Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Protecting Your Co signor When You Can’t Pay

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cosigned loans

Cosigning a loan links you and your cosignor together for the life of the debt.

If you get in financial trouble, your troubles are your co signor’s troubles too.

If you can’t pay your debts, the standard bankruptcy discharge will get rid of your debt, but it doesn’t help your co signor.

Even while you are protected in bankruptcy by the automatic stay, keeping collectors at bay, and by the discharge at the end of the case, anyone who cosigned for you is exposed.

But Chapter 13 isn’t the “standard” bankruptcy.  It has a special protection for people whose debts are co signed.

Automatic stay covers co signors

Unique to Chapter 13, Section 1301 of the Bankruptcy Code extends the protection of the automatic stay to those who are jointly liable with the debtor on consumer debts.

To qualify, the debt must be for a personal or household purpose.  

So a cosigned car loan is covered;

A cosigned business lease is not.

The benefits of the loan must have flowed to the person who filed bankruptcy.  If you co signed a loan made to a friend, your friend isn’t protected by your Chapter 13 stay.

Finally, to keep the stay in place, the Chapter 13 plan must provide for payment in full of the debt.

Co signed debts get preference

Chapter 13 plans are normally required to treat all unsecured, non priority debts the same.  Each of the general unsecured claims gets the same percentage payment through the plan.

But cosigned debts are excepted.  

The debtor can treat the cosigned debt differently and better than other debts.

It’s OK to separately classify a co signed debt and pay it in full, while other debts get little or nothing in Chapter 13.

So your plan can say:   pay 100% of the allowed claim on the joint credit card claim of BIG BANK, and far less to everyone else.

After the plan is over

The only sticky point for the co signor, who is protected from collection on the co signed debt during the plan, is that interest that may accrue on the debt over the life of the plan.

At the end of the plan, the principal on the debt and any interest owed when the case was filed, will have been paid.  But the bankruptcy case doesn’t stop the accrual of interest at the contract rate during the plan.

The cosignor will remain liable for that interest despite the bankruptcy.

Power of Chapter 13

The co debtor stay and the ability to separately classify co signed debts is just another reason why, as a bankruptcy attorney, I love Chapter 13.

Consider

The secrets of successful Chapter 13 plans

Interviewing a bankruptcy lawyer

Wipe out tax penalties in Chapter 13

How One Family Settled Huge Debt For Pennies

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chapter 13 success
When he started the Chapter 13 trek, he owed $370,000 in personal loans and credit cards.

As he completes his plan, he will have settled that debt for three cents on the dollar.

No tax is due on the forgiven debt and no listed creditor can legally come back to try to collect the difference.

And that’s why I love Chapter 13 bankruptcy.

Chapter 13 in the real world

I’ve talked here lots about how Chapter 13 is structured, how plan payments are calculated, and all the nifty things Chapter 13 can do for those with bills they can’t pay.  It’s sometimes dry and dense, but you see how it works.

But here’s how it worked for one real family now completing their plan.

They confirmed a Chapter 13 that resolved their debt for 3% of what they owed when they filed.

They got five years to pay that 3%, interest free.

The payments through their plan cured any pre bankruptcy arrears on their house, in full and without interest or penalty.

They were protected from the taxing authorities while they cured delinquent property taxes.

And in our insane real estate market in the Bay Area, their home appreciated about 50%.  Appreciation that is theirs, rather than their creditors’.

Plan payment driven by asset value

Not all unsecured creditors are as lucky as the creditors in this case, who got something on their claims, even if it was only three cents.

Because the couple had some stock and other assets that weren’t exempt, their plan had to guarantee unsecured creditors a share of the $11,500 value of those non exempt assets.

Based on their income and the infamous means test, general unsecured creditors wouldn’t have gotten anything.

So, the take-away is that just what you have to pay in Chapter 13 is decided by the interaction of the kind of debts you have; the income that the law says is available to pay those debts; and the value of your non exempt assets.

But seen from the top of this mountain, Chapter 13 is powerful.  And the view of life after bankruptcy is stunning.

More

Life after bankruptcy

How Chapter 13 plan payments are calculated

Little known alternative to bankruptcy

 

Sloppy Mortgage Servicers Prey On Borrowers

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banks behaving badly

 

Given the way they behave, you’d think mortgage servicers actually flew a pirate flag over their operations.

They cash your check for the mortgage payment, then who knows what they do with it and what they credit it to.

Outside of bankruptcy, screw ups in handling your payments are a breach of the contract between you and the lender.  The servicer is the agent for the lender.

Good luck in getting the real story about what’s going on, and call up a miracle to get it fixed.

