Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Who Gets A Slice Of The Bankruptcy Pie?

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pie-chart-pixabay_opt

“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…]

Why I Love Chapter 13

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13 reasons to love Chapter 13

How do I love thee, Chapter 13?

Let me count the ways.

Hang on, because it’s a long list.  Thirteen reasons Chapter 13 rocks.

I love Chapter 13 because:

1.    Debtors keep control of their assets. They run their businesses. There is no trustee tasked to sell  their assets.

2.    Repayment to creditors can be little or even nothing.  It depends on the debtor’s income and the value of their assets. 

3.    Chapter 13 plans  can be changed during the case. If income falls or is temporarily interrupted, the plan can be changed to accommodate the change.  

4.    The case can be freely dismissed.  You can get out of bankruptcy if you want, unlike Chapter 7 . 

5.    The automatic stay protects the debtor for the 3 -5 years of the plan.  No foreclosures, no repossessions, no levies. 

6.    Mortgage defaults can be cured over as long as five years. 

7.    The interest rate on car loans can be reduced to today’s market rate. 

8.    Mortgage liens that are totally underwater can be eliminated forever in 13. 

9.    The IRS has to go along with the repayment terms in your plan, without interest. 

10.  Tax penalties are dischargeable, even when the tax is recent. 

11.   Debts to former spouses, other than support, can be discharged. 

12.   Tax liens greater than the value of the debtor’s assets at filing are eliminated. 

13.   Attorneys fees for the case can be paid after filing.  

More advantages to Chapter 13

When you file Chapter 13, you are eligible to file another Chapter 13 case, if you need to, far more quickly than if you had filed a Chapter 7.

In fact, you are eligible to file a second Chapter 13 after two years from the filing of your first case.  (But you can’t have two cases active at once.)

Your Chapter 13 filing generally drops off your credit report three years earlier than if you had filed a Chapter 7 bankruptcy.  It’s gone two years after the Chapter 13 discharge in a five year plan.

Unlike debt settlement arrangements, your repayment plan is enforced by a federal judge. All creditors are required to go along. No creditor can elect not to be involved and opt out of the plan.  Whether a creditor files a claim or not, the creditor’s claim is likely toast at the end of the case.

And there’s no income tax on the debt that’s discharged.

Chapter 13 can be a powerful and affordable tool for getting back on your financial feet.

The Zero Interest Get-Out-Of-Debt Tool: Bankruptcy For The Solvent

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chapter 13 rescue

Once again, Chapter 13 rescued a client.

He’ll get out of debt and pay (effectively) no interest going forward on his credit cards.

He owned a home, had a job, and was solvent on paper, but he couldn’t sleep for worry about his debts.

Despite having lots of equity in a house, there wasn’t not enough income to retire the debt when the mortgage resets in the spring.

Chapter 7 would get rid of the debt, but cost him his house.

Thank goodness for Chapter 13, where you

  • keep your assets,
  • propose a plan, and
  • get a discharge.

Chapter 13 gets my client out from under credit cards with ruinous interest rates, reduces the interest rate on his high interest car loan, and lets him sleep at night knowing he won’t lose his house to unsecured creditors.

A pretty good deal for a $310 filing fee.

Interest free debt repayment

The good news is that the equity in his house requires that his Chapter 13 plan pay his debts in full. But, “in full” does not mean “with the usual credit card interest”.

Pay off the cards in full in Chapter 13 and you pay only the federal judgment rate.  Currently , that’s little more than  one half of one percent, instead of 18-34% due under the credit card agreements.

To pay off the cards according to their terms outside of bankruptcy, most of each payment for a long while goes to interest.  That’s why credit card issuers are content to have you carry a balance.

For this client, we figure that a 100% repayment plan for the cards and the tax debt will require a payment about 1/3 of what he currently pays each month on the cards.

No need to be broke to file bankruptcy

This client looks good on paper.  He’s solvent due to lots of equity in his house.   He’s current on his bills.

He just sees the freight train coming down the tracks when he reaches the end of the interest-only feature on his home equity loan.

You don’t have to be upside down, financially, to file bankruptcy.  You only need to be willing to play by the rules of the Bankruptcy Code for dealing with your creditors.

The applicable rule for this client says:  if you keep your house with that much equity, you must pay the creditors in full.

