CHAPTER
7
YOU DESERVE
A FRESH START
CHAPTER
13
RESTRUCTURING &
ASSET PROTECTION
IMMIGRATION SERVICES

Restructuring & Asset Protection

Chapter 13 is a ‘reorganization Chapter’, because it requires the Client to make monthly payments under a debt repayment plan. However, the monthly payments typically include payments for assets, such as a car or a home that the Client wishes to retain. At the same time, the Client will cancel other unwanted financial obligations.

 

Asset Protection

It is important to seek pre-Bankruptcy planning. Strategic planning is essential to Clients who have assets that need to be protected in the Bankruptcy process.When assets are not protected, there are steps that a Client may take to protect their assets in a subsequent Bankruptcy case.

 

 

Individual Restructuring Overview

Individual Restructuring

To be eligible for Chapter 13, an individual can have no more than $1,080,000 in secured debt (that is, mortgages, car loans, etc.) and no more than approximately $360,475 in unsecured debt (such as credit cards, medical bills and deficiency balances).  Clearly filing Chapter 13 cases are more complicated.

There are distinct advantages to Chapter 13 that are simply not available in Chapter 7.  For instance, in Chapter 13, a homeowner may eliminate entirely a mortgage or home equity line of credit (“HELOC”) if the property is worth less than the balance of the first mortgage.  In addition, a client may restructure a car loan while in Chapter 13. They may also set up a payment plan for back taxes owed or even arrears on a mortgage in Chapter 13.  A person may also operate a small business under Chapter 13.

Chapter 13, by definition, involves making monthly payments for a period of Portrait happy Hispanic family sitting with house in backgroundtime ranging from three (3) years to five (5) years.  The amount of this payment depends on a wide range of factors particular to each case.  Thus, no estimate of the amount of the monthly payment can be given without an analysis of a client’s specific financial and legal situation.

Many people often misunderstand Chapter 13 as requiring that all debts be paid in full, but that is not true.  Similar to Chapter 7, Chapter 13 allows most individuals to cancel obligations for credit cards; medical bills; mortgages or home equity lines of credit; car loans; back taxes and other debts. However, individuals with high earnings may have to pay some or all of such debts, although with little or no interest.

cutting credit cardsUnlike Chapter 7, a person retains much greater control over his or her assets in Chapter 13.  An individual can also qualify for a new home loan from the Federal Housing Administration (“FHA”) in two (2) years after the filing of their Chapter 13 case, instead of three (3) years after a Chapter 7.  They can also engage in home loan modification – after avoiding and canceling the lien imposed by junior mortgages.

There are other subtle differences between Chapter 7 and Chapter 13.  We make it a point that our clients understand the difference between these chapters so that the client can make an informed decision as to which Bankruptcy Code Chapter is best for his or her specific situation.

[back to top]

 

 

 

 

 

 

Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy

For some debtors, Chapter 13 bankruptcy is a better option than Chapter 7 bankruptcy.

For some debtors, Chapter 13 bankruptcy is a better option than Chapter 7 bankruptcy. And sometimes Chapter 13 is the only option because a debtor is not eligible for Chapter 7 bankruptcy.

It’s important to sort out the issues and decide which form of bankruptcy is best for you. Many debtors assume that Chapter 7 is better than Chapter 13 because Chapter 13 requires debtors to repay a portion of debt, whereas Chapter 7 wipes out most debts. But this is not always the case. Here are some good reasons to file for Chapter 13 bankruptcy.

You Are Not Eligible for Chapter 7 Bankruptcy

Some debtors cannot file for Chapter 7 — leaving Chapter 13 as the only option. You cannot file for Chapter 7 if both of the following are true:

  • Your current monthly income over the six months prior to your filing date is more than the median income for a household of your size in your state (go to the website of the United States Trustee, www.usdoj.gov/ust, and click “Means Testing Information” to see the median figures for your state).
  • Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13, exceeds certain limits set by law. These calculations are commonly referred to as the “means test” — if you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan, you flunk the test and are ineligible for Chapter 7 bankruptcy.

The means test can get fairly complex — and, to make matter worse, Congress has its own definitions of “disposable income,” “current monthly income,” “expenses,” and other important terms, which sometimes operate to make your income seem higher than it actually is. You can find step-by-step instructions to determine if you qualify for Chapter 7 with the help of your attorney.

In addition, if you have received a Chapter 7 bankruptcy discharge within the last eight years or a Chapter 13 discharge within the last six years, you may not file for Chapter 7 bankruptcy.

When Chapter 13 Is Better Than Chapter 7

Even if you are eligible for Chapter 7 bankruptcy, there are some situations when filing for Chapter 13 may be more advantageous than filing for Chapter 7.

You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.

You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7. You can include these debts in your Chapter 13 plan and pay them off over time.

You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. This might be the case if creditors are coming after you or if you simply require the formal structure and deadlines the Chapter 13 process provides in order to follow through on your good intentions.

You have nonexempt property that you want to keep. When you file for Chapter 7 bankruptcy, you get to keep only exempt property – property that is protected from creditors under state or federal law. You have to give your nonexempt property to the bankruptcy trustee, who can sell it and distribute the proceeds to your creditors. In Chapter 13, you don’t have to give up any property. Instead, you repay your debts out of your income. So, if you have nonexempt property that you can’t bear to part with, Chapter 13 might be the better choice.

