Is chapter 13 bankruptcy in Minnesota something you should start considering?
You think to yourself, there has to be a better way. You simply cannot continue to juggle servicing these payments on this pile of debt. You think about traditional debt consolidation but you have heard horror stories. The trouble with traditional debt consolidation programs is creditors eat first, you eat last. If you do not pay creditors what they demand, the creditor then pursues their legal remedies (i.e. sues you and gets a judgment against you) and proceeds to garnish your wages. You say, well wait a minute, I am in a debt consolidation plan with my 22 creditors and all but 2 of the creditors have acquiesced to the plan.
Since 2 of the 22 creditors refuse to play ball, you have the spectacle of 2 creditors getting paid a lot and 20 creditors getting paid squat. Trouble is you cannot afford to be garnished AND pay a debt consolidation payment too. Besides, if any debt is forgiven in debt consolidation, guess who gets to pay taxes on the debt forgiven? You do. Now, paying taxes on forgiven debt is better than paying the underlying debt, but you still have to pay the taxes. Finally, debt consolidation looks terrible on your credit. Why? Because you are advertising to the world, you are in financial distress.
I like the description of a Chapter 13 Bankruptcy as a government sponsored debt consolidation plan. The laws making Chapter 13 Bankruptcy legal were enacted by Congress and it is a wonderful tool used by hundreds of thousands of Americans to consolidate their debts. But unlike traditional debt consolidation, Chapter 13 Bankruptcy has some unique advantages to it that are appealing to most American looking to consolidate their debt.
The Bankruptcy Code prescribes the duration of a Chapter 13 Bankruptcy. The minimum plan length is 36 months and the maximum plan length is 60 months. During Covid, Congress extended the maximum plan length to 72 months for those who qualify. Apart from Covid, the minimum plan length is 36 months and the maximum is 60 months.
For those debtors whose income exceeds their state’s median income, for their family size, they are required to do a 60-month plan. For those debtors whose income is below their state’s median income for their family size, they are allowed to do a 36-month plan. Now, you do not have to be in a 60-month plan. For example, if your debt size is $20,000.00, and you are over your state’s median income, and your plan is to pay all your creditors in full, and you are able to do so over 36 months, you are not required to stay in the plan longer than necessary to pay all timely filed proof of claims submitted by your creditors.
One of the questions, about duration, we get a lot is, can I pre-pay my payments and finish early? The short answer is no, you cannot. For example, suppose your Chapter 13 plan is a 60-month duration plan and your payment is $100.00 per month. Could you just file the bankruptcy case, write a check out for $100.00 x 60 = $6,000.00 and be finished with your bankruptcy? The answer is no. The idea is your creditors should benefit from any financial windfalls that befall you during the 60-month duration. Makes sense right? If a debtor starts to prepay their payments, it begs another question; shouldn’t your plan payments be higher since you obviously have an ability to pay more than your plan states?
In the vast majority of Chapter 13 cases, the plan payment is based on what debtor can afford to pay to the trustee, who in turn, takes the payment and disburses it to creditors. How does this work? Well, it all starts with a budgetary analysis. What is debtor’s monthly net income and what are debtor’s reasonable and necessary monthly expenses? In theory, whatever debtor and debtor’s attorney say is debtor’s disposable monthly income that becomes debtor’s proposed monthly Chapter 13 payment. Now, creditors and trustee have the right to object to expenses or the income analysis if they believe the math is incorrect.
In most instances, creditors leave the math up to the Chapter 13 Trustee to police and manage. If one of debtor’s expenses is not reasonable and necessary, trustee often confers the concern to debtor’s counsel. If a resolution cannot be struck, trustee may file an objection to the plan. It is rare that these budgetary items cannot be worked out by trustee and debtor’s counsel.
Sometimes, the debtor’s proposed plan is the one accepted by trustee and debtor’s creditors. Sometimes, the plan needs to be modified to reflect changes prompted by trustee or issues that may have arisen post filing that were not known pre-filing by debtor. For example, if debtor filed a Chapter 13 Bankruptcy on July 5, 2020 and as of July 5, 2020, debtor’s mortgage payment had not yet been made for July; creditor/mortgage company may file an objection prompting debtor’s counsel to modify the plan to add the July mortgage payment to the plan.
In the Bankruptcy Code, all debtors are required to use “best efforts” to make payments back to creditors. For example, if you have $600.00 left over each month, after you pay reasonable and necessary expenses, paying only $300.00 into the plan would not be using your “best efforts”. Your payment would be required to be $600.00.
There is also another test called the “best interest” test that must be met by debtors as well. In English, whatever your creditors would have received in a Chapter 7 Bankruptcy is what creditors must receive in a Chapter 13 Bankruptcy. For example, suppose a debtor in a Chapter 7 Bankruptcy has $10,000.00 in non-exempt assets. In addition, suppose further that creditors receive $10,000.00 in disbursements in a Chapter 7 Bankruptcy, $10,000.00 becomes the hurdle debtor must jump in order to do a Chapter 13 Bankruptcy. Stated in another way, debtor must propose a plan where creditors receive at least $10,000.00 to meet the “best interest” test.