Bankruptcy won’t change the terms of his home loan, it will just spread out and pay off the other debts that have a claim on his monthly income.

And, he can stop underwithholding on his taxes.  He had increased his exemptions to get more cash monthly, leaving him owing taxes at the end of the year.

Part of our plan is making the withholding match the taxes owed, so we don’t have a recurring tax problem.

13 was my client’s lucky number.

Chapter 13 Bankruptcy Disrupted by Coronavirus

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chapter 13 case

Has your Chapter 13 bankruptcy case been turned upside down by coronavirus?

You are not alone.

And attorneys, trustees and judges are all working on adaptations and adjustments that will save pending cases.

Practices and procedures in Chapter 13 vary widely around the country.  What follows is what I see here in the Bay Area and hear from around the country.

Congress takes Chapter 13 action

The CARES Act, passed by Congress on March 27, extends the allowable length of confirmed Chapter 13 plans to seven years. Currently, plans cannot run more than five years.

That presents a problem if your case is driven by the value of your assets or the need to cure mortgage arrears or pay off a car loan.

To qualify for the extended plan duration, the need for a modification of the plan must be traceable to the COVID-19 national emergency, directly or indirectly.

Importantly, only the debtor can move to extend the duration of the plan.  That means that neither the Chapter 13 trustee nor creditors can move to lock you into a longer plan.

So, there’s new flexibility if you have a Chapter 13 plan that was confirmed before March 27, 2020.

Unconfirmed Chapter 13 plans

Suppose, though, that you’ve filed Chapter 13 and the means test “says” you need to pay something to unsecured creditors.  Only the virus emergency says that income is no longer there.

Current law allows the amendment of Chapter 13 plans that haven’t been confirmed to be amended.  I don’t anticipate any judicial resistance to new income and expense schedules that reflect today’s realities.

If your plan payments are driven, not by income, but by the value of your assets, the problem is harder.  The CARES Act provides no relief from the “best interests of creditors” test requiring that creditor get what they would have had you filed a Chapter 7 liquidation case.

If your assets have fallen in value, it may pay to consider dismissing the current case and filing one where today’s asset values control.

Inability to make Chapter 13 payments

Confirmed or unconfirmed, debtors nationwide find themselves suddenly without meaningful income.

Hardship discharges may become easier

The good news is that many others are in the same boat.

In other times, failure to make a monthly payment would trigger a motion to dismiss your case.

Probably, such motions are far less likely in these circumstances.

Plans, confirmed or unconfirmed, can be modified by the appropriate filing in bankruptcy court.

The practical problem is how does anyone reliably project their income going forward.

I see this as an issue that remains to be worked out among all the players.  The courts don’t want to dismiss a heap of cases, only to have to process refiled cases by the same debtors.  I expect there will be accommodations.

For the moment, both courts and trustees’ offices are operating with skeleton crews and no real appetite to toss people out of bankruptcy for non-payment.

Stay tuned.

Rescue payments excluded from income

The amended Bankruptcy Code definition of income now excludes payments made under federal law relating to the pandemic emergency.

This change benefits both those with unconfirmed Chapter 13 cases, and those who file new bankruptcies in the next year.  Governmental help will functionally not be available to your creditors in a bankruptcy case.

Bankruptcy law will revert to the current definitions of “current monthly income” and “disposable monthly income” at the end of a year’s time.

Challenges ahead

Our current economic catastrophe is unprecedented in its suddenness and its scope.  Lots of good minds (and a few not-so-good minds) are pondering work-arounds for family finances.

In the meantime, stay healthy, stay home, and stay strong.  We’ll keep posting as developments appear.

More

See our roundup of posts on the virus and your budget

 

 

 

Tax Deductions Hidden In Chapter 13

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taxesDon’t miss the tax deductions hiding in your Chapter 13 plan payments.

The same, very important debts that your Chapter 13 plan pays are often tax deductible.

And you are still the person who’s paying, even if the trustee writes the check.

Deductions in bankruptcy

Let’s look at some common deductions lurking in the Chapter 13 disbursements.

Mortgage interest  If your Chapter 13 plan is catching up on delinquent mortgage payments, the claim of the lender is probably mostly interest.