You have a co-debtor on a personal debt. If you file for Chapter 7 bankruptcy, your co-debtor will still be on the hook — and your creditor will undoubtedly go after the co-debtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your bankruptcy plan payments.

[back to top]

 

 

The Bankruptcy Means Test

Are You Eligible for Chapter 7 Bankruptcy?

If you’re looking for an easy way to determine your eligibility under the Chapter 7 means test, use the Nolo online means test calculator, created by the author of Nolo’s book,  “How to File for Chapter 7 Bankruptcy”, Albin Renauer, J.D. Once you enter your zip code, the calculator uses the applicable income and expense standards for your state, county, and region to determine your eligibility.

You’ll have to supply some income and expense information, but the calculator will save you the trouble of looking up income and expense figures for your area and doing the math. And, if you decide to file for Chapter7 bankruptcy, you can use these figures on your official paperwork (the calculator closely follows the format of the means test form, Official Form 22A, that you must complete when you file for bankruptcy).

The bankruptcy “means test” determines whether your income is low enough for you to file Chapter 7 bankruptcy. It’s a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. High income filers who fail the means test may use  Chapter 13 bankruptcy  to repay a portion of their debts, but may not use Chapter 7 bankruptcy to wipe out their debts altogether.

However, having to take the Chapter 7 means test doesn’t mean that you must be penniless in order to use Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment. This article discusses how to use our online means test calculator to determine whether you can pass the means test — and, therefore, file for Chapter 7 bankruptcy.

How Does the Chapter 7 Means Test Work?

The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can’t pay their debts. It does this by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.” The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy.

Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. To take the means test, you must first determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.

Is Your Income More Than the Median?

The first step is simple: If your current monthly income is less than the median income for a household of your size in your state, you pass. Period. You’re done. You do not need to complete the rest of the means test. You can file for Chapter 7.

Do You Have Enough Disposable Income to Repay Some Debts?

For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called “disposable income”), after paying your “allowed” monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy.

Median income levels vary by state and household size, and each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation.

If You Pass the Chapter 7 Means Test

Just because you qualify under the means test does not necessarily mean you should file for Chapter 7 bankruptcy — merely that you can. Any decision to file for Chapter 7 bankruptcy should be made only after considering alternatives and other factors discussed with an Attorney.

If You Don’t Pass the Chapter 7 Means Test

If you don’t pass the means test, you are limited to using Chapter 13 bankruptcy, which requires you to make monthly payments over a five-year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment. However, Chapter 13 bankruptcy is still the best way to handle specific types of problems, like curing a default on a mortgage.

[back to top]

 

 

 

Obligations Under Chapter 13 Bankruptcy

Which debts must be paid back when filing for Chapter 13 bankruptcy protection?

To begin a Chapter 13 bankruptcy you fill out a packet of forms – mostly the same forms as you would use in a Chapter 7 bankruptcy – listing your income, property, expenses, and debts. You file these forms and paperwork with a nearby bankruptcy court. You must also file a workable payment plan proposing how you plan to handle your debts over the payment plan period.

You must also file your tax return for the previous year, proof that you’ve filed your tax returns for the last four years, and a certificate showing that you’ve completed credit counseling with an agency approved by the United States Trustee (go to www.usdoj.gov/ust, then click “Credit Counseling and Debtor Education” for a list of approved agencies).

Under a Chapter 13 plan, you make payments, usually monthly, to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee in turn pays your creditors and collects a statutory commission based on the amounts paid out under your plan. You must make every payment, on time, in order to successfully complete your plan and get a discharge of your remaining debts.

How Much You Have to Pay

Some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage (or nothing at all). Typically, Chapter 13 bankruptcy plans must provide that:

Administrative claims will be paid 100%. These include:

  • Your filing fee ($281)
  • The trustee’s commission (7.5% of each monthly payment), and
  • Attorney’s fees, if you hire an attorney for help with your Chapter 13 bankruptcy.

Priority debts will be paid 100%. These include:

  • Back alimony and child support
  • Most tax debts (including state and federal income taxes)
  • Wages, salaries, or commissions you owe to employees, and
  • Contributions you owe to an employee benefit fund.

Mortgage defaults will be paid 100% if you want to keep your house.

Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments fall into this category.

 

Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:

  • The total value of your nonexempt property
  • The amount of disposable income you have each month to put toward your debts, and
  • How long your plan lasts.

Disposable Income

Your payment plan must commit to paying any leftover disposable income (your income less certain allowed expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts and medical bills.

Length of Payment Plan

The length of your payment plan depends on your income level. If your “current monthly income” (your average income over the six months prior to filing) exceeds the median monthly income for a household of your size in your state, your plan must last five years. If your income is less than the median, you can propose a three-year plan, even if your unsecured creditors cannot be fully repaid during that time. (To find the median income figures for your state, go to the United States Trustee’s website, www.usdoj.gov/ust, and click “Means Testing Information.”)

Your “current” monthly income might be out of date. Because your current monthly income, as calculated above, is an average, it may well be more than your actual monthly income at the time you file. For instance, if you were laid off unexpectedly three months before filing, your monthly income when you file may be quite low, as compared to your average income over the last six months, which will have to include three months of your salary.

