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Chapter 13 of the Bankruptcy Code allows people with regular income to keep their property and pay off some or all of their debts over a three to five year period.
Contact the law firm of Andrew M. Doktofsky, P.C. at (631) 673-9600 for a free consultation to determine if Chapter 13 bankruptcy is right for you. Attorney Andrew M. Doktofsky’s practice is focused on consumer bankruptcy law and he possesses the knowledge and experience necessary to guide you through a successful bankruptcy filing.
If you live in Nassau County or Suffolk County, New York, call Andrew M. Doktofsky, P.C. today if you have questions about filing for Chapter 13 bankruptcy. He represents clients in Deer Park, Babylon, West Islip, Bay Shore, Brentwood, Hauppauge, Huntington, Lindenhurst, Hempstead and surrounding Long Island areas.
Additionally, please download and complete the above .pdf documents prior to your first meeting with my office. The information will help me pursue a timely and efficient resolution, if it is determined that Chapter 13 is appropriate for your situation.
To be eligible to file for Chapter 13, an individual must have regular income, either through employment, operating a business, or other source of income. Married persons can file a joint Chapter 13 petition if at least one of the spouses has regular income. Chapter 13 is available for individuals only - a corporation or a partnership is not eligible to file for Chapter 13 bankruptcy.
A person is not eligible to file for Chapter 13 Bankruptcy if:
A person filing for Chapter 13 bankruptcy must have noncontingent, liquidated unsecured debts of less than $383,175, and noncontingent, liquidated secured debts of less than $1,149,525. The debt limits also apply to a joint Chapter 13 filing, i.e. the combined debts of husband and wife cannot exceed the amounts stated above. If necessary, two separate Chapter 13 proceedings could be filed to avoid exceeding the debt limitations.
Under Chapter 13 bankruptcy, a debtor files a repayment plan with the Bankruptcy Court that proposes to repay creditors over a period of three to five years. This chapter of the Bankruptcy Code is an alternative for those individuals whose income is too high to qualify for filing under Chapter 7, or who need to protect non-exempt assets.
For debtors with income that is below the median income for the state in which they live, the Chapter 13 repayment period is three years. However, the court may, for cause, approve a longer repayment period of up to five years. If the debtor’s income exceeds the state’s median income, the repayment period is generally five years. However, the time period can never exceed five years.
The following is the median income in New York State, based on family size, according to the U.S. Census Bureau:
During a Chapter 13 debtor’s repayment period, creditors are not permitted to take any actions to collect the debts owed to them by the debtor, unless the Bankruptcy Court grants the creditor relief from the automatic stay.
In Chapter 13 bankruptcy cases, a debtor in New York is required to provide additional documents to the bankruptcy trustee, no later than seven days before the first date set for the Meeting of Creditors. These documents include:
No later than seven days before the first date set for confirmation of the Chapter 13 plan, the debtor shall provide to the trustee:
Under Chapter 13 bankruptcy, the debtor’s assets are not liquidated, but the debtor must propose a repayment plan to pay back debts to creditors. Usually the plan is filed at the same time as the bankruptcy petition. However, if not filed with the petition, it must be filed with the bankruptcy court within 14 days of filing of the bankruptcy petition, unless the court extends the time for cause.
The plan will usually provide for monthly payments to the bankruptcy trustee. The trustee will distribute the funds to the debtor’s creditors according to the terms of the plan, which may be less than full payment to the unsecured creditors.
The debtor must start making payments to the trustee within 30 days of filing of the bankruptcy petition. If secured loan payments, such as car payments or mortgage payments, become due after the bankruptcy case is filed, the debtor must continue making these payments directly to the creditor.
Between 20 and 45 days after the meeting of creditors, a confirmation hearing is held to determine if the plan is feasible and meets the standards under the Bankruptcy Code. Creditors and the bankruptcy trustee are permitted to object to the plan for a number of reasons. The most common reasons for objecting are that the payments are less than what the creditor would receive if the debtor’s assets were liquidated, or that all of the debtor’s projected disposable income is not being used to pay unsecured creditors during the specified repayment period. If no objection is made, the bankruptcy court will normally confirm, i.e. approve, the plan.
