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.
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.
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.
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.