Articles Posted in Chapter 13 Bankruptcy

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Congress continues to ponder a change to the bankruptcy code that would allow bankruptcy Judges to treat mortgages the way that car loans (older than 2.5 years) are currently treated in a chapter 13 bankruptcy.

If you have read some other entries on this blog, you understand that in Chapter 13, a plan is proposed that allows you to make a payment toward your unsecured debt that you theoretically can afford on a monthly basis.

The remainder of the debt is then discharged or wiped away. Many chapter 13 filers end up paying a small fraction of the overall unsecured debt as a result.

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Chapter 13 Bankruptcy can be a useful legal tool for those in serious financial trouble. It allows the filer to do a number of things that he or she can’t do in a chapter 7 bankruptcy. A number of it’s potential benefits are listed elsewhere in the blog.

Despite all the good things you can find about chapter 13 bankruptcy, it does have it’s shortcomings.

An important one?…it doesn’t “discharge” or wipe away every type of debt.

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A chapter 13 trustee is the person that the United States Trustee (U.S. Department of Justice) appoints in each state/district to do the following:

1. Review the Chapter 13 Filer’s proposed Chapter 13 Plan to ensure that it satisfies the requirements for a chapter 13 plan.

2. Collect payments from the Filer.

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The goal of most bankruptcy cases, be they of the chapter 7 or chapter 13 variety, is reduction in debt. Reduction of debt occurs in a bankruptcy at the end of the successful case and is called a “discharge”.

If a debt is “discharged” legally, the debtor’s obligation to pay is ended.

In a chapter 13 bankruptcy there are two types of bankruptcy discharge.

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The bankruptcy automatic stay or simply the “stay” from here on out, is a Court Order that becomes effective on the date of the bankruptcy filing that protects the bankruptcy filer from most creditor activity.

The following is a brief breakdown of the benefits, exceptions and other interesting bits of information related to it.

Benefits

1. Collection contact must stop – Once the stay is in effect most lawsuits, calls, letters, etc. etc. must stop. Even from the IRS.
2. The stay doesn’t require the debtor to “ask” the Judge for it. It is automatic.
3. The stay remains in place during the length of the chapter 13 plan 4. The stay halts foreclosure activity – allowing the debtor a chance to propose a plan to catch up arrears.
5. The stay stops vehicle repossession and may be able to help get a car back that has already been repo’d.
6. Liens cannot be filed after the stay becomes effective 7. Debts cannot be reported to the credit reporting agency
8. Levy and Garnishment of assets in accounts and paychecks must stop 9. The debt component of a criminal proceeding will be placed on hold 10. Tax liens can’t be filed 11. Tax levy must stop 12. Co-Debtors are protected immediately from collection activity and may be permanently protected depending on how the debt is treated in the chapter 13 plan.

How Long the Stay Lasts

The stay will last until the court confirms the chapter 13 plan which replaces the stay as a protective order OR when the case is dismissed.
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The most basic definition of “chapter 13” is that it is that chapter in the Federal Bankruptcy Code that allows a debtor to pay back all or at least a part of his or her debts under the supervision of the Bankruptcy Court.

Of course, as with most legal matters, the question of what it is, can be much more complicated than where it is located in a book.

Let’s start with the statement above then….restated:

When a debtor files a chapter 13 bankruptcy, he or she is proposing a plan to deal with his or her debts and assets in a manner that will allow the debtor to reorganize his or situation for the better. In order to do so, this plan must propose a number of things by law.

Typically the most important three are these:

1. Pay Debt – which debts will be paid during the plan by the debtor;
2. Protect or Surrender Non Exempt Assets – Which assets will be paid for, protected or surrendered and;
3. Discharge Debt – which debts will be wiped away at the end of the plan
These proposals are more fully explained as follows:

1. Pay Debt

a. The plan must propose to pay all “priority” debt as defined by the Bankruptcy Code. This includes debts like child support, spousal maintenance, and newer income tax debt.

b. The plan must propose to pay all arrears on the home the debtor wishes to keep. The “arrears” are the reason the home lender is threatening foreclosure. The debtor is behind.

c. The plan must propose to pay the car loan(s) over the course of the plan, through the plan i.e. directly to the bankruptcy trustee who pays the car lender.

d. The plan must pay some amount as a fee to the Chapter 13 bankruptcy trustee.

e. The plan must pay unsecured creditors the greater of the following to amounts divided over the length of the plan:

– The value of the Debtor’s assets that aren’t protected by State Law or the non exempt assets.
– The amount that the bankruptcy code’s testing provisions determine that the debtor can afford to pay above his or her allowable living expenses, including the normal mortgage payment.

There are other debts, like student loans that are not necessarily priority debt, but that may not be “discharged” at the end of the plan OR paid in full during the plan. Strange, I know.
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Statistics from the U.S. Bankruptcy Court of Arizona show that there was a substantial jump in filings between 07 and 08. Statewide total filings were 10,570 in 2007 and 19,147 in 2008.

It is widely believed that filing numbers will continue to increase at least for the next few years.

While many of these filings are the result of consumer overspending, a number are also the result of failed businesses, lost jobs, tax debts, rental properties that have lost value and unexpected medical expenses.

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For those with serious financial problems, a chapter 13 bankruptcy may be the best solution. Chapter 13 bankruptcy benefits are relatively unknown and are often misunderstood.