But, if you’ve been through Chapter 13, you’ve got a teammate in the fight to get proper credit for your payments:  the bankruptcy judge.

Because in, or after, a Chapter 13, getting the loan accounting wrong violates federal bankruptcy law. [Read more…]

3 Real Reasons Chapter 13 Plans Fail

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chapter 13 success

Two out of three confirmed Chapter 13 cases fail.  Those are cases that met all the tests and got the judge’s OK.

And still they crater.

That’s a heap of people, deeply in debt, who don’t make it out of debt by using Chapter 13.

Arizona bankruptcy lawyer John Skiba has a theory about those failures:

  • Life
  • Lack of a lawyer
  • Luck of the trustee draw

I wouldn’t argue against any of John’s culprits:  none of the things he lists help a Chapter 13 debtor.

But I have an alternate set of reasons that those trying to reorganize their debt through Chapter 13 don’t make it to the end. [Read more…]

Who Gets A Slice Of The Bankruptcy Pie?

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“That woman filed a claim in our bankruptcy case, and we don’t owe her any money!”

The next line, or paragraph really, of my client’s email asked what was I, her bankruptcy lawyer, going to do about it.

The short answer was nothing.

Nada.

Not a thing.

I didn’t plan to do anything.

Because when you have a pot plan in Chapter 13, it doesn’t matter who files a claim or for how much.

You pay the same.

Pot or Percentage

When you choose Chapter 13, you get to set the terms of the plan.  The plan  tells creditors and the Chapter 13 how much money you’ll pay the trustee each month and how that money gets distributed.

The claims of creditors are categorized:  secured, priority, co signed, and general unsecured.

You can treat claims of the run-of-the-mill unsecured creditor in two different ways.  You can promise each unsecured creditor a certain percentage of their allowed claim:

Creditors holding unsecured claims shall receive 20% of their claim.

Or, you can propose a “pot” plan.  You fund a pot of a specified number of dollars, to be shared among unsecured creditors according to the percentage of the total claims represented by that creditor’s claim.

When filed claims differ

The difference between the two ways of stating your payment plan comes out when claims are actually filed.  (No creditor gets paid in Chapter 13 without filing a claim.) [Read more…]

How 13 Works To Save Your House From Foreclosure

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save house

Saving a house from foreclosure is the single reason most people file bankruptcy.

Bankruptcy stops foreclosure- that’s a given.

But then what?

How can bankruptcy save the house,  rather than just putting off the inevitable loss?

The mortgage lender has a lien on the house, and liens aren’t discharged in bankruptcy.

So, how does bankruptcy help?  Meet Chapter 13 of the Bankruptcy Code.

Chapter 13 bankruptcy is the chapter of choice if your goal is to keep living in the house, as opposed to selling it to realize equity or to avoid the credit hit of a foreclosure.

Chapter 13 imposes a payment plan on lender

Baked in to Chapter 13 is the power to cure defaults on long term debts like mortgages.

Gone is the ability of the lender to refuse to take catch-up payments or to insist on cure in a single payment.

This is federal law, and the homeowner is at the helm of this ship. [Read more…]

4 Keys To Chapter 13 Success

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successful Chapter 13

How do I make a Chapter 13 plan that succeeds?

That’s important because a successful Chapter 13 lets you

keep your assets,

keep control of your income, and

discharge more debts than any other form of bankruptcy.

Yet a distressing number of Chapter 13’s fail before they reach the finish line.

Debtor writes the plan

One powerful characteristic of Chapter 13 is that the debtor writes the payment plan.

How Chapter 13 works

Not the judge, not the trustee, not some anonymous “they”.  You.

The court must confirm it, but creditors don’t have to like it or support it for it to become the order of the court.

The plan sets out how much money you will pay in every month, and tells the trustee whom to pay with that money.

So,  how do you craft a plan that you can follow and will get you to your goals?  What plan elements increase the odds of success?

1.  Don’t overreach

Biting off too much to chew (or really, to pay) dooms more Chapter 13 plans than anything else in the debtor’s control.

And that usually comes down to trying to save a house with a loan badly in arrears. Or, keeping a vehicle with a huge unpaid balance.

Bankruptcy allows you to choose whether to continue paying on debts secured by things you own.  Chapter 13 differs from Chapter 7 in that it provides you protection from creditors and a space to catch up on secured debts that are delinquent.

But some other debts must, by law, be paid in Chapter 13.  Child support and recent taxes are the two most frequent examples.  Those debts have a  priority under the law, and must be paid in full through the plan.

