Understanding Chapter 13 Bankruptcy
What Is Chapter 13 Bankruptcy?
Our federal bankruptcy laws are contained in the United States Bankruptcy Code. Chapter 7 is titled “Liquidation,” Chapter 11 is “Reorganization,” and Chapter 13 is “Individual Debt Adjustment.” We often read or hear in the news about big companies filing for Chapter 11 bankruptcy without going out of business. Chapter 13 is similar in some ways to a Chapter 11 Plan of Reorganization, but there are many differences. While Chapter 11 Reorganization is normally used by businesses, only an individual may file for Chapter 13 relief. Chapter 13 is a much more streamlined process of “reorganizing,” or “adjusting” debts,” and as a result it is much less costly than a Chapter 11 Reorganization.
A Chapter 13 plan can be used to cure a default on the debtor’s mortgage over three to five years. Lenders can be unreasonable and difficult to work with if you have fallen behind on payments. They often refuse to accept partial payments, and instead of allowing borrowers to gradually bring their payments current, they often demand immediate payment of the entire past due amount. The good news is that the law has a remedy for this, Chapter 13. Lenders must immediately stop foreclosure efforts, halting any steps toward selling your home. A Chapter 13 plan does not risk a sale of the debtor’s assets, although a debtor may voluntarily choose to sell assets, with prior Court approval, to help fund the plan. Contact Seelinger Law; you might be interested in knowing that you have options which may enable you to avoid losing your home.
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How Filing for Chapter 13 Relief Can Truly Help You
If you are named as a defendant in a mortgage foreclosure lawsuit, you might be interested in knowing that you have options which may enable you to avoid losing your home.
You May Benefit from Chapter 13 Bankruptcy if
- You are behind on your mortgage, you will bring the payments current over time, no longer facing foreclosure.
- You owe back taxes, those will be paid off over time, preventing tax sales or IRS collection.
- You are drowning in debt each month, living paycheck to paycheck, with no emergency fund in case something happens to the car or house (i.e. robbing Peter to pay Paul), then you will have some padding to pay for those new snow tires or new water heater without having to sacrifice necessities.
- You are about to have your car repossessed, you will stop repossession and get caught up on your payments, probably paying off your car loan in full in the Chapter 13 plan.
- Student loan companies are garnishing so much from your paycheck that you cannot afford to live a normal life, you will stop the garnishment and be allowed to pay only the amount that you can afford to pay back each month.
- You filed a Chapter 7 bankruptcy less than 8 years ago, but new problems arose since then preventing you from paying what you owe each month, you can file Chapter 13 and stop lawsuits, foreclosures, tax sales, IRS collection, car repossession, student loan garnishments and more, because you don’t have to wait 8 years before filing a Chapter 13. You are not permitted to obtain a second Chapter 7 discharge until 8 full years have elapsed from the time you filed a previous Chapter 7 case.
If you are facing mortgage foreclosure, tax liens or tax collection, student loan garnishments, or have equity in your home or other assets which exceeds what you are allowed to protect as “exempt,” Chapter 13 can help you. At Seelinger Law, we can help you file for Chapter 13 Bankruptcy. Your free consultation includes an in-person meeting with a licensed attorney, not just a telephone interview.
How Long Does a Chapter 13 Take to File?
A Chapter 13 can take from three to five years depending on your income. Although Chapter 13 does take a period of years, most clients who are catching up on mortgage payments appreciate having five years, allowing them the time that they need.
The Chapter 13 Bankruptcy Trustee
When you file a Chapter 13 case, a Chapter 13 Trustee is appointed to your case. The trustee does not represent the creditors but is responsible for overseeing the bankruptcy estate. The trustee does not work for the Bankruptcy Court but instead is an independent attorney who has been appointed by the Department of Justice to serve as trustee in cases filed under Chapter 13 of the Bankruptcy Code. A Trustee is simply a lawyer whose job is to review your case for any errors or omissions and to evaluate whether you have listed all of your property on your paperwork. The Trustee’s job is to make sure that the creditors are being treated fairly since they will be the ones that are losing money in the bankruptcy process. In the Chapter 13 meeting, the trustee reviews your income and expenses to determine whether the payment plan you have proposed is appropriate based on your finances
Unlike a Chapter 7 Trustee, the Chapter 13 Trustee does not take possession of your property, even if its value is too high to be exempted. Instead, the Chapter 13 Trustee administers your payment plan, receiving funds that you dedicate to the plan, and disbursing it to the creditors provided for in your plan. Like a Chapter 7 Trustee, the Chapter 13 Trustee is required to ensure that you are the person on the petition, review your case for accuracy, and ask about your recent financial affairs.