Taxes  Property taxes paid through the plan should be deductible.  Likewise, state income taxes paid by the trustee are deductible.

 Business expenses  If you operate a business in Chapter 13 or operated one before you filed, you may be paying business leases, sales taxes, or vendor debt through the plan.

Get the info you need

In my experience, you have to dig out the information on deductible payments;  I have not seen lenders sending 1098’s reporting mortgage interest paid to debtors when the checks come from the trustee.

Step by step to claiming the mortgage interest deduction

But most if not all Chapter 13 trustees are on the web, and debtors can access the trustees reports of which creditors have been paid this year.

Pull up the report of last year’s disbursements and flag the payments that are deductible.

Save the printout of the trustee’s report in case of question  by the taxing authority.  The IRS will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.

How to treat 1099’s on foreclosures and short sales

Go back to prior tax years

If your plan is paying deductible expenses and you’ve been in the bankruptcy case for several years, you may want to look at prior year trustee reports.  Overlooked deductions might justify going back to amend a prior return.

Tax returns are generally amendable for three years.

Check it out

Take this post with a grain of salt, or rather, take it to a tax professional.

I am a bankruptcy lawyer and what I know about taxes, I’ve learned on the job.  But I am convinced that Chapter 13 debtors are missing legitimate tax deductions by overlooking what the Chapter 13 trustee has paid on their behalf.

More

How to find the mortgage interest paid by Chapter 13 trustee

What your tax professional should know about tax and bankruptcy

When your Chapter 13 plan struggles

Image courtesy of 401(k)calculator.org

What You Think About Chapter 13 Is Dead Wrong

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bankruptcy misunderstanding

The difference between bankruptcy’s Chapter 7 and Chapter 13 is often expressed this way:   

Liquidation: the process of turning assets into cash

Chapter 7 is a liquidation proceeding

Chapter 13 is a repayment plan

 

And therein lies the biggest misconception about Chapter 13: 

13 does not repay everything you owe.

It’s a repayment plan alright, but not necessarily a 100% repayment .

You may not pay much at all, to any creditor.  It depends.

How much you repay

The amount you repay to creditors through your plan is determined by comparing

Rough and dirty, you calculate the number for each of these factors, and your plan must pay the largest of the three tests.  That payment is spread over 3 to 5 years.

Which creditor gets 100%

Bankruptcy law gives special standing for repayment to two common kinds of creditors.

  • Family support (alimony, child support, or other Domestic Support Obligations)
  • Recent income taxes or payroll taxes

These creditors have a priority for payment,  ahead of all other unsecured creditors.  They get paid in full.  The interest that accrues on family support obligations even survives the Chapter 13 discharge.

Therefore, to get court approval of a plan, the plan payments must be sufficient to make these payments, along with any fees of the Chapter 13 trustee and any of your attorneys fees to be paid through the plan.

Unsecured creditors out of luck

The brutal truth is that general unsecured creditors holding medical bills, personal loans, judgments for money, and credit card debt may get nothing in Chapter 13.

That’s because the available money is paid first to priority claims and the costs of administration of the case.  So a debtor with little disposable income may propose a plan that pays only the costs of the plan and the priority creditors.

Chapter 13 makes creditors face reality

The strength of Chapter 13 is that it often forces unsecured creditors to accept that there simply isn’t enough money to pay their claim.

The bankruptcy schedules show it, and the bankruptcy judge enforces it.

It is that coercive effect that makes Chapter 13 so much more effective than debt settlement:  if the numbers support it, the plan can pay them little or nothing.

So, don’t be put off by the phrase “repayment plan”.

Chapter 13 pays creditors only what you can afford, over a limited period of time, in the order of the importance of the debt.

That’s why I love Chapter 13.

More

Debt settlement is a dud

How secured debt can scuttle a Chapter 13

What bankruptcy should cost

 

 

 

 

 

 

 

7 Keys To Keeping Your House: Chapter 13 After You File

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keep the house

Filing Chapter 13 bankruptcy stops the foreclosure.  You’ve protected your home, for the moment.

Bankruptcy gets you a sheltered legal environment to address the problems with your mortgage.

You heave a sigh of relief.

But the fight to keep your house isn’t over, just because there’s a stay.  You’ve just gotten through the first round.

