed without a vote of the creditors. A creditor in a Chapter 13 bankruptcy does, however, have the right to object to a plan. An objection must be a legally valid challenge to the plan to result in the plan not being confirmed. Typically, plans of reorganization are objected to on the grounds that the plan payments are insufficient to fund the plan; the debtor’s stepped -up payment schedule is unreasonable or impracticable, or the plan fails to provide for a claim at all.
One of the most difficult documents to draft and get approved by the court in a Chapter 11 is a disclosure statement. The disclosure statement is intended to be much like a business prospectus providing a creditor with sufficient information to make an informed decision as to whether to vote for the plan or not. Since there is no vote in a Chapter 13 bankruptcy, a disclosure statement is not required. This is a large time and money saver for debtors and one of the principal reasons why a Chapter 13 is usually preferred to a Chapter 11 when both are available options.
In a Chapter 13, a plan of reorganization must be filed within 14 days after the filing of the bankruptcy petition. If you do not file a plan of reorganization within the 14 days, your case may be dismissed. The plan that you initially file should be the one that you want to have confirmed, however, you can amend the plan or file a different one, if necessary. Filing a new or amended plan is an option as long as it is done timely and in good faith.
In the Eastern District of California, a plan of reorganization must be submitted using a mandatory form. In addition to using the mandatory form, a Chapter 13 plan generally, and with a few exceptions, must: submit necessary future income to the trustee to fund the plan; pay priority claims in full through the plan; provide for equal treatment of claims in the same class; and specify the plan duration which cannot exceed 5 years;
There are many different options in a Chapter 13 plan, even using the mandatory forms. Of course, for each item there are certain requirements that must be met or exceptions that exist. Things to discuss with at Chapter 13 bankruptcy attorney include: modifying secured and unsecured creditor rights; lien stripping; curing or waiving defaults on short-term debts; curing executory contracts or unexpired leases; curing short-term home mortgages; paying certain post-petition claims; assuming, rejecting or assigning executory contracts and unexpired leases; selling estate assets to pay claims; vesting the property in the debtor or another entity; and paying attorneys fees and administrative expenses.
Under the Bankruptcy Code, a Chapter 13 debtor has the right to sell assets. However, it generally must be done with a court order. The procedure for obtaining a court order varies amongst the Bankruptcy Districts. If the debtor happens to be engaged in a business, then the debtor is generally permitted to sell the assets of the business “in the normal course of operations.” However, what is considered within the normal course of operations is an issue of much contention, and before selling any assets you should seek the advice of a bankruptcy attorney, and when in doubt seek a court order.
When a creditor, or even a debtor on behalf of a creditor, files a proof of claim, any other debtor or creditor may file an objection to the claim. The trustee also has standing to object to the claim. When an objection is properly filed, it is coupled with a notice of a hearing and other relevant documents. The court will then rule on the claim. The need to file an objection to a claim varies dramatically based on the type of Chapter 13 plan proposed. If unsecured creditors are not scheduled to receive any distribution, then objecting to unsecured claims is usually a waste of time. Conversely, if unsecured creditors are scheduled to receive distributions, and there are debts such as student loans that will not be paid in full, then objecting to the claims can be very important to maximize the amount each creditor receives.
Unlike a Chapter 7 and a Chapter 11 Bankruptcy, a debtor in a Chapter 13 bankruptcy generally has the right to unilaterally dismiss or convert their Chapter 13 case. One major exception is if the case was previously a Chapter 7. When the case was previously a Chapter 7, court approval is usually required before dismissal.
The circumstances surrounding each bankruptcy dictate which type of documents need to be filed or provided to the trustee in a bankruptcy. However, the more common documents that must be prepared, filed, and/or served on the trustee are: petition; summary of schedules; statement of financial affairs; statement of current monthly income; certificate of credit counseling; certificate of debtor education; pay stubs; pre-petition tax return; attorney compensation disclosure; driver’s license or other government identification; proof of social security number; declaration regarding domestic support obligations, when applicable; plan of reorganization; and other documents as may be required by the court or local rules.
Besides filing the necessary schedules, statement of financial affairs, and plan of reorganization with the court, debtors are generally required to provide to the Chapter 13 trustee before the Meeting of Creditors their most recent tax return, 60 days worth of pay stubs. Many trustees request a copy of the debtor’s bank statements reflecting the balance on the date the bankruptcy was filed, as well as statements reflecting the previous six months. If you do not have a copy of your previously filed tax return, a tax transcript will suffice in most situations.
