Northern California Bankruptcy Lawyer

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Chapter 13 Keeps You In Control

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steering your financial course

You can’t decide between bankruptcy chapters until you really understand how Chapter 13 works to keep you in control.  

Control of your assets, control of your payment plan, control of who gets paid.

You want to be at the helm of your case.  Chapter 13 can do that.

Chapter 13 protects more than assets

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 whether to stay in bankruptcy

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 Chapter 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 Chapter 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 state 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.

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 keeps you in control

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 works to let you to chart a course out of debt, on your terms.

Image courtesy of Terence Faircloth under a Creative Commons license.

How To Save Your House With Chapter 13 Bankruptcy

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Saving your house 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, aren’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

Pay Off Credit Cards At Zero Percent

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specialedition-frame_opt

I’ve got news for you:

There’s a government program that lets you pay the balance on your credit card without interest and owe nothing more.

Sound like one of those snarky radio ads?

This one’s legit.

Meet Chapter 13.

Credit card interest is the killer

Here’s the refrain I hear from clients, over and over.

I want to pay off my credit cards, but the damned interest rate makes it impossible

They could pay back what they’ve charged if it wasn’t for the sky high interest rate. They want to pay what they owe.


Credit card interest, despite our national allegiance to unregulated business guided by market forces, still remains hugely more than the cost to borrow elsewhere.

But the card’s interest rate no longer applies when you file Chapter 13.

How Chapter 13 works

Unsecured debts in Chapter 13 stop accruing interest when the case is filed.

The card issuer’s  claim consists of whatever the balance is when the bankruptcy case is filed.

Credit card debt is almost always unsecured debt.  The card issuer has only your promise to repay.  There is no collateral for the debt, like there is with a car loan or a home mortgage.

So, with a stroke of the pen, or really the clank of the file stamp, your credit card debt is frozen in amount by filing Chapter 13.

You write the repayment plan

The debtor, the person who filed Chapter 13, proposes the plan which can run from as little as 3 years to a maximum of 5 years.

Full repayment is not required in Chapter 13.  How much you have to pay creditors depends on your income and your assets.

How to calculate the smallest possible repayment

We’re assuming here that you want to pay the credit cards in full, just without interest.

Take the card balances, add 5-10% of that total for trustee commission and divide by 60, the maximum number of months in a Chapter 13 plan.

There you have the  rough monthly Chapter 13 payment to pay all of your credit cards in full, without any interest.

At the end of the plan, the debt, including unpaid interest, late charges, add ons and penalties are discharged, gone, unenforceable.

But, but, but…

Note that this works regardless of how much money you make or how valuable your assets are.

Creditors are never entitled to more than 100% of their claim.

The exception is that if your non exempt assets would pay creditors in full in a hypothetical Chapter 7 liquidation, you have to pay interest to creditors at the federal judgment rate.

That interest rate these days  hovers close to zero.   It’s one fifth of one percent per year:  .22%

So if you are ready, willing and able to pay your credit cards in full, without interest, check out Chapter 13.

If paying in full isn’t really possible, talk with an experienced bankruptcy lawyer about a plan that pays creditors only what bankruptcy law requires.

Put that interest money that you save to work to provide for emergencies and your old age.

More

How Chapter 13 works

How to interview a bankruptcy lawyer

What about your credit report

Tax Deductions Hidden In Chapter 13

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taxes

Don’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

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 off credit cards with no interest going forward.

So many people tell me they could pay off the credit card balance if it wasn’t for the high interest.

This client 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.

More

Why I love Chapter 13

Update on California homestead

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 from foreclosure,  rather than just putting off the inevitable loss?

After all, 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.  Or it works to enable a sale 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 court approves the plan. The trustee pays creditors according to the plan.  The usual distribution scheme pays secured claims, like home loans, first.

So,  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 amount of the mortgage arrears.

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.  It depends on the means test or the net value of your assets.

The trustee will look at the total amount your plan provides over the life of the plan and compare 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, there’s a mortgage check up. 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 save their homes from foreclosure.

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.

Bankruptcy judges over the last decade have seen much of the mortgage meltdown up close.  They’ve also seen the deterioration of mortgage servicing.  They are familiar with the problems and less and less tolerant of lender abuses.