There are other considerations as well. Suppose debtor has $35,000.00 in IRS tax liability. With few exceptions, the Bankruptcy Code requires all priority debts are paid in full on a Chapter 13 plan. If your plan proposes to pay $20,000.00 toward the IRS liability you will have what we refer to as a “plan buster”. A “plan buster” is a plan that fails to pay priority debts in full. At the end of the plan, your case will be closed without the benefit of a discharge. Without a discharge, you remain personally liable for all your debts just as if you never filed bankruptcy to begin with.
More complications can occur if you are trying to cure mortgage/rent/vehicle arrears on the plan. Debtors do not always know exactly how much they owe in arrears. When you estimate an amount but you are wrong, the plan payment may need to be adjusted to pay the arrears and the other necessary amounts on the plan.
The Bankruptcy Code restricts when you can cram down a loan on a vehicle. Basically, any vehicle purchased with money that is now a loan against the vehicle cannot be crammed down if the loan was taken out less than 2.5 years prior to filing the Chapter 13 Bankruptcy.
For example, if you purchased a car 3 years before filing the Chapter 13 Bankruptcy and if the loan balance today is $15,000.00 but the vehicle is worth $11,000.00 we would be able to “cram down” the loan to pay the creditor $11,000.00 on the plan and the balance of the loan is treated as an unsecured debt. Now, suppose the loan was taken out one year prior to filing the bankruptcy and the loan balance is $15,000.00 and the vehicle is worth $11,000.00. Now, creditor must receive payment on the plan of $15,000.00 not $11,000.00.
As part of the administration of a Chapter 13 Bankruptcy case, the Bankruptcy Code, Section 341, requires debtor(s) to submit to an examination. These examinations are typically done by a lawyer for the Chapter 13 trustee. The examination’s purpose is to make sure that the information contained on the bankruptcy schedules is true, complete, and correct.
Typically, these meetings last around 15-20 minutes. It is the power of the government verifying that you are telling the truth because you are getting a lot of relief. Debtor(s) appear with their attorney and the trustee’s lawyer. Creditors are rarely present at these meetings, although they have the right to be. Following most meetings, the trustee’s lawyer will send you a communication indicating that the plan is either fine to confirm as is or trustee’s lawyer will have suggested modifications to the plan. While I say suggested modifications to the plan, some of these suggestions are important enough to the trustee, that trustee will file an objection to your plan confirmation if they are not made.
The vast majority of plans get confirmed either by the first plan being filed or a subsequent modified plan being filed pursuant to an agreement between debtor and trustee or debtor and trustee/creditor.
After the 341 meeting or meeting of creditors, there is a hearing scheduled with the court called a confirmation hearing. If debtor’s proposed plan is not objected to by creditors or the trustee, attendance at the confirmation is not required and the proposed plan becomes a confirmed plan. If there is an objection to the plan, and an agreement cannot be reached to resolve the objection, the objection to the plan is decided by the bankruptcy court by either sustaining the objection or overruling the objection and allowing the plan to become confirmed. Contested confirmation hearing are the exception not the rule.
Even if attendance is required at the confirmation hearing, typically it is debtor’s attorney who attends the confirmation hearing on debtor’s behalf. Typically, debtors are told not to plan on attending the confirmation hearing unless specifically told to by their attorney.
The actual effect of confirmation can be found in Section 1327 of the Bankruptcy Code. However, the confirmation of the plan is a court order that binds debtor and creditors to the contents of the plan. Should debtor not comply with the plan provisions, creditors or more likely trustee, will file a motion to dismiss the case for failing to comply with the plan.
Section 1329 of the Bankruptcy Code allows for modification of a plan subsequent to confirmation of the plan. We are human and life is messy. It is not a question of if there will be change in your life the question is when, what, and how often there will be changes in your life.
Job changes, income changes, relationship changes, medical problems can and do affect most of us in our lives. The typical plan length is 3-5 years. It is not unusual for a debtor to ask their attorney to modify their plan during the duration of the plan.
Once the plan is finished, debtor receives a discharge. The discharge is legal jargon for nullifying your liability on specific debt. For example, let us say you filed the Chapter 13 Bankruptcy with 145k in credit card debt. Let us further assume that in the plan, 85k of this debt is paid. The 60k in unpaid debt is discharged, tax free, forever. That is a good deal. Other example can be even more pronounced than this. You might have a debtor who has 145k in unsecured debt who only pays 15k during the life of the plan. The balance, or 130k in unsecured debt, gets wiped out, tax free, forever.
I often describe a Chapter 13 Bankruptcy like a government sponsored debt consolidation plan with a couple of very important twists. First, your creditors are barred from collecting from you while you are in the plan. Second, most debt gets paid interest free. Third, whatever debt that does not get paid gets wiped out (discharged) tax free, forever!
Chapter 13 Bankruptcy is a wonderful tool that can be used to protect your family from your creditors. We have the ability to cure mortgage arrears, cure vehicle arrears, pay taxes, pay back child support, and many other debts in a Chapter 13 Bankruptcy.
Contact the attorneys at LifeBackLaw or visit us at www.LifeBackLaw.com to find out if Chapter 13 bankruptcy filing is right for you.