If the plan is confirmed, the trustee will then distribute funds according to the provisions in the plan. If the plan is not approved, the debtor may be able to file a modified plan in order to address objections that were raised. Claims are paid in the order provided for in the Bankruptcy Code, depending on the type of debt. The different types of debts are priority, secured and unsecured debts.
Priority claims are granted special status by bankruptcy law. Priority claims include taxes, child support or other domestic support obligations, and the administrative expenses of the bankruptcy proceeding. These types of debts must be paid in full unless a particular creditor agrees to different terms for the claim.
Secured claims are debts that have some kind of collateral attached to the debt. Collateral is property that has been pledged to secure a debt, meaning that the creditor can repossess or foreclose on the property if the borrower defaults on repayment of the debt.
Secured claims can be treated in different ways in Chapter 13. Usually, the debtor continues to make payments directly to secured creditors outside of the Chapter 13 plan. For instance, the debtor will continue making monthly payments for a car loan or mortgage directly to the lender (i.e. the payments are not made through the Chapter 13 plan). Note that this is the usual practice in the Eastern District of New York and may differ in other parts of the country.
Arrears on secured debts, however, are paid through the Chapter 13 plan. If, prior to the bankruptcy filing, the debtor had defaulted on a mortgage, the debtor may cure the default by repaying the mortgage arrears through the Chapter 13 plan. However, the debtor must also continue making the mortgage payments that come due during the length of the plan.
Secured claims, other than those secured only by a security interest in the debtor’s principal residence, can be modified in Chapter 13. However, if the final payment on a mortgage secured by the debtor’s principal residence will come due during the pendency of the plan, (e.g. a balloon payment), then the claim can be modified.
Modification generally means that the secured creditor will be paid less than the remaining balance due. Unless the secured creditor agrees to the modification, the plan must propose to repay at least the value of the collateral plus interest. The interest rate to be paid is based on the Supreme Court decision in Till v. SCS Credit Corp. – calculated by adding a risk factor to the prime rate of interest. The risk factor is usually between 1% and 3%.
The cramdown is most commonly used with motor vehicle loans. However, the cramdown may not used if the vehicle was purchased within the 910 days prior to the filing of the bankruptcy petition and was purchased for the personal use of the debtor. Also, the cramdown is not available for any secured property for which the debt was incurred within one year preceding the bankruptcy filing.
If the debtor is successful in cramming down the lien on the vehicle or other property, then the balance of the loan above the value of the property is considered an unsecured debt, and will be treated in the same manner as other unsecured debts are under the debtor’s Chapter 13 plan.
The Chapter 13 cramdown may not be used for claims secured only by a security interest in the debtor’s principal residence. However, in Chapter 13, the debtor can void junior mortgage liens (i.e. second mortgages or home equity loans) on the debtor’s primary residence, if the value of the property is less than the balance due on the first mortgage. This is commonly known as a “lien strip" and can only be done when no equity attaches to the junior mortgage ( i.e. it is “wholly unsecured”). The reason why this can be done is that when the balance owed on the first mortgage is greater than the value of the property, there is no equity left for the second mortgage to attach to. Of critical importance is the value of the property. If there is even one dollar in equity above the first mortgage, then the second lien cannot be voided.
In order to have the bankruptcy court void a subordinate mortgage the debtor must commence a separate proceeding in the bankruptcy case and an appraisal will have to be performed to determine the value of the property.
If the debtor is successful in showing that the value of the property is less than the balance due on the first mortgage, then any subordinate mortgage liens will be classified as unsecured debts, and will treated in the same manner as other unsecured debts under the debtor’s Chapter 13 repayment plan. Upon the debtor’s successful completion of the Chapter 13 plan, the junior mortgage lien will be voided, and the debtor will no longer be required to make payments on the junior mortgage.