Chapter 13 can be a struggling homeowner’s lucky number to save their house from foreclosure.

More

Our best advice on keeping your house

Image copyright Fotolia and Jakub Krechowicz

Does Bankruptcy Bar Retirement Savings?

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Ongoing retirement saving by Chapter 13 debtors has been a touchy subject since the means test became a part of the bankruptcy scene.

The means test was intended to squeeze every available dollar from consumer debtors. It works by limiting the expenses that can be deducted from income in figuring what a debtor can/must pay his existing creditors.

Retirement savings accounts have been broadly protected from the reach of Chapter 7 trustees and excluded or exempted in the asset analysis in Chapter 13.

But courts have been split over whether debtors are permitted deduct as a reasonably necessary expense their ongoing contributions to voluntary retirement schemes while in Chapter 13.

So, I’m cheering the 6th Circuit’s decision in Davis which held that monies withheld by a debtor’s employer to fund her 401(k) plan were an allowable deduction from income under the means test.

Ongoing 401(k) contributions allowed

The Davis decision effectively allows the debtor to reduce the amount the means test formula would require her to pay to her creditors by the amount of her 401(k) contributions.

The court described its ruling as narrow: it applied to contributions withheld by the debtor’s employer from her wages during the means test look-back period of six months.

Only by virtue of the provisions of Section 541(b)(7) that reference sums “withheld by an employer” were the contributions deductible in calculating “current monthly income”. The self employed or those whose contributions to retirement savings took another form are not protected like Ms. Davis.

In deciding that Ms. Davis could make ongoing 401(k) contributions, the appeals court had to wade through more sloppy drafting of the bankruptcy “reform” act of 2005. The drafters inserted this protection for ongoing contributions to retirement in a section that deals with property of the estate, rather than with the means test. The Davis decision decided that the judicial canon that says “every word matters” trumped the location of the text in the Bankruptcy Code.

Californians still barred from savings

Sad to report, but the retirement-friendly Davis decision comes from the 6th Circuit, not the 9th Circuit which includes California.

federal judicial circuits

The 9th Circuit BAP held in Parks, 475 B.R. 703 (B.A.P. 9th Cir. 2012) that a Chapter 13 debtor could not deduct any voluntary retirement contributions in calculating what debtors pay in Chapter 13.

While it’s unclear the extent to which BAP decisions bind bankrutpcy courts in its circuit, as a practical matter, it will take an appeal to the 9th Circuit or legislation to assure Californians filing bankruptcy that they can continue to make provisions for their old age.

Retirement savings are necessary

I’ve long advocated for treating retirement savings as a necessary expense for purposes of both the means test and the debtor’s projected budget.

It is ludicrous to contend that individuals don’t have to make regular and meaningful contributions to their retirement accounts to enjoy a stable retirement.

And by mandating that savings are not permitted in Chapter 13, we condition debtors to spending every penny they make either for current living expenses or plan payments to deal with past debts. We forfeit the opportunity to habituate debtors to looking at their needs beyond the upcoming month.

Planning to file bankruptcy

Too often, individuals find themselves filing bankruptcy with little or no forethought. But if you see a bankruptcy in your future, and have the opportunity to have 401(k) contributions deducted from your paycheck, do it.

How Chapter 13 Saves You Money

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chapter 13

Why 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  cost $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.

More

How Chapter 13 can save your house

Chapter 13 To The Rescue In Ruinous Business Lawsuit

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rescued

Twice in the last six months, Chapter 13 bankruptcy has saved clients facing catastrophic lawsuits arising out of business.

And because the targets of these lawsuits filed bankruptcy before they’d spent a fortune on lawyers and before the court had a chance to award huge damages, they fit beneath the Chapter 13 debt limits.

We think of Chapter 13 as a consumer tool.  It’s designed for those with a regular income.  It’s sometimes called a wage earner plan.  The amount of debt involved has to be below certain limits.

So, Chapter 13’s application to business lawsuits isn’t obvious.

But it works like a charm.

Here’s how Chapter 13 rescued one client sued about a business dispute.

Chapter 13 filed before judgment

Chapter 13 is not available to everyone.  Only individuals can file.  Their debts must fall below certain amounts.

