CHAPTER 13 BANKRUPTCY PETITION/PROCESS
(Substantive Issues and the Bankruptcy Process)
BY: Marc G. Alster
This is one of a series of articles the author is writing concerning both
substantive and procedural issues pertaining to individuals (also known
as debtors) filing for relief under
Chapters 7 and/or 13 of the U.S. Bankruptcy Code. A separate article in this website
focuses on substantive and procedural issues pertaining to individuals
filing for Chapter 7 relief; this article will focus on the substantive
issues and the procedural process pertaining to individuals filing for
relief under Chapter 13 of the U.S. Bankruptcy Code. In general, if a
debtor is qualified, general unsecured debts are fully dischargeable at
the successful conclusion of a Chapter 13 proceeding, just as they are
at the successful conclusion of a Chapter 7 proceeding. See article entitled "The Chapter 7 Petition/Process" in this website.
While secured debts are generally not dischargeable in a Chapter 7 proceeding
(there can be exceptions to this rule, such as under-secured or unsecured
judgment liens, tax liens etc.), in a Chapter 13 proceeding debtors'
may be able to convert all or part of their secured debt into an unsecured
debt and then have that unsecured debt discharged along with all of the
debtor' s other general unsecured debts - this is called a cram down
or strip down of the debtor's secured debt. A chapter 13 debtor can
do this when the total amount owed to a secured creditor is greater than
the fair market value ("FMV") of the debtor’s property
securing the collateral; in the case of a Mortgage lien filed against
the debtor's residence (that is a consensual lien), a chapter 13 debtor
would have to show that the secured creditor, such as a 2nd mortgage lien holder, does not have any equity whatsoever (even one penny)
in the debtor' s residence. If the Chapter 13 debtor can show this,
then the entire 2nd and/or 3rd mortgage lien can be entirely converted to unsecured status and wiped
out/discharged along with the debtor's other dischargeable debts.
If the secured lien is collateralized by any of the debtor's property
other than his/her home, the debtor would not have to fully convert and
would be able to partially convert the amount of the secured lien holder's
lien to unsecured status based on the amount of the secured debt which
is under-secured or another way of saying it is "under collateralized";
the amount the secured lien holder's lien which is secured by the
debtor's nonresidential property would then have to be paid in full
over the 5 year or less length of the debtors Chapter 13 plan. As indicated
above the unsecured portion of a partially crammed down unsecured debt
would be discharged along with the debtor's other dischargeable debts
pursuant to the Court's discharge order issued at the successful conclusion
of the Chapter 13 case.
If a secured creditor' s debt is not being fully paid or completely
or partially crammed/stripped down by a Chapter 13 debtor, the secured
creditor maintains its right to collect all monies owed by the debtor
after the Bankruptcy Court's issuance of its final decree and/or discharge
order (unless the secured creditor earlier sought out and received an
Order from the Bankruptcy Court lifting the Automatic Stay in effect during
the pendency of the bankruptcy case); however, unlike a Chapter 7 proceeding,
a chapter 13 proceeding provides a qualified debtor with the opportunity
to catch up on all payments owed to secured creditors, such as his/her
mortgage arrears, by making payments to the Chapter 13 Trustee over a
60 months chapter 13 plan. There are other differences as well, see below
and answer in the frequently asked question section of this website "What is the difference between Chapter 7, 11 and 13 proceedings".
MORTGAGE ARREARS
In the overwhelming majority of cases, Chapter 13 petitions are filed in
order to give debtors time to catch up on their mortgage arrearages, i.e.,
past due balances owed on their mortgages. Rather than face foreclosure,
qualified Chapter 13 debtors are given the opportunity to pay back all
arrearages ("past due amounts") owed on their mortgages or to
other secured creditors over a maximum amount of 60 payments, i.e., a
five year period (or less if debtors so choose and are able to do so).
Debtors must submit a Chapter 13 plan which provides for the full payment
of all arrearages owed to their mortgage lender or other secured creditor
over the length of their Chapter 13 plan. As long as the debtor's
petition indicates that the debtors have sufficient disposable income
to allow them to pay off their arrearages over the length of their Chapter
13 plan, the debtors' plan will be confirmed by The Bankruptcy Court.
It is important for debtors to realize that after filing a Chapter 13
petition they will still have to make their regular, post-petition, monthly
mortgage payments ("RPPMPs) directly to their mortgage lender or
its servicer as these payments become due, as well as to all other secured
lien holders if the debtors wants to retain the secured collateral (such
as an automobile loan). Interest typically does not accrue on the arrearages
owed to secured creditors during the length of the Chapter 13 Plan.