Since secured debts are usually paid first by the Chapter 13 trustee, the first dollars into your plan pay for those secured debts you choose to pay.

If  later you are unable to fund the plan, you can find yourself tossed out of bankruptcy, still behind on house and car, AND owing the feds and your ex.

Sometimes, the most valuable thing a bankruptcy provides is a chance to walk away from deals you can’t afford any longer.

2.  Be real about the cost of living

Bankruptcy is unlike many kinds  of legal representation where you can hand the problem to a lawyer and go on about your life.

Not in Chapter 13.

Chapter 13 requires that you help your lawyer present a budget for the life of your plan that is realistic.  Nothing good comes of estimating that you can feed a family of four on $200/month, or that you can operate an older car for just the price of gas.

Make unrealistic assumptions about ongoing living expenses, so that the plan appears to work, just pushes the next crisis a bit down the road.

Think about the real cost of running your house and nurturing your family.  Make provisions in the projected budget for those expenses that come around but not on a monthly schedule.

3.  Opt for automatic payments

Have your Chapter 13 payment automatically deducted from your paycheck, or your bank account, and you stand a far better chance of completing your plan.

It’s simply easier to look at what’s in the account and spend what’s available than it is to spend such that enough is left to make the Chapter 13 payment.

‘Nuff said.

4.  Cling to a capable lawyer

Your bankruptcy lawyer is yours for the duration of the plan.  Stay in touch.

Before there’s a crisis, or even a change that cramps your ability to make plan payments, pick up the phone.  Tell your lawyer what you’re facing.

Be proactive in solving problems before those problems prompt the Chapter 13 trustee to dismiss your case.

You may be eligible to reduce your payments, to surrender the collateral for some debt, or to suspend payments for a while.

If not, your choices may include converting to Chapter 7,  asking for a hardship discharge, or simply voluntarily dismissing your case.

Your lawyer can help you figure out which of the options works best for you.

Most problems in Chapter 13 are solved more effectively and more cheaply when you are proactive in facing those problems early.

Don’t be a stranger to your lawyer.

More

How to interview a bankruptcy lawyer

Why I love Chapter 13

If your Chapter 13 is in trouble

 

 

 

 

Chapter 13 Dismissed After All Payments Are Made: Self Inflicted Wounds

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Debtors shoot themselvesThere’s been a rash of bullet-ridden feet lately in Chapter 13 cases.

Debtors seem to whip out their pistols and shoot themselves in the foot with increasing regularity.

Just when their goal of keeping the house was within reach, had they paid attention, they lose it all.

It happens when debtors don’t hold up their end of the bankruptcy bargain.

And at the end of the day, or the end of the plan, they get none of the benefits they sought through bankruptcy.

How does that happen?

Chapter 13 saves houses

The overwhelming majority of Chapter 13 cases in the Bay Area are filed to save a house.

The homeowner needs to catch up on payments, or more frequently, needs a loan modification in order to keep the house.

The Bay Area bankruptcy judges have developed procedures to confirm Chapter 13 plans, and get money flowing out to creditors, while a loan modification is under consideration.  If there is anything we know about loan modifications, it’s that they take time and persistence.

Troubles after the loan modification

One of the provisions of the Chapter 13 plan that the debtor proposes for confirmation by the court addresses how the mortgage lender will be paid while we wait on a loan modification.

The plan might provide that the debtor will make the regular payment, according to the loan terms, directly to the lender in the meantime.

Or, the debtor may propose to make an ongoing payment to the mortgage lender calculated according the the HAMP formula, which says that housing costs should be no more than 31% of a person’s gross income.

So, the HAMP payment to the lender works out to be 31% of monthly income, less property taxes and hazard insurance.

Whichever approach the debtor chooses to deal with the current mortgage payment, it’s set out in the plan, along with the monthly payment the debtor will make to the trustee toward other kinds of debts.

Once a plan is confirmed by the judge, it binds all parties, creditors, trustee and the debtor.  See §1327.

Only some debtors seem to forget their part of this deal.  They don’t make the ongoing payments and don’t modify their plans to match their behavior. [Read more…]

Chapter 13 Keeps You In Control

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steering your financial course

Chapter 13 bankruptcy is about protecting assets, I read somewhere on the internet.

That sells Chapter 13 short by half in my view.

It’s not just about assets.

Many of my Chapter 13 clients have no meaningful assets to protect.  Assets to protect isn’t what made 13 right for them.

It’s that Chapter 13 kept them in control.

  • Control of creditor interaction.
  • Control of income.
  • Control of assets, too

In the face of a creditor who is entitled to levy, garnish, and harass, Chapter 13 lets the debtor-client stay at the helm of their financial life.