No Surrender of Property

If you file for Chapter 13 bankruptcy, you don’t have to hand over any of your property; instead, you repay your debts out of your income. In exchange for getting to keep your property, your plan will have to pay your creditors at least the value of your nonexempt property. (In Chapter 7 bankruptcy, you must surrender your nonexempt property to the trustee, who can sell it and distribute the proceeds to your creditors. You do get to keep property that is exempt.)

[back to top]

 

 

 

Debts That Must Be Paid in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you must pay some debts in full through your plan; others you pay in part. Here are the details.

The Chapter 13 plan is the crux of a Chapter 13 bankruptcy case. The plan lays out how much each creditor will get paid, how long the plan will last, the values of the debtor’s property, and more. The plan must be confirmed by the bankruptcy court in order for the case to proceed. The bankruptcy trustee and creditors can object to various aspects of the plan.

Different types of debts are paid in different ways in a Chapter 13 bankruptcy. The Bankruptcy Code classifies creditor claims and requires your Chapter 13 plan to pay these different classes of claims in particular ways. The most common classes of claims in a Chapter 13 case are secured claims, unsecured priority claims, and general unsecured claims.

Secured Claims

How secured claims are paid in Chapter 13 depends on how long your ongoing payments will last, and in some cases whether your loan is underwater or not. Secured claims are claims for debts that are secured by collateral. If you do not pay a secured debt, the creditor can come take the collateral and sell it to obtain payment. The most common examples of secured claims are home mortgages, property taxes when a lien has been attached to your property, and car loans. If you file a Chapter 13 and intend to keep the property that secures the loan, you have to pay the loan.

How Must Secured Claims Be Paid?

For the most part, secured claims must be paid in full with interest in a Chapter 13 case. The interest rate will depend on the debt. And in certain situations, you can satisfy the claim by paying less than what is owed (this happens in “cram downs”). If the contract on a secured debt calls for ongoing payments that would normally last longer than your Chapter 13 plan (for example, if you have 15 years left on your mortgage payments), you don’t have to pay off the entire debt during your plan. Instead, you continue with your regular monthly payment during and after your repayment period.

Here’s how the most common secured debts are treated:

Mortgage debt

Although your mortgage is a secured debt, you do not have to pay your mortgage in full in a Chapter 13 case. Mortgages are classified as ongoing debts; as such, you make your monthly mortgage payment during your Chapter 13 case and then continue to pay on it when your case ends. However, if you have a past due balance this must be paid in full through your plan. For example, if your monthly mortgage payment is $1,000, you were three months behind on your mortgage when you filed bankruptcy, and you incurred $450 in interest and fees, you must continue making $1,000 per month payments to the mortgage lender and also pay $3,450 (which represents the three months of arrears, plus the overdue interest, and fees) with interest over the life of the plan. To learn more about mortgage debt and your options under Chapter 13, read “Your Home and Mortgage in Chapter 13 Bankruptcy”.

Property taxes. If you are paying past due property taxes though your Chapter 13, you must pay the entire past due balance in full with interest over the life of the plan. The amount of interest you pay will depend on the local rate where you live.

Car payments. If your car loan balance becomes due before the end of your Chapter 13 plan, you must pay the balance in full over the life of your plan. How much you end up paying, however, will depend on a number of factors. If you are upside down on your car loan (meaning you owe more on the loan than the car is worth) and you bought the car more than 910 days ago, the secured claim is limited to the value of the car. You pay market value plus interest through your plan. The remaining balance becomes part of your unsecured debt. This is called a “cram down.” However, if you bought your car less than 910 days ago or if the loan you’re paying was not the loan you used to buy the car, you must pay the full balance due with interest through your plan.

Unsecured Priority Claims

Unsecured priority claims are claims that are not secured by collateral but that the Bankruptcy Code has granted priority over other unsecured debts. Unsecured priority claims must generally be paid in full through the Chapter 13 plan. Unsecured priority debts include certain income tax debts, past due child support, past due spousal support and other past due domestic support obligations. Unsecured priority debts also include administrative expenses, such as your attorney’s fees and the Chapter 13 trustee’s fees.

General Unsecured Claims

General unsecured claims are claims that are not secured or priority. The most common general unsecured debts are credit card debts, personal loans, medical bills, and utilities. General unsecured claims receive a percentage of what is owed based upon your disposable income and the value of your bankruptcy estate; that is, whatever your best effort at payment will yield is what the creditors will receive, and they must also receive at least what they would have received if you had filed Chapter 7. Many Chapter 13 debtors pay only a small portion of their unsecured debts through the Chapter 13 plan.

[back to top]

 

 

 

 

Your Home in Chapter 13 Bankruptcy

You can stop foreclosure and save your home in a Chapter 13 bankruptcy.

Chapter 13 bankruptcy provides opportunities for homeowners to delay or prevent foreclosure and pay off back debt on their mortgages. In some cases, homeowners can also eliminate the amount of second or third mortgages. Chapter 13 bankruptcy is particularly helpful to people who are behind in mortgage payments and need time to get current on their payments so they can keep their home indefinitely.

Saving Your Home

If you are behind on your mortgage payments, and cannot get current, Chapter 13 bankruptcy may be a good way to save your home. In Chapter 13 bankruptcy, you pay all or a portion of your debts over time through a repayment plan. Chapter 13 bankruptcy lets you pay off a mortgage “arrearage” (late, unpaid payments) over the length of the repayment plan — usually three or five years, depending on your income and the time it will take you to meet all the plan’s requirements.