The final category of debts to be paid in Chapter 13 are non-priority unsecured claims. Unsecured claims are those for which no collateral attaches to the debt. These debts are generally paid last, and are often not paid in full.
In Chapter 13, unsecured creditors must be paid at least as much as they would have been paid if the debtor’s assets were liquidated under Chapter 7. This is known as the best interests of creditors test. However, if an unsecured creditor or the Chapter 13 trustee objects to confirmation of the plan, then the court may not approve the plan unless:
In essence, this means that the plan must first satisfy the best interests of creditors test and then must satisfy the disposable income test.
To determine the amounts to be paid under the disposable income test, the debtor’s current monthly income must first be established. Current monthly income is based on the debtor’s average monthly gross income from all sources received over the six month period preceding the bankruptcy filing. However, current monthly income does not include payments from social security.
Income includes a spouse’s income, whether or not the spouse is also filing for bankruptcy (unless the debtor and spouse are living in separate households). In addition, any contributions to household expenses made by other persons (usually other adult family members) are included in calculating the debtor’s current monthly income.
Disposable income is defined as:
Current monthly income (as calculated above), excluding child support payments, foster care payments or disability payments for a dependent child (to the extent reasonably necessary to be expended for such child), less
Once the above calculations are done, the resulting amount is the amount that must be paid to unsecured creditors each month for the applicable length of the plan.
The specified time period (known as the applicable commitment period) in which to pay unsecured claims depends on the debtor’s current monthly income (as defined above). The repayment period will be three years if monthly income is less than the state’s median income for a family of the same size. The repayment period is five years if the debtor’s current monthly income is greater than the median income for a family of the same size. The plan may be less than the applicable time period if the unsecured debt is paid in full over a shorter period of time.
Note that if the debtor’s current monthly income exceeds the median income, then the reasonable living expenses are determined using Form 22C, entitled “Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income”. This form is similar to the Means Test form used in Chapter 7.
A debtor who files for bankruptcy under Chapter 13 will receive a discharge after completing all payments, and will be released from debts provided for in the plan, if the debtor:
Upon the discharge, creditors may no longer pursue legal action against the debtor to collect debts not paid in full, unless the debts were not discharged in the Chapter 13 proceeding. Read more about debts that are not dischargeable when filing for bankruptcy.
If a debtor is unable to complete the repayment plan in the specified time period, the debtor may request a hardship discharge. This is usually only available if:
An example that may qualify a debtor for a hardship discharge is if the debtor suffers an injury or illness that prevents him or her from earning sufficient income to fund a modified repayment plan. A hardship discharge is similar to a Chapter 7 discharge in that only debts dischargeable in Chapter 7 are discharged.
The Bankruptcy Court for the Eastern District of New York - This court serves the Eastern District of New York, including the counties of Nassau, Suffolk, Brooklyn and Queens, and is a unit of the U.S District Court. All bankruptcy proceedings in the Eastern District of New York are filed in this court.
USBC-EDNY Local Rules – This link is to the local rules for the United States Bankruptcy Court for the Eastern District of New York. These rules vary from the federal rules, and are applicable only to the USBC-EDNY.
Chapter 13 of the United States Bankruptcy Code – Title 11 of the United States Code, which is entitled, “Bankruptcy,” contains the federal law regarding bankruptcy. The Code governs all bankruptcy cases in the United States. This link is to the laws pertaining to Chapter 13 bankruptcy.
Contact the law firm of Andrew M. Doktofsky, P.C. today for a free consultation about filing for Chapter 13 bankruptcy in Suffolk County and Nassau County, New York. This also includes the Long Island communities of North Bay Shore, North Babylon, Lindenhurst, Commack, Central Islip, Hempstead, Freeport, and Long Beach, NY. Call (631) 673-9600 today to discuss your options and whether you should file for Chapter 13 bankruptcy in New York.
Contributor: Andrew M. Doktofsky