It is very rare that a creditor actually appears at the Meeting of Creditors. However, the debtors and the trustee are required to appear. This meeting is really more of an interview of the debtor by the trustee, and once the debtor’s case is called, it rarely lasts more than four or five minutes in a Chapter 13. Typically, the debtors are sworn in and provide proof of identity and their social security number. The trustee then interviews the debtors briefly about their schedules and the plan, confirming their accuracy and feasibility.
The trustee will often summarize the plan to make sure that the debtors understand what is expected of them. Usually, the trustee has also performed calculations prior to the meeting, and if there are concerns about the funding of the plan, those are raised at this meeting. The trustee will often use this opportunity to discuss with the debtors the specific dates payments are due, where to send the payments, and what to put on the payment to make sure it is properly credited to the correct account.
In a Chapter 13 bankruptcy, the Meeting of Creditors usually happens no less than 21 days after the case was filed, and no more than 50 days after the case was filed. The meeting is typically during business hours, and for cases venued in the Sacramento division of the United States Bankruptcy Court, the meeting is held on the 7th floor. There are two main meeting rooms on the 7th floor, and a few back-up rooms that are used. Outside the rooms, a calendar is typically posed that identifies the order that the cases will be called during that session. Parking is available across the street in the train station parking lot, but that parking is particularly expensive. There is some limited metered parking on the street available. The best place for most to park is underneath the K Street mall. It is only a short walk, and parking can be validated with a small coffee purchase in the mall.
While the meeting is under oath and perjury can be prosecuted, it is not a “court proceeding.” Consequently, the rules of evidence do not apply during these proceedings. While the rules of evidence do not apply, privileges still apply. Consequently, communications with your attorney are privileged and should not be divulged. Likewise, if you have concerns about self-incrimination (e.g. undeclared income, willful non-payment of taxes or child support), you should discuss these matters with a bankruptcy attorney prior to the meeting as, occasionally, those privileges against testifying should be invoked.
Whether priority claims are entitled to interest depends on several factors. Generally speaking, unless the Code specifies that the claims are to be paid at least their minimum present value, priority claims do not get paid interest. Two other significant exceptions are in certain solvency cases when the best interest of creditors test cannot be met and for over secured administrative claims.
The attorney’s fees in a Chapter 13 case are fully negotiable between the debtors and the attorneys. However, the court typically sets certain maximum fees that it will permit the attorney to charge absent special circumstances. In Sacramento, there is a local rule that provides a maximum of $4,000 in a consumer case, and $6,000 in a business case, absent court approval. These amounts were as of 2014, and subject to revision.
The length of the plan in a Chapter 13 Bankruptcy can vary dramatically based on the income of the debtors and the purpose of bankruptcy. Generally, most plans are between three and five years. If the debtor’s income is below the state median, and the debtor desires, the plan can often be drafted to be three years or less. If the debtor’s income is above the state median, or the plan is structured to allow a debtor to get caught up on a secured debt such as a home, the plan is usually drafted for five years. How long your plan of reorganization should be is a topic to be discussed with a Chapter 13 bankruptcy attorney.
What secured claims must be paid through the plan, and what secured claims may be paid outside the plan?
There are many intricate rules about what claims are required to be paid in the plan, and what claims may be paid outside the plan. However, there are a couple of general rules applicable to Chapter 13 bankruptcy cases filed in the Eastern District of California. If a secured claim is not to be paid in full during the life of the bankruptcy, and the claim is current when the case was filed, then the debtor may typically pay that claim directly and outside of the plan. If a secured claim was either delinquent when the case was filed, of if it is to be paid in full within the plan period, it must generally be paid inside the plan.
The general purpose for requiring delinquent claims to be paid in the plan is to ensure that the debtor is actually paying them. It is a way for the court and the trustee to monitor the payments, and make sure the debtor is not abusing the automatic stay and unnessarrily frustrating the creditor’s rights. The downside of paying the claims inside the plan is that it results in a fee to the Chapter 13 trustee of as much as 10%. Consequently, the amount needed to fund can often be reduced if the claims are paid outside of the plan when possible.
If a lien holder is completely unsecured (e.g. the value of senior liens exceeds the property value), it is often possible to strip off the lien completely. In these situations, the lien holder is treated as a general unsecured creditor, and receives little to nothing.
On the other hand, if the lien holder is partially secured, it may be possible to pay the secured portion and strip down the unsecured portion. This is referred to as stripping down a lien. Unfortunately, it is practically difficult because when you do this you usually must paythe secured portion in full during the bankruptcy. Furthermore, there are several statutory prohibitions on stripping down liens on the debtor’s principal residence, purchase money debt on a vehicle acquired for personal use within the previous 910 days, or purchase money secured debt on other personal property of value incurred within the prior year.
Please contact our law firm today to discuss your Chapter 13 bankruptcy case with one of our Sacramento Bankruptcy Attorneys.