Enhance Your Life After Filing for Chapter 13 Bankruptcy
Chapter 13 is not a punishment, and it is certainly not a death sentence. My clients often tell me that they are living much better in their Chapter 13 than they were before they entered bankruptcy, because they pay what they can afford, after providing for their living expenses. Chapter 13 is a voluntary procedure and Seelinger Law offers a free consultation to go over all of your options. Chapter 13 is often the best way for you to take care of your financial problems.
You Can Still Sue if You Are Wronged
You must obtain prior court approval before hiring an attorney, an accountant, or other professionals to represent you in other matters during your Chapter 13 case. If you suffer an injury and want to take legal action against someone who was responsible for your injury, you will be permitted to do so, but you must ask the court for permission to hire any attorney who will be representing you. It is also important that you tell that attorney or other professional that you are currently in a Chapter 13 bankruptcy case. Permission is obtained by filing a motion explaining why you need an attorney, and the proposed compensation which will be sought by the attorney. When the legal matter involves a claim for money damages, it is customary for the bankruptcy court to limit the approval of compensation to a contingent percentage fee.
Employment of professionals to be paid on an hourly basis may be approved if the services to be performed are likely to benefit the bankruptcy estate, or if contingent fees are not consistent with the type of services for which employment of a professional is sought, such as family law matters.
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Frequently Asked Questions that Come with Chapter 13 Bankruptcy
How will I know when to make payments for my Chapter 13?
Your Chapter 13 plan says how much you will pay to the trustee each month, and the length of time you will make those monthly payments. The plan also tells the court and the trustee if you plan to supplement your monthly plan payments with a lump sum of money from voluntarily selling some property, from an expected inheritance, or any other source you had available when your plan was being formulated. The total of all of those payments, including any lump sums, is called the “plan base.” When the amount of your plan base has been fully paid, your plan is “paid in full.”
Once I Am in a Chapter 13, Are There Things That I Cannot Do?
Keep in mind that your primary obligation as a Chapter 13 debtor is to make your plan payments. If you are employed, your plan payments can be automatically deducted from your wages and sent to the trustee, so you don’t have to worry about buying money orders and mailing them every month. Your plan payment will be large enough to allow the trustee to pay your creditors what is required under your plan, but you will be allowed to keep enough of your income to continue buying groceries, paying your utility bills, putting gas in your car, etc., as well as leaving you enough for a modest amount of recreation.
What is a Means Test?
The means test is meant to keep high-income earners from having access to the benefits of Chapter 7 bankruptcy. It is a numeric test that your attorney will do for you based on your income and ability to pay off some of your unsecured debt. If your income is lower than your state’s median income, then you have already passed the test and you are eligible to file for Chapter 7. If your household income is higher than the average income in Pennsylvania for your household size, you may still pass the means test if your expenses are high.
Your attorney will be adept at factoring in the types of expenses which are used in the means test to determine whether you have any disposable income to pay your creditors. If you make $100K or are considered a high-income filer with no children or medical issues, you can still take advantage of your bankruptcy rights under a Chapter 13 repayment plan. Remember that you will not be required to pay back the majority of your unsecured debt under Chapter 13.
May I Continue to be Self-Employed or Become Self-Employed?
You will be required to provide the trustee with a report each month, showing your profits or losses, so that the trustee can monitor the profitability of your business. The trustee may question the feasibility of a Chapter 13 plan where the primary source of funding is projected profits from a business, if the business is not profitable. A self-employed Chapter 13 debtor is permitted to do all of the normal things involved in running the business, such as hiring employees, paying business expenses, and being paid by customers. The trustee may ask from time to time for proof that all required tax returns are being filed, and that taxes which come due are being paid, because those matters are essential to the continuing success of the Chapter 13 plan. Failure of a self-employed debtor to file tax returns and to pay post petition taxes as they come due can result in the case being dismissed.
How do my Creditors get Paid?
Your creditors and your attorney get paid in a simple hierarchy, with the funds you paid into the plan flowing first to certain creditors until they are current, then to the next category of creditors until they are paid, and so on. First, if you did not pay the filing fee for your Chapter 13 case when it was filed, the trustee will pay that fee before paying anyone else. After that, the trustee will pay the current monthly payments due on your mortgage, your car, your attorney fees, and so on and so forth. The trustee continues disbursing money in that sequence until you have paid the full amount required by your Chapter 13 plan, thus ending your obligation to make plan payments.
Did You Know that Both the Court and the Trustee Want Your Chapter 13 Plan to Work?
Many of my clients have gone through a divorce and are used to the Court process being adversarial and contentious, involving unpleasant court hearings. Here is where the bankruptcy system is fundamentally different. The court and the trustee want your plan to work, so that at the end of the process, you will enjoy the benefits of a successfully completed plan.