In order for this option to work, you’ll need enough income to at least meet your current mortgage payment and your other basic expenses at the same time you’re paying off the mortgage arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home. (Note: Although Chapter 13 bankruptcy’s provisions can be used to prevent foreclosure in the long run, Chapter 7 bankruptcy provides a temporary relief from foreclosure that can sometimes lead to a long-term solution. To learn if you can use Chapter 7 bankruptcy to save your home, Your Home in Chapter 7 Bankruptcy.)

Eliminating Second and Third Mortgages

As mentioned, Chapter 13 bankruptcy may help you eliminate the payments on your second or third mortgage. That’s because if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), then you may no longer have any equity with which to secure the later mortgages. If this is the case, the bankruptcy court may “strip off” the second and third mortgages and re-categorize them as unsecured debt, which, under Chapter 13 bankruptcy, takes last priority. Unsecured debts are usually not paid in full in Chapter 13 bankruptcy and sometimes do not have to be paid back at all.

Halting or Delaying Foreclosure: The Automatic Stay

When you file a Chapter 13 bankruptcy petition, all foreclosure proceedings must stop (with one exception, discussed below) until your Chapter 13 repayment plan is approved by the court. This is called the “automatic stay.” If your repayment plan includes provisions for paying off your mortgage arrearage, then once the plan is confirmed (approved by the bankruptcy judge) the lender is bound by the plan and cannot continue with the foreclosure, assuming you make your regular mortgage and bankruptcy plan payments.

If your repayment plan does not include provisions to pay off your mortgage arrears, then once the court approves the repayment plan, the lender may continue with foreclosure proceedings. If you don’t want to keep your home as part of the Chapter 13 bankruptcy, filing for bankruptcy will give you a reprieve from foreclosure of at least several months, during which time you can continue to live in your home. In addition, since most bankruptcy judges give debtors several chances at proposing a feasible repayment plan, the confirmation process may take a long time — giving debtors an even longer respite from foreclosure. (However, if it appears that you’ll never propose a feasible repayment plan, the confirmation process can be greatly shortened.)

There is one exception to the automatic stay. If you have filed another bankruptcy petition within the previous two years, and that filing resulted in the automatic stay being lifted at the request of the party seeking a foreclosure, the filing of this Chapter 13 bankruptcy will not halt foreclosure proceedings. This is to prevent people from filing a series of bankruptcy petitions just to stall foreclosure.

Modification of Certain Mortgages

Chapter 13 bankruptcy allows the bankruptcy court to modify some debts secured by property if the amount you owe is greater than the value of the property. The amount of the debt equal to the value (or equity) of the property remains secured (meaning the collateral can be taken to pay the debt if you don’t make the payments). The remainder of the debt becomes part of your unsecured debt and is treated as a non-priority debt (which means you will pay less, or even none of it, in your repayment plan). This is called a “cram down.” For example, let’s say your loan is for $300,000 and the property value is only $200,000. If the loan is eligible for a cram down, $200,000 remains secured by the property and the remaining $100,000 is added to your unsecured debt.

For the most part, you cannot cram down a mortgage on your residence. However, cram downs are allowed if:

  • The mortgage is for a multiunit building
  • The loan is for other buildings or property not part of your residence (like a farm)
  • The loan is for a mobile home that is considered to be personal property, or
  • The loan is not secured solely by your residence (for example, both your residence and a business asset secure the loan).

If one of these exceptions applies, the court may cram down the loan, but you will have to pay off the entire crammed-down loan through your Chapter 13 repayment plan. For this reason, even if you meet one of the above exceptions, mortgage cram downs rarely make sense unless you will have the capacity to make a balloon payment at the end of your plan.

[back to top]

 

 

 

Options if You Can’t Make Your Chapter 13 Plan Payments

Here’s what you can do if you can’t make your Chapter 13 plan payments.

If you fall behind on your Chapter 13 plan payments, your bankruptcy trustee or a creditor will usually ask the court to dismiss your bankruptcy case.  However, you still have many options available to you to save your bankruptcy and obtain a discharge.  Read on to learn more about your options if you have fallen behind on your Chapter 13 plan payments.

(To learn about the Chapter 13 plan, including what it is, what you must pay through it, and more, see our Chapter 13 Repayment Plan area.)

Get Current on Your Payments

Many bankruptcy debtors miss plan payments because of a temporary financial emergency.  After their emergency is resolved, most debtors are able to get caught up if given enough time.  If you are facing dismissal, you can explain your circumstances to the court and request more time to catch up on your plan arrears.  Most courts will allow you more time or add a specific catch up plan to your Chapter 13 plan to cure your default.

Modify Your Chapter 13 Plan Payments

If your financial emergency will not get resolved in a short period of time (for example, you lost your job or your pay was permanently reduced), then you can ask the court to modify and reduce your monthly plan payments.  To modify your payments, you will need to propose a new payment amount that you can afford and provide the court with documentation showing your changed circumstances and new budget.  However, keep in mind that if your Chapter 13 plan is only paying debts that have to be paid in your bankruptcy, then you may not be able to reduce your payment amount.

Request a Hardship Discharge

If you are unable to continue with your Chapter 13 bankruptcy, you may be eligible to receive a hardship discharge.  A hardship discharge is a discharge that is granted even though you have not completed all of your required plan payments.  The court will analyze your financial situation and consider what is in the best interest of all parties involved before granting a hardship discharge.  Also, receiving a hardship discharge does not wipe out your priority debts that have to be paid in a Chapter 13 such as certain taxes or domestic support obligations (like child support and alimony).  To learn more about the hardship discharge, see The Chapter 13 Hardship Discharge.