But, critically, the debt limits in Chapter 13 apply to debts that are liquidated.  That means that the amount of money owing is fixed.

Liquidate:  to determine the amount of indebtedness or damages.

The lawsuit my client faced asked for “damages according to proof”.  The former business associate claimed many measures of harm, all of which was disputed.  The claim was unliquidated; you couldn’t see or calculate the claim from the face of the complaint.

The suit could not be ignored.  And given the attitude of the plaintiff, the seriousness of the allegations, and the complexity of the case, it was going to be expensive to try.  And ruinous if the plaintiff won.

By filing Chapter 13 before trial, the claim was UNliquidated when the bankruptcy was filed.

No matter how much the plaintiff claimed was owed, because no amount of damages had been determined before the bankruptcy was filed, the unliquidated debt didn’t count against the Chapter 13 debt caps. [For context, when the plaintiff later filed a claim, he sought $15,000,000!]

Why Chapter 13 rocks

Chapter 13 offers eyepopping advantages over other forms of bankruptcy that my client could have chosen.  The first advantage is that a debtor in Chapter 13 stays in possession and control of his assets during the case.

By contrast, in Chapter 7, a court appointed trustee takes legal control of the debtor’s assets.  The trustee is tasked with turning non exempt assets into cash for the benefit of creditors.

My client could have seen his home sold in a Chapter 7, long before it was determined if he really owed the former business associate anything.

In a Chapter 11, which has no debt caps, he could have stayed in possession of his assets.  But to confirm a Chapter 11 plan, he would have to get the votes of his creditors in favor of a plan.  An angry creditor with a large claim is unlikely to vote for a plan the debtor sees as desireable.

In Chapter 13, the role of creditors in approving a plan is much smaller.  A creditor can object only on certain grounds found in the bankruptcy code.  Being unhappy with the amount being paid to creditors is not one of the permissible objections.

Confirmation tests for Chapter 13

Not to mention that the legal fees in Chapter 11 are invariably much larger than in Chapter 13.

Plan confirmation limits the damage

When the Chapter 13 plan proposed by my client was confirmed, that plan effectively limited for all time the amount he’d have to pay to put all of his debts behind him.

Where a creditor with a California judgment can collect that judgment for 10 years, and renew it for another 10 years, confirmation of a Chapter 13 plan limits what creditors get.  The pot of money the debtor will create through the plan equals the amount that would have been paid to creditors if the bankruptcy case had been Chapter 7 instead of Chapter 13.

Importantly, the amount a Chapter 7 trustee would distribute is what’s left when the trustee’s expenses have been paid, any capital gains taxes have been paid, and any claims with priority over unsecured creditors have been paid.

Instead of his wages and his acquisitions for the next 10 or 20 years being exposed to levy to pay a judgment, now the client has a 5 year payment plan based on the value of his assets on the day he filed bankruptcy.

Appreciation in value and improvement in financial circumstances all remain with the debtor.

What plaintiff gets if he wins

Confirmation of a Chapter 13 plan which fixes the total amount that unsecured creditors get on their claims limits the up-side to the vicious plaintiff.

The dispute about whether my client owes this guy anything is ongoing;  since we objected to the $15 M claim, the dispute has to be decided somewhere.

If the debtor wins, his other creditors don’t have to share the pot of money created by the plan with plaintiff.

If plaintiff wins and fixes the amount that the debtor owes him, he gets only a larger slice of the same “pie”.  Whether he is owed fifteen dollars or $15, 000,000, plaintiff’s recovery is limited to a share of the money going through the Chapter 13.

At the end of the Chapter 13, any part of the judgment that hasn’t been paid is discharged.

Some pain remains

It’s not going to be a free ride.  My client has been forced to file bankruptcy and still has to pay for representation in the bankruptcy case and for his trial lawyers.

The litigation over plaintiff’s claim won’t be pleasant.

He faces five years of plan payments to fund the Chapter 13 plan.

But even an adverse result at trial will not blot his life for the foreseeable future.

That’s why our legal system favors a fresh start through bankruptcy.  And why I’m a huge fan of Chapter 13.

Who Gets A Slice Of The Bankruptcy Pie?

By

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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…]

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