You need to stay on your toes for the balance of the match to emerge with your house safe at the end of your bankruptcy.

Here’s what you need to know.

Mortgage lenders get special consideration

In the bankruptcy context,  the mortgage lender gets privileged treatment.

Anglo Saxon law, from which US law is drawn, has long given particular protection to the claims of property owners.  After all, it was those who owned property who wrote the laws.

The mortgage lender gets that special treatment because the lender’s lien is a property interest in your home.

That lien entitles the lender to regular payments;  if payments aren’t made, the lender can ask for relief from stay to foreclose.

The exception is if the value of the collateral is less than the total of the liens ahead of the lien in question.  Think:  underwater second mortgage.

Follow these 7 keys for keeping your house AND getting a discharge in Chapter 13.

1.  Regular mortgage payments required

Most Chapter 13 plans provide that the trustee pays the arrears on your mortgage, while you make the payments that come due after filing.

Make the payments- that means property taxes and insurance as well.

Too often, homeowners get fixated on paying the arrearages on their mortgage that they overlook, or struggle, with the ongoing payments.

Court are intolerant of borrowers who want the protection of the bankruptcy stay, but don’t take seriously their obligation to pay the monthly payments that come due after filing.

That intolerance spills over into dismissal of  Chapter 13 cases without a discharge when debtors fail to make current payments.

2.  Look for other liens

Chapter 13 isn’t limited to fixing problems with mortgage liens.  Your plan can either avoid altogether or reduce the amount of tax or judgment liens,

Make sure that you check the public record to see if any avoidable liens have attached, unnoticed, to your home.

If you find liens, your plan can cut them down to size.

3.  Pursue modification

Your best bet may be to agree with the lender on a modification of your mortgage.  Nothing in Chapter 13 stops the parties from considering modification.

Northern California bankruptcy judges have decreed that negotiations for a modification do not violate the automatic stay

Frequently, the modified mortgage either folds the arrears into the loan balance, to be paid over the life of the loan. Or, modification designates a portion of the amount owed as not bearing interest, but payable at loan-end or sale.

A modification that cures the arrears may eliminate the mortgage arrears portion of a Chapter 13 monthly payment, thereby increasing the chances of success.

4.  Review the lender’s claim

In order to be paid in a Chapter 13, a creditor must file a proof of claim.  For mortgages secured by the debtor’s principal residence, a detailed attachment is required.

The mortgage attachment must account for payments and charges to the loan from the date of the first, uncured default.

The POC also contains an analysis of any escrowed taxes and insurance, and the adequacy of the monthly payment to pay those expenses.

Dig into these numbers and see if they match your payment records and whether they are otherwise complete.

There’s lots of data there, some of it correct and some woefully wrong.

5.  Keep records of  your payments

Too many mortgage servicers fail the fundamental task of accepting your payments and crediting them properly.

The method of accounting changes with bankruptcy:  payments made after filing are supposed to be credited to a separate accounting for your loan, while the pre bankruptcy record stands alone

Servicers don’t always do that.  Payments sometimes sit for months on someone’s desk, undeposited.

I tell clients to pay with paper checks on their accounts and send the payment by a method that gets you a receipt upon delivery to the servicer.

It’s a hassle, I know, but you end up with a record from your bank that the check was cashed, and you have proof that it was delivered.  The added expense is nothing to the cost of your attorney having to track down the facts showing you paid.

6.  Read payment change notices

If your monthly mortgage payment changes after you file bankruptcy, the servicer must send you a Notice Of Payment Change.

The change may be driven by an interest rate change or a change in the cost of escrowed taxes or insurance.

Even though it comes on a court form, and looks dense, you’ve got to read it and adjust your post filing payments on your mortgage accordingly.

If you’re uncertain, ask your lawyer.

7.  Exploit case-end rules

When you’ve made your last payment to the trustee, bankruptcy rules require a notice to the mortgage servicer about the state of your loan balance.

If the lender claims that either the pre-bankruptcy claim hasn’t been paid in full, OR, that there are unpaid amounts arising after you filed, they must file a reply.

This call-and-response procedure flushes out any difficulties that show in the lender’s books, and provides a mechanism and a judge to sort things out.

The goal is to exit bankruptcy knowing exactly where you stand on the home loan.