Convert To Chapter 7

Similar to the hardship discharge, if you can no longer afford to be in a Chapter 13 bankruptcy, you can convert your case to Chapter 7 and receive a quick discharge.  When you convert, you will be assigned a new bankruptcy trustee and will need to provide proof that you now qualify for a Chapter 7 bankruptcy because your new circumstances do not allow you to afford a Chapter 13.  However, like a hardship discharge, converting to Chapter 7 will not get rid of your priority debts or allow you to get caught up on your mortgage arrears. (To learn more see, Converting a Bankruptcy Case From Chapter 13 to Chapter 7.)

Dismiss Your Case And Re-file

If none of the options above allow you to meet your goals, you can always let your case get dismissed and re-file another Chapter 13 bankruptcy.  This may be your best option if you cannot afford your Chapter 13 right now but you are not able to lower your payments or convert to Chapter 7 because you have priority debts or mortgage arrears you need to pay.  Once your financial situation improves, you can file another Chapter 13 to pay your debts.  But keep in mind that depending on when you file, you may have to ask the court to extend the automatic stay in your subsequent bankruptcies.

[back to top]

 

 

 

 

Keeping Your Business in Chapter 13 Bankruptcy

If you want to keep your business during and after bankruptcy, Chapter 13 may be a good option.

If you want to continue your business while filing for bankruptcy, Chapter 13 may be a good option. Keeping your business and other property is one of the benefits of filing for Chapter 13 bankruptcy.  However, only individuals can file for Chapter 13 bankruptcy, so if your business is an LLC or Corporation, Chapter 13 won’t help.

Chapter 13 is basically a court enforced payment plan. You keep your property and repay some or all of your debts.  As long as you have enough income to pay your current expenses and make payments toward your debts, Chapter 13 could be a very useful financial tool to get your business back on track without losing it. However, there are some limitations, particularly with respect to the type of entity you use to do business.

Who Can File for Chapter 13?

Only individuals can file Chapter 13.  If you operate your business as a sole proprietorship, your business is included in your personal filing.  The assets are owned by you personally and the debts are owed by you personally. Chapter 13 can help you under these circumstances.

It is different if you operate your business as an entity which is legally separate from yourself, such as a corporation or a limited liability company. Legally separate business entities cannot file for Chapter 13.

If, however, you have personal liability for some of the corporation’s or LLC’s business debts because, for example, you personally guaranteed payment of the debts, you can include those debts in a Chapter 13.

How Can Chapter 13 Help You Keep Your Business?

In Chapter 13 bankruptcy, you list all of your personal and business debts and assets in your paperwork. Both your personal and business debts are paid through the Chapter 13 plan.  As long as you have enough income, either from your business or from other sources, to make payments under your Chapter 13 while paying your regular operating and living expenses, you can keep your business and any other assets you own.  The only requirement is that you contribute all of your disposable income to the plan and, if unsecured creditors are not paid in full, the total of all the payments under the Chapter 13 plan has to equal or exceed the amount the unsecured creditors would have received if you had filed a Chapter 7 liquidation instead of the Chapter 13.

Debt Limits Under Chapter 13

There are debt limits under Chapter 13.  You can only file if your non-contingent, liquidated (easily calculated, not unspecified claims) unsecured debts are less than $360,475, and your non-contingent, liquidated secured debts are less than $1,081,400.  If your debts, including the business debts of your sole proprietorship, equal or exceed these amounts, you do not qualify for a Chapter 13.

Co-debtor Stay Not Available for Corporate or LLC Business Debts

A co-debtor stay means that as long as you are in Chapter 13, a creditor cannot try to collect money you owe from any co-signors or guarantors.  But there is an exception: the co-debtor stay does not apply to business debts.  This is not a problem if you operate your business as a sole proprietorship because both you and the business are included in the Chapter 13 filing.

It can be a big problem if your business is a corporation or a limited liability company.  If you file a Chapter 13 to get rid of your personal liability for business debts, and you have guaranteed debts that are owed by your corporation or limited liability company creditors can continue to take collection action against the corporation or limited liability company. There is no co-debtor stay.  This is true even if you are making payments under your Chapter 13 plan.   It is possible that some creditors of a corporation or limited liability company might be willing to wait for the payments under the Chapter 13 and continue to do business with your company, but you can’t legally force them to do this.

[back to top]

Asset Protection Overview

An important consideration for anyone facing financial challenges is to seek pre-Bankruptcy planning. Such strategic planning is essential to individuals who have assets that may or may not be protected in the Bankruptcy process. To the extent that assets are not protected, there may be permissible steps that a client may take to protect his or her assets in a subsequent Bankruptcy case. This is a core expertise provided by The Law Offices of Christopher Alliotts.

As a general matter, certain assets are deemed “excluded” from the Bankruptcy estate. These assets include but are not limited to ERISA-qualified and tax-qualified retirement plans, such as pensions, 401(k) plans, 403(B) plans, and spendthrift trusts. These assets have some of the strongest protections against successful attack in a Bankruptcy case and will pass through the case proceedings unaffected.

row of housesIn addition, individuals filing Bankruptcy can also “exempt” certain assets; by exempting an asset, the client preserves the value of a particular asset up to a certain dollar authorized by law. For example, a client may exempt equity in their principal residence; the amount varies widely depending on the age of the client, whether the client is married or has dependents in the home, and whether someone in the household is disabled.