Some of these potential benefits are listed here with short explanations. If you live in Arizona, have serious debt problems, and have a steady income, you should speak to a bankruptcy attorney about any of the following that catch your eye.

1. Stop foreclosure and catch up mortgage arrears over time

Foreclosure rates in Arizona are climbing. Chapter 13 bankruptcy stops foreclosure and provides a mechanism for the filer to bring current any arrears over three to five years. The mortgage arrears are paid as part of a monthly payment to the chapter 13 trustee. As long as the chapter 13 plan proposed is viable and approved by the court, and the plan payments and normal house payments are made, nothing happens to the home.

2. “Strip down” mortgage

If the home’s value is less than or equal to what is owed on the first mortgage, chapter 13 can be used to change the second, third etc. mortgage(s) into unsecured debt which don’t necessarily have to be paid in full, thereby reducing the overall house payment. Legislation is being considered right now, that may allow certain filers to “strip” the home down to it’s actual value, cramming down both mortgages. Continue visiting this blog to stay updated on this issue.

3. Protect non exempt property

A Chapter 13 plan makes it possible for the filer to keep property which would be lost in a chapter 7. Much of which average consumers own, is protected by statute and doesn’t need to be protected in a chapter 13. You can review the current Arizona bankruptcy exemptions here.

For those items that aren’t protected, the filer must be able to pay the value of the asset during the plan length period in monthly installments, or the asset could be surrendered for distribution to creditors much like in a chapter 7.

4. Co-Debtor Protection

11 U.S.C. Section 1301, may stop a creditor from going after the co-debtor on a consumer debt, during the plan period.

5. Selling Property

If an asset is vulnerable from creditor attack, a chapter 13 bankruptcy filing will provide the asset owner some breathing room. It stops the creditor and under 11 U.S.C Section 1303 provides the filer the right to sell property under section 363 of the code. This allows for the control of the sale of the asset. This control may result in a better sale price.

6. Stop the Repossession of a Car and “Cram” it down

Filing bankruptcy stops the repossession of a car and may even allow the filer to re obtain a car already repossessed. If the car is one the potential chapter 13 filer wishes to keep and it is worth much less than what is owed, the car may be “crammed” down as well. This means that the filer may be able to pay only the lesser value of the car not the total amount owed through the chapter 13 plan. Any remaining debt would be treated as unsecured debt, partially paid through plan and/or wiped away at the end of the plan IF the car was purchased more than 2.5 years before filing.

As a side note, the filer is also able to “cram down”, non purchase money claims and purchase money claims that are older than 1 year. He or she can also potentially cram down a vehicle purchased for someone other then the filer as well.

7. Unsecured debt is frozen

Most chapter 13 plans propose to pay a percentage of what is owed to unsecured creditors. Not only do many of these plans “cram” down the amount paid in principal to unsecured creditors, they also stop the growth of interest and fees. Sometimes it is worth filing for that reason alone.

Some filers pay the chapter 13 trustee, attorney, secured debts for auto(s) they want to keep, arrears on home, priority child support arrears and priority taxes and discharge all else.

As an example, a recent chapter 13 client in our office was able to successfully propose to pay roughly $5000.00 of $150,000.00 in unsecured debt over the plan term, his car loan, trustee fees and most attorney fees and the remainder will be wiped away at the end of the plan.

I think that the fact that the filer is NOT necessarily paying back all of the unsecured non priority debt is one of the most misunderstood aspects of chapter 13 bankruptcy.

8. Chapter 13 is great for those with sincere desire to repay some of the debt

Many with debt problems cannot avoid bankruptcy despite the fact they don’t want to file. For those with a steady income, and a desire to try and pay back some of what they owe, a chapter 13 bankruptcy is often the answer. It allows the filer to try to pay at least some of the debt. For many, it is seen as the honorable thing to do. A number of our clients through the years, have insisted on using chapter 13, even if they otherwise qualified for a chapter 7 bankruptcy.

9. The Chapter 13 case allows for more control of consumer claims

The filer of the chapter 13 can control all consumer claims in the case. He or she will have standing to file what are called adversary proceedings on all pre petition consumer claims like violations of the fair debt collections practices act that occurred prior to the filing date. He or she can litigate any violations of the automatic stay or discharge violations by the creditors including the misapplication of payments and improper fees by mortgage servicers. Most adversary proceedings provide for fee shifting statutes that require the creditor to pay the filer’s legal fees when they lose.
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Small business is the backbone of our economy. There are literally millions of small businesses in the United States and at any given time, a large percentage of them are failing.

Many Arizonans with small businesses have contacted me when faced with serious business related debt to ask whether a creditor(s) can sue them personally for debts incurred to create and maintain the business.

A small business owner’s personal liability usually is determined by whether the debt has been personally guaranteed. I.E. did the business owner borrow the money in his or her own name, or did they personally promise to pay if the business couldn’t. If so, a lawsuit and collection can follow.

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If you have credit card, medical bill debt, or other unsecured personal loans that are so large you can’t pay them off in a reasonable amount of time, you will likely end up using one of the following options to deal with it.

1. Borrow your way out

In the recent past, most with serious unsecured debts would turn to their home in the form of a home equity line or second mortgage. This was a quick fix that usually provided a lower monthly payment to service the same amount of debt. The obvious problem now? Loans are more difficult to come by.