Make sure this happens in your case.

If you change your mind

Things change over time.  If you find that keeping the house no longer fits with your financial future, tell your lawyer immediately.

The confirmed Chapter 13 plan obligates you to make the payments you promised as well as obligating your creditors to stand down.

There’s nothing wrong with changing your mind, so long as you change your Chapter 13 plan to match.

Far too many debtors recently get to the end of the case and get their cases dismissed, without a discharge, because they stopped paying on the mortgage and didn’t alert their lawyer.

More

Make sure you don’t lose house and discharge

Monitoring your mortgage loan 

Before you list your house for sale

 

How To Keep Your House In Chapter 13 Bankruptcy

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Saving your home ranks high on the list of reasons people file Chapter 13.

The automatic stay stops foreclosures; Chapter 13 gives you time to fix the problem.

Powerful stuff.

But the stay and more time, alone, isn’t enough to save the day if you run afoul of other rules, written and unwritten, about homeownership in Chapter 13.

So, here’s your manual for Keeping Your Home Through Bankruptcy.

Read your Chapter 13 plan

The basic premise of Chapter 13 is that you continue making payments on your home loan during the plan.  Typically, you make the payments that come due after you file, plus catch up on any missed payments via your payments to the Chapter 13 trustee.

In the Bay Area, debtors can choose direct payment or a conduit plan

Every Chapter 13 district does things a little differently  but they all treat post filing payments in one of two ways:

  • either the homeowner makes the payments directly to the mortgage servicer, just as if there were no bankruptcy.
  • or, the on going payments are made to the Chapter 13 trustee, who in turn pays the mortgage servicer. (Those are called conduit payments.)

Make sure you know how it works in your district,  and when your first payment after filing bankruptcy is due.

Keep track of payments you make

Future disputes about whether you made payments directly to the servicer are virtually certain.  Arm yourself with a paper record.

You want your paper trail to be complete and retrievable.  Chances are, the servicer’s records won’t be as good.

I suggest clients pay by personal check (so you get a cancelled check) and transmit that payment by a means that gets you a receipt showing delivery.  With a receipt, you can monitor whether the servicer is promptly crediting your payment, as they are required to do.

Any automatic payments from your bank account or even your ability to pay electronically will undoubtedly be canceled by the servicer.

Compare monthly statements

A new federal rule requires servicers to continue sending you monthly mortgage statements.  That’s a welcome change.

More on the new mortgage statement format

The rule breaks out what is happening with your loan, both as to any pre-bankruptcy default and as to the post-filing payments.

Check out the statements to see if they are consistent, and save them for support in case there’s a dispute in the future.

Watch for payment changes

Your monthly payment on your home loan may change during the Chapter 13.  Escrow amounts for taxes or insurance may change; your loan may have an adjustable rate, or a time-limited interest only feature.

Bankruptcy rule 3002.1 now requires the servicer to give you advance notice of any change in the monthly payment you must make.  If you are in a conduit district, where the trustee makes the on-going payment, ask your attorney how increases in payments are handled.

The rule also requires the servicer to disclose any fees, expenses or charges that it adds to the loan balance during your case.  The disclosure must be made to you, your attorney and the court within 180 days of the expense being incurred.  You have the right to challenge the expense and have a hearing on whether it’s truly owed.

Pay your property taxes

Depending on your loan terms, you may pay property taxes directly to the local taxing authority.  Staying current on property taxes is a condition of being in good standing on your loan.

Know whether your property taxes are escrowed and thus included in your monthly payment, or whether you pay them directly.

If you pay property taxes directly, make it a habit to set aside 1/12th of your annual property taxes when you make your mortgage payment, so you don’t fall behind.

Avoid suffering a motion for relief from stay

The automatic stay is automatic, but it’s not necessarily forever.

If you fail to make required ongoing payments or fail to keep the property insured, the servicer can file a motion asking the court to lift the stay and allow it to foreclose.

More about motions for relief from the stay

Even if you manage to get a deal to cure any defaults, a motion to lift the stay will add to the lender’s attorneys fees, which they will want to collect from you.  And that’s on top of whatever you have to pay your own attorney to protect your property.

Don’t go there:  stay current.