If a person does not hold equity in their home, California provides a separate series of exemptions that a client may use to protect other assets. That scheme applies to cash, bank deposits, vehicles, household goods and furnishings, jewelry, tools of the trade, personal injury settlements, among other things.

Individual retirement accounts (“IRA’s”) may also be exempted to the extent “reasonably necegoing over assetsssary” for the future support and welfare of the client and his or her dependents. How much is deemed reasonably necessary is a fact-intensive question taking into account the age of the client, his or her earning power, and the number and specific needs of dependents. As a general matter, however, generous amounts have been found to be reasonably necessary.

The most important aspect of pre-Bankruptcy planning is that a client needs to seek advice as soon as possible. The more time he or she has to implement asset protection, the greater chance the client will have to successfully shield the assets going forward.

Moreover, pre-Bankruptcy planning should not be confused with improper “hiding” or concealing of assets from creditors, such as transferring an asset on the eve of Bankruptcy. There is a fine line between viable asset protection planning and planning which can be successfully challenged by creditors. Experience and sound legal advice is usually the difference between success and failure in asset protection.

[back to top]

 

 

 

 

Obligations Under Chapter 13 Bankruptcy

Which debts must be paid back when filing for Chapter 13 bankruptcy protection?

To begin a Chapter 13 bankruptcy you fill out a packet of forms – mostly the same forms as you would use in a Chapter 7 bankruptcy – listing your income, property, expenses, and debts. You file these forms and paperwork with a nearby bankruptcy court. You must also file a workable payment plan proposing how you plan to handle your debts over the payment plan period.

You must also file your tax return for the previous year, proof that you’ve filed your tax returns for the last four years, and a certificate showing that you’ve completed credit counseling with an agency approved by the United States Trustee (go to www.usdoj.gov/ust, then click “Credit Counseling and Debtor Education” for a list of approved agencies).

Under a Chapter 13 plan, you make payments, usually monthly, to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee in turn pays your creditors and collects a statutory commission based on the amounts paid out under your plan. You must make every payment, on time, in order to successfully complete your plan and get a discharge of your remaining debts.

How Much You Have to Pay

Some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage (or nothing at all). Typically, Chapter 13 bankruptcy plans must provide that:

Administrative claims will be paid 100%. These include:

  • Your filing fee ($281)
  • The trustee’s commission (7.5% of each monthly payment), and
  • Attorney’s fees, if you hire an attorney for help with your Chapter 13 bankruptcy.

Priority debts will be paid 100%. These include:

  • Back alimony and child support
  • Most tax debts (including state and federal income taxes)
  • Wages, salaries, or commissions you owe to employees, and
  • Contributions you owe to an employee benefit fund.

Mortgage defaults will be paid 100% if you want to keep your house.

Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments fall into this category.

 

Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:

  • The total value of your nonexempt property
  • The amount of disposable income you have each month to put toward your debts, and
  • How long your plan lasts.

Disposable Income

Your payment plan must commit to paying any leftover disposable income (your income less certain allowed expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts and medical bills.

Length of Payment Plan

The length of your payment plan depends on your income level. If your “current monthly income” (your average income over the six months prior to filing) exceeds the median monthly income for a household of your size in your state, your plan must last five years. If your income is less than the median, you can propose a three-year plan, even if your unsecured creditors cannot be fully repaid during that time. (To find the median income figures for your state, go to the United States Trustee’s website, www.usdoj.gov/ust, and click “Means Testing Information.”)

Your “current” monthly income might be out of date. Because your current monthly income, as calculated above, is an average, it may well be more than your actual monthly income at the time you file. For instance, if you were laid off unexpectedly three months before filing, your monthly income when you file may be quite low, as compared to your average income over the last six months, which will have to include three months of your salary.

No Surrender of Property

If you file for Chapter 13 bankruptcy, you don’t have to hand over any of your property; instead, you repay your debts out of your income. In exchange for getting to keep your property, your plan will have to pay your creditors at least the value of your nonexempt property. (In Chapter 7 bankruptcy, you must surrender your nonexempt property to the trustee, who can sell it and distribute the proceeds to your creditors. You do get to keep property that is exempt.)

[back to top]

 

 

 

Debts That Must Be Paid in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you must pay some debts in full through your plan; others you pay in part. Here are the details.

The Chapter 13 plan is the crux of a Chapter 13 bankruptcy case. The plan lays out how much each creditor will get paid, how long the plan will last, the values of the debtor’s property, and more. The plan must be confirmed by the bankruptcy court in order for the case to proceed. The bankruptcy trustee and creditors can object to various aspects of the plan.

Different types of debts are paid in different ways in a Chapter 13 bankruptcy. The Bankruptcy Code classifies creditor claims and requires your Chapter 13 plan to pay these different classes of claims in particular ways. The most common classes of claims in a Chapter 13 case are secured claims, unsecured priority claims, and general unsecured claims.

Secured Claims

How secured claims are paid in Chapter 13 depends on how long your ongoing payments will last, and in some cases whether your loan is underwater or not. Secured claims are claims for debts that are secured by collateral. If you do not pay a secured debt, the creditor can come take the collateral and sell it to obtain payment. The most common examples of secured claims are home mortgages, property taxes when a lien has been attached to your property, and car loans. If you file a Chapter 13 and intend to keep the property that secures the loan, you have to pay the loan.

