This is one of a series of articles the author is writing concerning substantive and procedural issues pertaining to individual debtor(s) filing for relief under Chapters 7 and 13 of the U.S. Bankruptcy Code. Other articles focus on substantive and procedural issues pertaining to individuals filing for Chapter 7 relief; this article will focus on the substantive issues and procedural process pertaining to individuals filing for relief under Chapter 13 of the U.S. Bankruptcy Code.
In general, if a debtor is qualified - unsecured debts (not procured through fraud or the willful misconduct of debtors) are fully dischargeable under Chapter 7; however, secured debts are not dischargeable under Chapter 7 (or Chapter 13 for that matter). Secured creditors maintain their rights to collect all monies owed to them after The Bankruptcy Court's issuance of its final decree/discharge order in a Chapter 7 case.
In the overwhelming majority of cases, Chapter 13 petitions are filed in order to give debtor time to catch up on arrearages owed on their mortgage(s). However, debtor(s) can payoff arrearages (past due balances) owed to secured creditors over a three to five year period by filing for relief under Chapter 13. Debtor(s) must submit a Chapter 13 plan which provides for the full payment of all arrearages owed to secured creditors over the length of a 3 to 5 year plan. On a separate note, if the total amount owed to a secured creditor is greater than the fair market value of the debtor’s property securing the collateral, then the debtor may be able to convert the amount of the debt which is undersecured to general unsecured status and have the unsecured portion of the debt discharged.
As long as the debtor(s)' petition indicates that the debtor(s) has sufficient disposable income to allow him/her to payoff the arrearages over a three to five year period, the debtor(s) Chapter 13 plan will be confirmed by The Bankruptcy Court. It is important for debtor(s) to realize that after filing a Chapter 13 petition they will still have to make their regular monthly payments directly to their mortgage company and/or all other secured lien holders as they become due if the debtor wants to retain the secured collateral (which is usually the debtor’s home). 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 a debtor is $10,000.00 in arrears on their mortgage, the debtor will be able to pay the $10,000.00 to his/her secured creditor through a five year Chapter 13 plan, but the regular mortgage payment must be submitted to the mortgage company beginning on the first day of the month following the debtor(s) filing a Chapter 13 petition. If the debtor(s) fails to submit his Chapter 13 installment plan payments to the Chapter 13 Trustee, the Trustee will file a motion to dismiss the debtor(s)' Chapter 13 petition. Upon filing a bankruptcy petition the automatic stay which goes into effect immediately prevents the continuation of all legal actions against debtor(s), including state foreclosure proceedings; the stay goes into effect as soon as the debtor(s)' petition is filed. If the debtor fails to make his/her regular monthly mortgage payments to the mortgage company after filing a Chapter 13 petition, the mortgage company will likely file a motion with the U.S. Bankruptcy Court to lift the automatic stay in order to start or continue with a foreclosure action against their collateral. If a creditor is able to procure an Order lifting the automatic stay, the creditor would then be able to either commence or continue prosecuting any legal action previously filed against the debtor(s), including a foreclosure action against the debtor(s)' real property.
A Chapter 13 plan can provide anywhere from a 0% to a 100% recovery to 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(s) 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), 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 ' 522 of the U.S. Bankruptcy Code and the debtors satisfy the means test under the new Bankruptcy Code, the debtor(s) Chapter 13 plan does not have to provide for any recovery to unsecured creditors. The exact amount of the debtor’s chapter 13 plan payment obligation will also depend on the debtor(s)' monthly disposable household income and whether or not the debtor satisfies the new Bankruptcy Code’s means test, which is based on the debtors the household gross monthly income during the preceding six months. (The Bankruptcy Code’s means test is also performed in order to determine if potential debtors must file a chapter 13 as opposed to a chapter 7 petition and pay back a minimum of 25% of their total general unsecured debt (the means test requirements fall beyond the scope of this article). All potential debtors/clients should speak to the undersigned or another experienced bankruptcy attorney concerning the Bankruptcy Codes means test requirements.
The 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 to take place approximately three months after the 341(a) Hearing. The Confirmation Hearing is when any objections filed by the Trustee or the debtor’s creditors are usually resolved if they haven’t been resolved earlier, the purpose of the hearing is for the Trustee to make sure that the Chapter 13 installment payment plan is both fair to the debtor(s)' creditors and feasible (one which the debtor(s) will be 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. The debtor(s) may 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 US Bankruptcy Court unless the debtors general unsecured creditors are receiving 100% of the amount they are owed. This is definitely the case for the first three years of the debtors chapter 13 plan and should be discussed with Mr. Alster if debtors believe they may be able to do this.