By way of example, if debtors are $10,000.00 in arrears on their mortgage,
the debtors will be able to pay the $10,000.00 of mortgage arrears back
to their mortgage lender or servicer through their five year (or less
if they so choose) Chapter 13 plan; but their RPPMPs must be timely submitted
beginning with the first day of the month following the debtors filing
for Chapter 13 relief. Upon filing a bankruptcy petition the automatic
stay which goes into effect, immediately prevents the continuation of
all legal actions against debtors, including all/any state foreclosure
proceedings; the stay goes into effect as soon as the debtors' petition
is filed. If the debtor fails to make his/her "RMMPs" to the
mortgage company after filing their Chapter 13 petition, the mortgage
company will likely file a motion with the U.S. Bankruptcy Court to lift
the automatic stay ("MFR") in order to start or continue with
a foreclosure action against the debtor's home or other real property
collateralized by its mortgage lien. If the debtors fail to submit their
Chapter 13 plan monthly installment payments to the Chapter 13 Trustee,
the Trustee will promptly or eventually file a motion to dismiss ("MTD")
the debtors' Chapter 13 petition. As soon as the Chapter 13 case is
dismissed, as with the mortgagee or other secured creditor who is able
to procure an Order lifting the automatic stay, the secured creditor would
then be able to either commence or continue prosecuting any foreclosure
previously filed against the debtors' real or other property.
RECOVERY, IF ANY, BY UNSECURED CREDITORS
A Chapter 13 plan can provide anywhere from a 0% to a 100% recovery to
a debtor's unsecured creditors. In order for a Chapter 13 plan to
be approved by the Bankruptcy Court, the debtor's unsecured creditors
must receive at least the same amount of money they would have received
had the debtor filed a Chapter 7 petition; e.g. if the debtor has $10,000.00
in non-exempt assets, (assets that cannot be protected by the various
Bankruptcy Code exemptions -see
Bankruptcy Exemptions article appearing elsewhere in this website), the debtor's Chapter
13 plan must provide for unsecured creditors to receive at least $10,000
through the debtor's Chapter 13 plan. By way of another example, if
all of the debtor's assets fall under the exemptions allotted by sec.
522 of the U.S. Bankruptcy Code (see
Bankruptcy Exemptions article in this website), and the debtor’s income falls under/satisfies
the Bankruptcy Code's means test (see
Means Test article appearing elsewhere in this website), the debtor's Chapter
13 plan does not have to provide for any recovery to unsecured creditors
if no net disposable monthly income exists to pay the unsecured creditors.
If additional net disposable income exists, which is determined after
comparing the debtors net, projected, monthly income against the debtor's
reasonable projected monthly household expenses, this amount must be paid
into the debtor' s Chapter 13 plan so that the Trustee can fulfill
his/her obligation to maximize the recovery received by the debtor's
unsecured creditors. Regardless of the amount of the debtor' s net
projected monthly disposable income, if the debtor's gross household
income over the previous 6 months prior to the filing of his/her bankruptcy
petition (the "means period") is above the
Bankruptcy Code’s means test, the debtor's Chapter 13 plan must provide for a minimum, net recovery
of 25% of the debtor's total unsecured debt to the debtor's unsecured
creditors. (see other article in this website entitled "The Bankruptcy Means Test" for more on this). All potential debtors/clients should speak to
the undersigned or another experienced bankruptcy attorney concerning
the Bankruptcy Code’s means test requirements as part of their consultation.
The initial bankruptcy process for a Chapter 13 case is essentially the
same as that for a
Chapter 7 case. The major exception is that, subsequent to the 341(a) Hearing, the
Bankruptcy Court schedules a Confirmation Hearing , which is supposed
to take place approximately 1 to 2 months after the 341(a) Hearing. The
Confirmation Hearing is where any objections filed by the Chapter 13 Trustee
or the debtor’s creditors are dealt with if they haven’t been
resolved earlier. The purpose of the hearing is also for the Trustee to
make sure that the Chapter 13 installment payment plan is both fair to
the debtor's creditors and a feasible one, meaning one which the debtor(s)
has a reasonable chance of being able to complete, at least on paper.
Of course, the discharge order will not be issued by the Bankruptcy Court
until after the completion of the Chapter 13 plan, which is usually anywhere
from 3 to 5 years in length. Generally, the debtors will not be able to
pay off the entire amount of their Chapter 13 plan in full after the debtor's
plan is confirmed by the Bankruptcy Court unless the debtor's general,
unsecured creditors are going to receive 100% of the amount they were
owed at the time the petition was filed. This is definitely the case for
the first three years of the debtor's Chapter 13 plan and should be
discussed with Mr. Alster or another experienced Bankruptcy practitioner
if debtors believe they may be able to do this.
To learn more about how Chapter 7 works, call or
contact a Teaneck bankruptcy lawyer from our firm today. We offer
free initial consultations, quality services at competitive rates and effective representation.