Chapter 13 Bankruptcy – The Basics

piggy bank with a red backgroundChapter 13 Bankruptcy – The Basics

A chapter 13 bankruptcy is commonly referred to as a wage earner  bankruptcy. In Arizona less than 25% of all consumer bankruptcy cases filed are originally filed as chapter 13 bankruptcy cases. Chapter 7 bankruptcy and Chapter 13 bankruptcy filers have the same goal, the legal discharge of as many obligations as is legally possible. A bankruptcy discharge is a legal status/document that is issued by an Arizona Bankruptcy Judge to the successful  bankruptcy filer that wipes away the filer\’s obligations on all debts that are subject to that discharge.

The chapter 13 bankruptcy filer proposes a plan when the case is filed that proposes to pay creditors certain amounts after reasonable household expenses are paid each month. The amount of the household budget and the amount paid to creditors is based on a number of different tests and other factors. It is important to understand that in most cases, much of the filer\’s debt is unpaid and discharge  at the conclusion of the case. The Chapter 13 bankruptcy time period or time the filer must make the payments is typically between 36 and 60 months.

The chapter 13 bankruptcy trustee collects the amount of the chapter 13 payment and distributes those funds to the creditors according to the plan that is proposed by the chapter 13 bankruptcy filer and then confirmed (typically with changes) by the Arizona Bankruptcy Judge. This plan divides debts into classes. some debts are considered more important than others and are placed in a class of debt that may receive more money from the filer as a percentage of it\’s debt than other debts in lower classes. Certain taxes, child support, spousal maintenance and secured creditors are typical examples of debts that are considered more important that other debts and are placed as a result in a higher class.

Basic Requirements to File and Obtain a Chapter 13 Bankruptcy Discharge

In order for the filer to obtain a discharge of the remaining debt in the Chapter 13 bankruptcy, the debtor has to meet these basic requirements (there are others):

  • He or she must be an individual/married couple. Corporations, LLC’s, Partnerships and business trusts can\’t obtain a chapter 13 discharge.
  • The filer has to have a regular income. This income can be from work, operation of a business, rental income, government assistance income or even gifts from others.
  • The income has to be large enough to pay living expenses each month and leave something for creditors on top of that. (the something  is dependent on the various tests mentioned above)
  • The filer’s secured obligations, such as home mortgages, mortgages on other real estate, obligations secured by personal property such as business debt, and automobile liens, etc., must total less than $1,081,400.00
  • The filer’s liquidated, unsecured obligations must total less than $360,475.00.
  • The filer cannot have received a discharge in a chapter 7 case filed within the last 4 years and a chapter 13 bankruptcy within the last two years.
  • The filer can’t file the chapter 13 and receive a discharge if a prior bankruptcy was dismissed during the preceding 180 days as a result of the filer\’s violation of a court order or failure to appear or if the filer requested the court to dismiss the case after a creditor asked the court to lift the automatic stay.
  • The filer must have taken a credit counseling class within 180 days of filing and prior to the entry of discharge.
  • The filer must be current on tax return filings.
  • The plan must be proposed in good faith.
  • The plan must satisfy the best interest of creditors  test. The Chapter 13 plan must propose to pay creditors at least as much as they would have received had the filer filed a chapter 7 bankruptcy instead and the non exempt assets were liquidated and distributed to the creditors. If the filer owned an airplane worth $50,000.00, than in a chapter 7 bankruptcy the creditors would in theory divide $50,000.00. In order to keep the airplane in a chapter 13 bankruptcy, the plan must propose to pay those creditors at least $50,000.00. If the plan doesn’t propose this or if the filer can’t follow through the plan won’t be confirmed by the Bankruptcy Judge.

Common Reasons People Pay Creditors Something in a Chapter 13 Proceeding Instead of Filing a Chapter 7 Bankruptcy or remaining in an IRS payment plan