You call the shots

The basic difference between Chapter 7 and Chapter 13 is the role of the bankruptcy trustee.  In 7, the trustee may take possession of your non-exempt assets to sell for benefit of creditors.

A Chapter 7 trustee is entitled to sue people you’ve paid off just before bankruptcy and to assert his own view of the value of your assets.  Chapter 7 can be uncomfortable and risky.

In 13, you commit to a payment plan that gives creditors at least what they would have gotten if a Chapter 7 trustee scooped up your stuff, sued your family members, and otherwise wreaked havoc in your life.

How a Chapter 13 plan is calculated

You stay in possession of your assets and in control of your income.

You write the plan that says how much you pay into your plan a month, within the requirements of the law.  The Chapter 13 trustee just cashes your check, and pays creditors as the plan directs.

The automatic stay prevents the continuation of litigation or collection action outside the court.

You’ve rounded up all the folks to whom you owe money and corralled them in the bankruptcy court, where the bankruptcy rules apply.

You’re on your way to getting control of the situation.

Even judgment creditors bound

The appeal of Chapter 13 for several of my recent clients involves the way Chapter 13 limits how much of their income going forward is exposed to judgment creditors.

Outside of bankruptcy, a creditor with a California judgment can reach 25% of a person’s after-tax paycheck.  I don’t know many individuals who can meet their other financial obligations with only 75% of their paycheck.

Sure, you can argue that you can’t live on 75%, but you have to work through the courts to reduce the amount a judgment creditor can get.

In Chapter 13, the means test, which I usually detest, saves the day.  It has a formula for calculating what is genuinely available to pay run-of-the-mill creditors.

That’s creditors as a whole.

All of them collectively.

Lumped together, creditors share their slice of the available pie.

General unsecured creditors in Chapter 13, under the means test, get what’s left after:

  • Rent or mortgage payments
  • Car payments
  • Health care
  • Child care
  • Delinquent taxes
  • Support of dependent elders

I don’t think I’ve ever seen a Chapter 13 payment to general unsecured creditors that equaled 25% of my client’s after tax income.

So in addition to simplifying the process of how much a legitimate creditor gets, almost invariably, Chapter 13 reduces the absolute amount that the creditors get.

And the Chapter 13 debtor is assured of having control of his paycheck so his current living expenses are met.

Note that this analysis applies even to debts like student loans:  while the student loan may survive the Chapter 13 discharge, the amount paid out on the loan is limited by the means test and the claims of other creditors.

Time is on your side

Chapter 13 has a maximum length of 5 years.  The life of a judgment is generally far longer.  A California judgment is good for 10 years, and can be renewed for another 10.

So a Chapter 13 plan can halve the length of time your earnings are exposed to your creditor.

It may not be pleasant to be in bankruptcy for 5 years, but it shortens duration of the pain considerably.

Another time-related benefit of 13 is the durability of the Chapter 13 plan.   Plan terms are worked out and approved by the court at the beginning of the case.  Absent a marked improvement in your ability to pay creditors, the plan controls.

Chapter 13 has none of the periodic  judgment-debtor examinations that are features of state law.  Your time commitment to managing old debts is limited.

Chapter 13 protects paychecks

So, Chapter 13 isn’t just about protecting assets.  If you have a paycheck, or a small business, and have creditors you can’t pay, Chapter 13 allows you to chart a course out of debt, on your terms.

 

 

 

 

 

Image courtesy of Terence Faircloth under a Creative Commons license.

Discharged Debts Don’t Bar Chapter 20 Lien Strip

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Underwater liens that linger after an earlier bankruptcy don’t count in Chapter 13.

At least, they don’t count against the unsecured debt limit that restricts entry into Chapter 13, says the 9th Circuit Bankruptcy Appellate Panel in Free.

Great news for homeowners for whom Chapter 13 was not initially available because they exceeded the debt limits.

Free settles the question of whether the lien that passed through a prior bankruptcy case is a “debt” counted for eligibility purposes in a subsequent Chapter 13 if there is no collateral value to secure it.  The answer is no.

Neither the Code nor case law compels inclusion of the discharged in personam liability in such calculation.

What survives a bankruptcy discharge

Without getting so technical that only a lawyer would care, the problem when a Chapter 13 case is filed after a Chapter 7 is characterizing what’s left of the liens in effect when the 7 was filed.

The Chapter 7 discharge eliminated any personal liability of the debtor for the debt that was secured by a lien, but left the lien as a valid charge on any collateral to which it had attached. [Read more…]

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