How Must Secured Claims Be Paid?

For the most part, secured claims must be paid in full with interest in a Chapter 13 case. The interest rate will depend on the debt. And in certain situations, you can satisfy the claim by paying less than what is owed (this happens in “cram downs”). If the contract on a secured debt calls for ongoing payments that would normally last longer than your Chapter 13 plan (for example, if you have 15 years left on your mortgage payments), you don’t have to pay off the entire debt during your plan. Instead, you continue with your regular monthly payment during and after your repayment period.

Here’s how the most common secured debts are treated:

Mortgage debt

Although your mortgage is a secured debt, you do not have to pay your mortgage in full in a Chapter 13 case. Mortgages are classified as ongoing debts; as such, you make your monthly mortgage payment during your Chapter 13 case and then continue to pay on it when your case ends. However, if you have a past due balance this must be paid in full through your plan. For example, if your monthly mortgage payment is $1,000, you were three months behind on your mortgage when you filed bankruptcy, and you incurred $450 in interest and fees, you must continue making $1,000 per month payments to the mortgage lender and also pay $3,450 (which represents the three months of arrears, plus the overdue interest, and fees) with interest over the life of the plan. To learn more about mortgage debt and your options under Chapter 13, read “Your Home and Mortgage in Chapter 13 Bankruptcy”.

Property taxes. If you are paying past due property taxes though your Chapter 13, you must pay the entire past due balance in full with interest over the life of the plan. The amount of interest you pay will depend on the local rate where you live.

Car payments. If your car loan balance becomes due before the end of your Chapter 13 plan, you must pay the balance in full over the life of your plan. How much you end up paying, however, will depend on a number of factors. If you are upside down on your car loan (meaning you owe more on the loan than the car is worth) and you bought the car more than 910 days ago, the secured claim is limited to the value of the car. You pay market value plus interest through your plan. The remaining balance becomes part of your unsecured debt. This is called a “cram down.” However, if you bought your car less than 910 days ago or if the loan you’re paying was not the loan you used to buy the car, you must pay the full balance due with interest through your plan.

Unsecured Priority Claims

Unsecured priority claims are claims that are not secured by collateral but that the Bankruptcy Code has granted priority over other unsecured debts. Unsecured priority claims must generally be paid in full through the Chapter 13 plan. Unsecured priority debts include certain income tax debts, past due child support, past due spousal support and other past due domestic support obligations. Unsecured priority debts also include administrative expenses, such as your attorney’s fees and the Chapter 13 trustee’s fees.

General Unsecured Claims

General unsecured claims are claims that are not secured or priority. The most common general unsecured debts are credit card debts, personal loans, medical bills, and utilities. General unsecured claims receive a percentage of what is owed based upon your disposable income and the value of your bankruptcy estate; that is, whatever your best effort at payment will yield is what the creditors will receive, and they must also receive at least what they would have received if you had filed Chapter 7. Many Chapter 13 debtors pay only a small portion of their unsecured debts through the Chapter 13 plan.

[back to top]

 

 

 

Options if You Can’t Make Your Chapter 13 Plan Payments

Here’s what you can do if you can’t make your Chapter 13 plan payments.

If you fall behind on your Chapter 13 plan payments, your bankruptcy trustee or a creditor will usually ask the court to dismiss your bankruptcy case. However, you still have many options available to you to save your bankruptcy and obtain a discharge. Read on to learn more about your options if you have fallen behind on your Chapter 13 plan payments.

(To learn about the Chapter 13 plan, including what it is, what you must pay through it, and more, see our Chapter 13 Repayment Plan area.)

Get Current on Your Payments

Many bankruptcy debtors miss plan payments because of a temporary financial emergency. After their emergency is resolved, most debtors are able to get caught up if given enough time. If you are facing dismissal, you can explain your circumstances to the court and request more time to catch up on your plan arrears. Most courts will allow you more time or add a specific catch up plan to your Chapter 13 plan to cure your default.

Modify Your Chapter 13 Plan Payments

If your financial emergency will not get resolved in a short period of time (for example, you lost your job or your pay was permanently reduced), then you can ask the court to modify and reduce your monthly plan payments. To modify your payments, you will need to propose a new payment amount that you can afford and provide the court with documentation showing your changed circumstances and new budget. However, keep in mind that if your Chapter 13 plan is only paying debts that have to be paid in your bankruptcy, then you may not be able to reduce your payment amount.

Request a Hardship Discharge

If you are unable to continue with your Chapter 13 bankruptcy, you may be eligible to receive a hardship discharge. A hardship discharge is a discharge that is granted even though you have not completed all of your required plan payments. The court will analyze your financial situation and consider what is in the best interest of all parties involved before granting a hardship discharge. Also, receiving a hardship discharge does not wipe out your priority debts that have to be paid in a Chapter 13 such as certain taxes or domestic support obligations (like child support and alimony). To learn more about the hardship discharge, see The Chapter 13 Hardship Discharge.