Deduct the mortgage interest you pay

A large part of most mortgage payments is made up of interest on the loan balance.  That interest and any property taxes you pay to the lender are probably tax deductible.  But for reasons I can’t explain, servicers don’t give you a tax form 1098 showing the deductible payments you’ve made or the trustee has made on your behalf.

Follow our how-to on calculating your deduction and assembling the records to support your claimed deduction.  If you don’t do it, you can be sure the IRS won’t do it for you.

Reducing your income tax bill frees up money to make your plan payments.

Heads up and keep your house

This post bankruptcy to-do list isn’t complicated but it is important.  Armed with knowledge of the possible pitfalls, you can head off trouble and sail through Chapter 13.

More

Mistakes that crater Chapter 13 plans

If you can’t make your plan payments

Why discharge gets snatched away at plan’s end

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

Chapter 13 is built to allow the homeowener 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.

The homeowner in Chapter 13 proposes a plan for payments to the Chapter 13 trustee.  The trustee, in turn, pays creditors according to the plan.  The usual distribution scheme pays secured claims, like home loans, first.

So, if you are, say, $24,000 behind on your mortgage, your plan can provide that you pay the trustee a monthly payment that catches up on that default.  Chapter 13 plans last a minimum of three years and a maximum of five years.

Your plan will need to provide that you make the on going payments on the mortgage as well.  Each district has its own protocol as to whether you write the check to the mortgage lender for ongoing payments or whether you pay the trustee, who pays the lender.

Once your plan is confirmed, the lender is required to accept the payments.  Absent some post filing breach on your part, the lender is unlikely to have any way to push back against the payment plan.

Trustee challenges to confirmation

Because the confirmed Chapter 13 plan has such power, both the Chapter 13 trustee and the mortgage lender have opportunity and incentive to object to your plan.

coins in a stackThe trustee’s objection is often focused on feasibility.  Does your projected budget show that you can pay enough into the plan to do what’s required?

Remember that the amount necessary to fund the plan is not just the $24,000 that our hypothetical debtor owes on the mortgage.

The Chapter 13 trustee gets a commission on the money she handles in the case.  So, to get $1000 to the mortgage lender, you have to pay the trustee $1100, where the trustee’s commission is the 10% maximum.

Also, if you owe priority taxes, the Bankruptcy Code requires that those taxes be paid in full over the life of the plan.  Likewise,  any delinquent family support claims must be paid in full.

So, the total payments to creditors through the plan may need to cover other creditors as well.

The trustee will look at the total amount your plan provides over the life of the plan and comparing it to your projected income on schedules I and J.  Does it look like you can pay your current living expenses and the amount required by the plan?  If you propose to increase plan payments in future months, is there reason to think you will have the money to do that?

If not, your plan may not be feasible.  If it’s not feasible, it doesn’t get confirmed.

Mortgage creditor fights back

The mortgage creditor has standing to oppose confirmation as well.

Even if the secured creditor doesn’t challenge feasibility or good faith, both required for confirmation, the secured creditor has another, less direct weapon.

When you file bankruptcy, the secured creditor gets to claim not only the missed mortgage payments, but any money the lender has advanced for taxes or insurance.  And, they may have an escrow shortage projected for the current year’s payments.  That’s not to mention foreclosure costs and other fees.

So the lender’s claim may be larger than you expected.

The beauty of Chapter 13 is that the lender has to make full disclosure of those claims and you get to challenge whether the accounting is correct.  You can also challenge whether the fees sought are really allowed by the mortgage.

Mortgage check up at plan’s end

So let’s assume that you get your plan confirmed and faithfully make all the payments required.

New bankruptcy rules work to make sure that you emerge from Chapter 13 fully current on your home loan.

Bankruptcy Rule 3002.1 requires a lender secured by a principal residence to give notice to the court, the trustee and the homeowner of payment changes that occur during the case.

Also, if the required escrow payment changes, or any fees get added to the loan during the case, the lender has to file a notice describing the change.

And the homeowner can challenge changes or additions to the debt.  If it doesn’t get sorted out, a judge will look at the situation and make a ruling.

After the last payment to the plan, if the lender contends you aren’t fully current on the loan, it has to file a detailed accounting showing how much it claims is unpaid.  That accounting is subject to challenge.

