Reorganizing Debt With Chapter 13 Bankruptcy
Chapter 13 of the Bankruptcy Code allows debtors 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 Office of Andrew M. Doktofsky, P.C., at 631-812-7712 for a free consultation to determine if Chapter 13 bankruptcy is right for you. My practice is focused on consumer bankruptcy law and I possess the knowledge and experience necessary to guide you through a successful bankruptcy filing.
Eligibility Requirements For Filing Chapter 13
To be eligible to file for Chapter 13, an individual must have a regular income, either through employment, operating a business or another 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:
- He or she had been a debtor in a pending bankruptcy case at any time in the preceding 180 days; and
- The case was dismissed by the court for willful failure of the debtor to abide by orders of the court or to appear before the court in proper prosecution of the case; or
- The debtor voluntarily dismissed the bankruptcy proceeding following a request by a creditor for relief from the automatic stay
Debt Limitations In Chapter 13
A person filing for Chapter 13 bankruptcy must have noncontingent, liquidated unsecured debts of less than $419,275, and noncontingent liquidated secured debts of less than $1,257,850. 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.
Establishing A Chapter 13 Repayment Plan
Under Chapter 13, the debtor’s assets are not liquidated. Instead, the debtor files a plan with the Bankruptcy Court that proposes to repay creditors over a period of between 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 nonexempt assets.
For debtors with income that is below the median income for a family of the same size, 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 plan may be less than the applicable time period if the debtor’s unsecured debts will be paid in full over a shorter period of time.
The following is the median income in New York state, based on family size, according to the U.S. Census Bureau:
- One Person in Household, $54,014
- Two People in Household, $69,642
- Three People in Household, $81,887
- Four People in Household, $99,943
For households exceeding four people, add $8,400 for each individual in excess of four.
Usually, the Chapter 13 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 the filing of the bankruptcy petition, unless the court extends the time for cause.
The debtor must commence payments to the Chapter 13 trustee no later than 30 days from the date that the bankruptcy petition is filed. If secured loan payments, such as car loan 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 Chapter 13 trustee are permitted to object to the plan for a number of reasons. The most common reasons for objecting to the plan 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. 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. If the plan is not approved, the debtor may be able to file a modified plan in order to address objections that were raised.
Mandatory Disclosures To Be Aware Of
The Local Bankruptcy Rules for the Eastern District of New York require that a debtor in a Chapter 13 bankruptcy case provide certain documents to the Chapter 13 trustee no later than seven days before the first date set for the meeting of creditors. These documents include:
- Copies of all payment advices or other evidence of payment from any employer received 60 days before the filing of the bankruptcy petition
- Affidavit of contribution from each person contributing to the proposed plan or to payment of expenses of the debtor’s household along with payment advices received within 60 days before the date of the filing of the petition
- Documentation of the current value of all real property, co-op apartments, land, condominiums, cemetery plots or timeshares in which the debtor has an ownership interest (unless the debtor proposes to pay 100% to unsecured creditors)
- Copies of all leases for real property for which the debtor is a lessor
- A detailed affidavit of changed circumstances if a prior Chapter 13 case was pending within a year of the filing date
- Copies of all payments on mortgage installments, real property lease agreements or car payments that have come due since the petition was filed
No later than seven days before the first date set for confirmation of the Chapter 13 plan, the debtor shall provide to the trustee:
- Copies of all payments on mortgage installments, real property lease agreements or car payments that have come due since the first disclosure (see above) were made
- A copy of an affidavit stating whether the debtor has made all payments for child support or other domestic support obligations that became due after the bankruptcy petition was filed or that the debtor has no domestic support obligations
- An affidavit that the debtor has filed all federal, state and local tax returns as required by the Bankruptcy Code (Debtors must have filed all tax returns required to be filed for all taxable periods ending in the four years preceding the bankruptcy filing.)
Priority Creditor Claims Under The Chapter 13 Repayment Plan
Priority claims are granted special status by bankruptcy law. Priority claims include certain types of 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 Creditor Claims Under The Chapter 13 Repayment Plan
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 and Southern District of New York, and may differ in other bankruptcy courts.
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.
What Is The Chapter 13 Cramdown?
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 be 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 unsecured debt and will be treated in the same manner as other unsecured debts are under the debtor’s Chapter 13 plan.
Treatment Of Subordinate Mortgages
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 file a motion in the bankruptcy case to determine the value of the real property. An appraisal of the property will be necessary.
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 be 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.
Unsecured Creditor Claims Under The Chapter 13 Repayment Plan
The final category of debts to be paid in Chapter 13 are nonpriority 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. In addition, if an unsecured creditor or the Chapter 13 trustee objects to confirmation of the plan, then the court may not approve the plan unless:
- The objecting unsecured creditor is paid in full
- All of the debtor’s projected disposable income for the applicable commitment period is committed to paying unsecured creditors
In essence, this means that the plan must first satisfy the best interests of creditors test and then must satisfy the disposable income test.
Determining The Amount To Be Paid To Unsecured Creditors In Chapter 13
To determine the amount 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.
Generally, interest does not accrue on unsecured debts once the bankruptcy petition is filed. However, there are exceptions to this rule, specifically for nondischargeable student loans, which continue to accrue interest on any portion of the outstanding balance that is not paid through the Chapter 13 plan.
The Chapter 13 Discharge Of Remaining Debts
A debtor will receive a Chapter 13 discharge after completing all plan payments if the debtor:
- Certifies that all domestic support obligations have been paid;
- Has not received a prior Chapter 13 discharge in a case filed within the previous 2 years;
- Has not received a prior Chapter 7 discharge in a case filed within the previous 4 years;
- Has completed an approved financial management course.
Upon entry of the discharge, creditors may not take any action to collect debts that were 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:
- The debtor’s failure to complete the plan was due to circumstances for which the debtor should not justly be held accountable
- The debtor’s creditors have received as much as they would have received in a Chapter 7 bankruptcy proceeding
- Modification of the plan is not practicable
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.
Discuss Your Options With A Knowledgeable Attorney For Free
Contact The Law Office of Andrew M. Doktofsky, P.C., today for a free consultation about filing for Chapter 13 bankruptcy in Suffolk County, Nassau County, and Long Island. Call 631-812-7712 or email the firm today to discuss your options and whether you should file for Chapter 13 bankruptcy in New York.
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