  • Avoidance of the Liquidation of Assets-The chapter 13 bankruptcy trustee doesn’t have the authority to liquidate assets. The filer may keep his or her assets but creditors have to be paid the value of those non exempt assets over the plan payment period as mentioned above. If the filer’s business is worth $20,000.00 than in order to ensure the business is safe in a consumer bankruptcy, creditors must receive at least $20,000.00 over the plan period.
  • Forced Lower Repayment on Creditors- The chapter 13 bankruptcy filer can use the case to force a payment plan on certain creditors. Mortgage arrears can be caught up and repaid over the length of the plan period, stopping foreclosures and allowing the arrears amount to be spread out. Priority taxes can be paid over time and often in a way that is friendlier to the filer’s budget. Car loans can be crammed down to the market value of the car and paid over time stopping repossession. Student loan payments can be adjusted for the period of the chapter 13 plan.
  • Forced to use Chapter 13 Bankruptcy – The filer must pass a means test  in most cases in order to qualify to file a chapter 7 bankruptcy. Many people don’t pass the means test and are therefore forced to pay creditors something in a chapter 13 bankruptcy case. Also, the filer may have filed a previous bankruptcy case and be barred from filing a chapter 7 bankruptcy as a result. The time periods for filing a new case are friendlier to chapter 13 filers.
  • Splitting liens- A secured creditor’s lien in many cases as mentioned above, can be divided into a secured portion and an unsecured or under-secured  portion. The secured portion can be paid over the plan period and the unsecured portion can be forced to receive the same percentage that other unsecured non priority creditors receive under the plan which may be very little.
  • Removing Mortgage Liens- A second mortgage can be removed and paid the same percentage as other unsecured creditors if the lender is wholly unsecured and there is not equity in the home above the amount that is owed on the first mortgage in most cases.
  • Stop Foreclosure and Repossession Permanently- A chapter 13 bankruptcy plan provides a vehicle for the filer to pay home arrears in full and car loan amounts in full. If a home is going to be foreclosed or a car repossessed, the plan can be filed and those actions stopped while those payments are made. A chapter 7 bankruptcy doesn’t permanently stop foreclosures and repossessions.
  • Better payment plan re: IRS.  A chapter 13 bankruptcy typically creates a lower payment plan on Tax Debt than can be created outside of bankruptcy.  There are a number of reasons this happens.  The primary reasons are that the chapter 13 living expense budget is typically better than the IRS’ budget, many debts are treated as unsecured and dischargeable and are often paid little or nothing including certain taxes and penalties, interest rates are crammed down and certain types of income aren’t treated as income for purposes of determining how much a person can pay creditors.
  • Easy entry.  We typically charge $500.00 plus court costs to analyze, prepare and file a chapter 13 case and build the remainder of the fee into the plan payments.  This allows our clients to obtain quick relief from creditors, including the IRS.

 

 

May Be Filing a Bankruptcy Case in Arizona? 10 Important Facts you should be Aware of

suspiciousMay Be Filing a Bankruptcy Case in Arizona? 10 Important Facts you should be Aware of

1. BANKRUPTCY STOPS DEBT COLLECTION Debt collectors, Law Firms, the IRS are all barred from trying to contact you and to collect the debt at the moment you file your Bankruptcy Petition. When the debt is discharged that safety net becomes permanent. Bankruptcy doesn’t stop certain government related proceedings and doesn’t discharge all debts.

2. LYING GETS YOU IN TROUBLE

The Court may dismiss your case or worse if you leave something out or lie on the documentation you file.

3. ANY TAX REFUNDS YOU ARE OWED WILL BE TAKEN

At least a portion of the tax refund you may be due for the year in which you file for bankruptcy and 100% of any previous year(s) that may be owed to you become “property” of the bankruptcy trustee for distribution to creditors.

4. BANKRUPTCY DOESN’T “CLEAR” YOUR CREDIT REPORT

The debt discharged in a bankruptcy should be shown in your credit report as “included” in bankruptcy or “discharged” in bankruptcy within months of the date your debts are discharged BUT bankruptcy doesn’t “clear” your credit report in the sense all the debt history disappears. Your bankruptcy filing stays on the credit report history for 10 years.

5. BANKRUPTCY CRIMES – YOU CAN GO TO JAIL

Many people lie on their bankruptcy schedules and get caught. Some of those spend up to 5 years in Prison. You can’t conceal property from the Trustee in bankruptcy, you can’t transfer property or conceal property to defraud creditors, and you can’t hide or destroy documents, or make a knowingly false statement. Just because you heard that someone else got away with it doesn’t mean you will.

6. YOU CAN’T EASILY GET OUT OF A CASE THAT YOU HAVE FILED IF YOU CHANGE YOUR MIND

You can’t just dismiss your chapter 7 bankruptcy without a Judge’s approval and that may be hard to obtain. You can dismiss your chapter 13 anytime.

7. TAX DEBT ISN’T DISCHARGEABLE UNLESS IT MEETS CERTAIN REQUIREMENTS

Just because you owe the IRS money and list the IRS properly in your bankruptcy schedules, you won’t necessarily get rid of your obligation. The tax debt has to meet certain date criteria and be of a certain type of tax to be discharged in the bankruptcy.

8. BANKRUPTCY FILING DOESN’T MEAN YOU DON’T HAVE TO PAY FOR YOUR HOUSE OR CAR

If you want to keep an asset that is acting as security for a loan, at a minimum, you have to keep making the payment regularly even if the bank stops sending statements to you.

9. ALL INCOME, BUDGET, DEBTS, ASSETS AND FINANCIAL HISTORY HAVE TO BE LISTED

You don’t get to pick and choose what you tell the court. The bankruptcy code and rules determine how your assets are treated, what happens to your debts, and whether you qualify to file based on your income and budget.

10. TRY NOT TO INCUR NEW DEBT BEFORE FILING

It is a bad thing if you take trip to Cancun a few weeks before filing and use a credit card to pay for it. It is worse if you do it without the intent to repay. Taking on debt prior to filing should be avoided in most cases.