Debtor’s rights after 13 is over

mortgage tools for homeownersOne of the few good things included in the 2005 amendments to the Bankruptcy Code, in my opinion, are the provisions that make it a violation of the debtor’s discharge to improperly credit payments made pursuant to a Chapter 13 plan.

All too often, the lender or mortgage servicer either has two sets of books on a loan, or the entries it has made for payments during the plan get altered after the Chapter 13 is over.

Bingo, the lender now claims the borrower is in default, and foreclosure looms.

The bankruptcy court is now a forum for challenging those contentions and getting redress, including the borrower’s attorneys fees to make it happen.

Chapter 13 saves houses

The power of Chapter 13 goes far beyond the automatic stay in giving homeowners a chance to keep their homes.

Not only does it get the homeowner some law to counter balance the endless rights of the lender in the loan documents, it gives the homeowner a referee in the form of a bankruptcy judge who can resolve disputes.

Because bankruptcy judges over the last decade have seen some much of the mortgage meltdown and the deterioration of mortgage servicing up close, they are familiar with the problems and less and less tolerant of lender abuses.

Chapter 13 can be a struggling homeowner’s lucky number.

More

Our best advice on keeping your house

Image copyright Fotolia and Jakub Krechowicz

How Chapter 13 Saves You Money

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chapter 13Why should I file Chapter 13  if I have to pay all my creditors in full?

Because, I said, even a 100% repayment plan under Chapter 13 saves you money.

This client had a fistful of equity in a home;  that equity made a Chapter 13 the required choice of chapter for the man.

But he struggled with finding the benefit of using Chapter 13 to manage his debt.

I never would have filed bankruptcy if I realized I had to pay everyone 100%.

So I fired up Excel and crunched numbers to quantify the answer to “why file“.  In this client’s case, the answer was $20,000. 

When asset value drives Chapter 13 payment

Chapter 13 saved $20,000 over 5 years when compared to paying all the creditors what they were owed outside of bankruptcy.

It’s all about the interest rate

At base, the $20,000 bankruptcy savings for this client flowed from the difference between the interest rate in bankruptcy compared to the interest rates on taxes and credit cards in the non-bankruptcy world.

When creditors are entitled to get interest on their claims in bankruptcy, the interest rate that applies is the federal judgment rate.  When I did this exercise, the federal interest rate was 2.35%.  Find today’s judgment rate.

By contrast, I assumed credit card interest rate of 23% and the IRS interest rate to be 6%.

13 crushes credit card debt

Paying the approximately $39,000 in credit cards in 5 years (the same duration as the Chapter 13 plan)  according to contract terms netted the credit card issuers $27,000 in interest!  The total cost to pay off those cards was roughly $69,000.

The cost to pay off the same $39,000 in cards in Chapter 13 was $2250 in interest and $4121 in Chapter 13 trustee commission (assuming the maximum allowed rate of 10% of dollars the trustee receives.)

So, which would you rather pay to keep your house and get rid of your credit cards:  $27,000 or $6365?

Point: Chapter 13

Taxes score a draw

The savings on paying off taxes through Chapter 13 was less dramatic.

We were looking at $46,000 in taxes, some priority, some older than that.  To pay them off outside of bankruptcy would run up about $7300 in interest.

Paying those same taxes in Chapter 13 incurred $2550 in interest. But when you added the trustee’s commission to the bankruptcy interest, the transaction costs essentially equaled the cost of paying the taxes outside of bankruptcy.

Point: neither side

Snoozing creditors lose

The unpredictable further savings may lie in creditor ineptitude.  That’s because only creditors who file a timely proof of claim in a bankruptcy case share in the payments.

In my experience, it’s the rare case when every creditor follows through and files a claim.

So my client will get a discharge of all his liability to creditors who don’t file claims, without paying them a cent.

Point: too soon to tell

Non economic benefits

Here, we looked only at the dollars and cents differences between paying everyone in bankruptcy or outside of bankruptcy.

Not visible in a spreadsheet is the reduced stress that Chapter 13 brings, by corralling all creditors in a single proceeding and having the law to back you up on the schedule on which they are paid.

Stress kills

Chapter 13 keeps you in control of your assets, protected by law, while you pay off what you owe.

 

 

 

 

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