Congress created the Bankruptcy Code with the understanding that unforeseen things happen. Bankruptcy helps and protects good, truthful people from creditors when they need it. The court understands this goal, and so does the Chapter 13 Trustee.
Am I Going to Get Bills from my Bankruptcy Lawyer During the Five Year Chapter 13 Plan Term?
Your bankruptcy attorney is required to tell the court how much you agreed to pay for legal fees for representing you in the Chapter 13 case, and aside from the portion you paid before filing, as a retainer, those fees will be paid by the trustee from your plan payments. If things happen in your case which require your attorney to do more than was anticipated at the beginning, your attorney will ask the court to approve any additional fees, to be paid by the trustee from your plan payments, as opposed to sending you a bill.
Can I end my plan early if my rich aunt offers to give me enough money to pay the remainder of my plan base to help me out?
If your Applicable Commitment Period (ACP) is three years, and three years or more have elapsed since your plan term began, the answer is usually yes. If your unsecured creditors are being paid in full, regardless of your ACP, the answer is usually yes. If you are not paying your unsecured creditors in full, then your plan may NOT end before the expiration of your ACP (three years or five years), even if you are able to pay the remainder of your plan base early.
I filed my Chapter 13 Case jointly with my spouse. Her car lease wasn’t listed in the same places in the paperwork as my car loan. Why is that?
A car lease is considered an Executory Contract, and those are listed in Schedule G of your bankruptcy petition. You car loan is a secured claim, listed in Schedule D. In the plan, secured claims and car leases are listed in different places. Executory contracts may either be assumed or rejected in a Chapter 13 plan.
If the lease was rejected, your spouse would have been required to return the car, but any remaining balance owing under the lease would have been treated as a non-priority unsecured claim. Even if your plan payments would get behind, preventing the lease payments from being fully paid by the end of the lease term, the car would have to be returned at that time, and the balance of the lease payments would still be payable a priority claim. If your spouse likes the car enough to want to buy it at the end of the lease term, by paying the amount stated in the lease agreement for the buyout option, your attorney will file a motion seeking court permission to do so.
Will I be able to Incur New Debts During the Plan Term if I Get Prior Court Permission?
What if you find it necessary to replace your car? Maybe you can find a reliable used car, priced low enough to buy for cash, without taking out a loan. If not, you may need to finance the purchase. The sales representative at a dealership may tell you that you simply need a letter from the trustee giving you permission to buy a car. However, in the Western District of Pennsylvania, you are required to ask the court for permission before taking out any new loans, including a loan to buy a car.
Your attorney will file a motion with the court, spelling out why you need to buy a car, how much you propose to pay for it, and the amount of the monthly payments the loan will require. If you can show that the car you wish to buy is modestly priced, and that the payments will fit your budget, and if you are otherwise current with your Chapter 13 plan payments, the court will likely approve it. You would then receive a court order authorizing you to incur the loan.
Can I Sell My Home or Car if I’m in a Chapter 13 Bankruptcy?
You can sell your car or even your home as long as you contact your Chapter 13 attorney who will get permission from the court. If you want to sell something substantial, such as a car or your house, you will need court permission before doing so, because despite the fact that you remain in possession of your property during the Chapter 13 case, your assets are considered property of the bankruptcy estate until the plan has been completed and your case is closed.
If you wish to hire a real estate agent to sell property, you must ask the court to formally approve the retention of a broker and the listing agreement itself and you must make sure that your broker knows that you are currently in a Chapter 13 case. If you sell your home during Chapter 13 bankruptcy, you may be able to keep the “exempt” portion of the net sale proceeds remaining after payoff of any mortgages, other liens and closing costs. If the net proceeds are enough to pay all unsecured creditors in full, then you may be able to keep any amount remaining after payment of all unsecured creditors, even if that amount is more than the exemption you were able to claim in the property.
What About the Taxes I Already Owed when I Filed my Chapter 13 Case?
Your Chapter 13 plan addresses the back taxes you owed when the case was filed. If you owed income taxes to the IRS, and if they were incurred within the past three years, those will be paid by the trustee from your plan payments. Tax liens may have been filed against you, and if so, your plan provides payments to clear those liens from your property.
The objective of your Chapter 13 plan is to achieve a fresh start upon the completion of the plan, so that you will no longer have to worry about your property being sold on behalf of your creditors. The only liens which will remain on your home, for example, will be consensual liens which you voluntarily gave to creditors, such as the mortgage you used to buy the property. Unless that mortgage was nearly paid off when your Chapter 13 case was filed, you probably had more than five years left on the payments, and you will continue making those payments after the five years is up, but you will be current on those payments.
Contact Seelinger Law today for your free consultation. We can help, and provide you with guidance, when you need it most
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