Convert To Chapter 7

Similar to the hardship discharge, if you can no longer afford to be in a Chapter 13 bankruptcy, you can convert your case to Chapter 7 and receive a quick discharge. When you convert, you will be assigned a new bankruptcy trustee and will need to provide proof that you now qualify for a Chapter 7 bankruptcy because your new circumstances do not allow you to afford a Chapter 13. However, like a hardship discharge, converting to Chapter 7 will not get rid of your priority debts or allow you to get caught up on your mortgage arrears. (To learn more see, Converting a Bankruptcy Case From Chapter 13 to Chapter 7.)

Dismiss Your Case And Re-file

If none of the options above allow you to meet your goals, you can always let your case get dismissed and re-file another Chapter 13 bankruptcy. This may be your best option if you cannot afford your Chapter 13 right now but you are not able to lower your payments or convert to Chapter 7 because you have priority debts or mortgage arrears you need to pay. Once your financial situation improves, you can file another Chapter 13 to pay your debts. But keep in mind that depending on when you file, you may have to ask the court to extend the automatic stay in your subsequent bankruptcies.

[back to top]

 

 

 

Keeping Your Business in Chapter 13 Bankruptcy

If you want to keep your business during and after bankruptcy, Chapter 13 may be a good option.

If you want to continue your business while filing for bankruptcy, Chapter 13 may be a good option. Keeping your business and other property is one of the benefits of filing for Chapter 13 bankruptcy. However, only individuals can file for Chapter 13 bankruptcy, so if your business is an LLC or Corporation, Chapter 13 won’t help.

Chapter 13 is basically a court enforced payment plan. You keep your property and repay some or all of your debts. As long as you have enough income to pay your current expenses and make payments toward your debts, Chapter 13 could be a very useful financial tool to get your business back on track without losing it. However, there are some limitations, particularly with respect to the type of entity you use to do business.

Who Can File for Chapter 13?

Only individuals can file Chapter 13. If you operate your business as a sole proprietorship, your business is included in your personal filing. The assets are owned by you personally and the debts are owed by you personally. Chapter 13 can help you under these circumstances.

It is different if you operate your business as an entity which is legally separate from yourself, such as a corporation or a limited liability company. Legally separate business entities cannot file for Chapter 13.

If, however, you have personal liability for some of the corporation’s or LLC’s business debts because, for example, you personally guaranteed payment of the debts, you can include those debts in a Chapter 13.

How Can Chapter 13 Help You Keep Your Business?

In Chapter 13 bankruptcy, you list all of your personal and business debts and assets in your paperwork. Both your personal and business debts are paid through the Chapter 13 plan. As long as you have enough income, either from your business or from other sources, to make payments under your Chapter 13 while paying your regular operating and living expenses, you can keep your business and any other assets you own. The only requirement is that you contribute all of your disposable income to the plan and, if unsecured creditors are not paid in full, the total of all the payments under the Chapter 13 plan has to equal or exceed the amount the unsecured creditors would have received if you had filed a Chapter 7 liquidation instead of the Chapter 13.

Debt Limits Under Chapter 13

There are debt limits under Chapter 13. You can only file if your non-contingent, liquidated (easily calculated, not unspecified claims) unsecured debts are less than $360,475, and your non-contingent, liquidated secured debts are less than $1,081,400. If your debts, including the business debts of your sole proprietorship, equal or exceed these amounts, you do not qualify for a Chapter 13.

Co-debtor Stay Not Available for Corporate or LLC Business Debts

A co-debtor stay means that as long as you are in Chapter 13, a creditor cannot try to collect money you owe from any co-signors or guarantors. But there is an exception: the co-debtor stay does not apply to business debts. This is not a problem if you operate your business as a sole proprietorship because both you and the business are included in the Chapter 13 filing.

It can be a big problem if your business is a corporation or a limited liability company. If you file a Chapter 13 to get rid of your personal liability for business debts, and you have guaranteed debts that are owed by your corporation or limited liability company creditors can continue to take collection action against the corporation or limited liability company. There is no co-debtor stay. This is true even if you are making payments under your Chapter 13 plan. It is possible that some creditors of a corporation or limited liability company might be willing to wait for the payments under the Chapter 13 and continue to do business with your company, but you can’t legally force them to do this.

[back to top]

 

 

 

Be Sociable, Share!

IMMIGRATION QUESTIONS?

FREE BANKRUPTCY EVALUATION - ASK CHRIS
Evaluacion Gratuita de Bancarrota haga clic aquí

Latest Blog

Si la propiedad está en proceso de ejecución hipotecaria, tengo que presentar una declaración de bancarrota o hacer una venta corta?

Mientras que una venta corta (es decir, la venta de bienes raíces, de menos de el saldo de la deuda [Read More…]

If My Property Is In Foreclosure, Should I File Bankruptcy Or Do A Short Sale?

While a short sale (that is, a sale of real estate for less than the balance of the debt against [Read More…]

Small Business Bankruptcy – A Possible Solution

Small businesses that are weighed down with overwhelming debt may be wondering where to turn for relief. While keeping up [Read More…]

Write a Review
The information on this website is for general information purposes only and may not be reproduced or copied without written consent. Nothing on this web site or its pages, documents, comments, answers, emails, or other communications should be taken as legal advice or counsel for any individual case or legal circumstance. The viewing of information on this website is not intended to create or constitute an attorney-client relationship. We are a professional debt relief corporation and assist our clients file bankruptcy under the US Federal Bankruptcy Code. If you need legal assistance related to bankruptcy, please fill out the contact form on this website or contact us at (831) 753-2200.