The underlying premise of Chapter 13 Bankruptcy is that you have sufficient income not only to meet all of your cost of living expenses but also have money left over to pay down your debts. You pay your excess income (“disposable income”) to your Chapter 13 Trustee once a month for the life of your Plan (3 to 5 years depending on medium income requirements).
From your monthly payments the Trustee must pay in full:
- Past due amounts on defaulted secured debt (mortgages, car loans, etc.)
- Priority debts (recent taxes, past due child support, etc.)
What is left of the payment goes to your unsecured creditors (credit cards, medical debt, etc.), often for a fraction or percentage of the outstanding debt.
For your proposed monthly payment plan to be accepted by the court, the total payout must equal to what the liquidation value of your estate would have been if a Chapter 7 had been filed. You must also pay the Trustee all of your disposable income each month.
Chapter 13 is only available to individuals with regular income from any source, whether one is a wage earner or owns a sole proprietorships. Partnerships and corporations are not eligible for Chapter 13 relief. The purpose of chapter 13 is to help individual debtors reorganize their finances by making payments to creditors through the Chapter 13 plan for a 3 to 5 year period. Debtors may not have unsecured debts in excess of $336,900, nor secured debts in excess of $1,010,650 to qualify for Chapter 13. If debts exceed either amount, one can file under Chapter 11.
Filing a bankruptcy petition under Chapter 13 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property, such as foreclosures, lawsuits, and sheriff seizures. The stay arises automatically by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor. The Automatic Stay is a powerful legal tool which enables you to regain control over your personal financial affairs and property while your bankruptcy case is pending and a fresh start is sought.
A Chapter 13 bankruptcy case begins with the filing a petition for relief pursuant to the United States Bankruptcy Code. The bankruptcy petition is filed with the Bankruptcy Court in the district where the individual debtor has lived for the majority of the time during the 180 days immediately prior to the filing of the bankruptcy petition. The debtor, in addition to the bankruptcy petition, must also file schedules listing all assets and all liabilities, an income and expense report, a statement of financial affairs and a Chapter 13 plan. If only one spouse files, the income and expenses of the non-filing spouse must be included in the debtor’s schedules, which numbers are used to determine the amount of the Chapter 13 plan payment.
Upon the commencement of the Chapter 13 bankruptcy case, a Chapter 13 Trustee is appointed to administer the case. The initial role of the Chapter 13 Trustee is to ensure the Chapter 13 Plan is proper and proposed in good faith, and that the Chapter 13 debtor(s) have filed all the necessary documents with the Trustee and the Bankruptcy Court required by the rules. Once the Chapter 13 Plan is confirmed, the Chapter 13 Trustee collects all plan payments from the debtor and makes distributions to the debtor’s creditors pursuant to the plan. The Chapter 13 Trustee conducts a 341 first meeting of creditors, and you are examined under oath concerning the schedules, statement of financial affairs, and the Chapter 13 plan. Creditors may attend the meeting of creditors and ask questions, though they rarely do. Debtors (both husband and wife if jointly filed) must attend the meeting. Problems with the plan are typically resolved during or shortly after the first creditors’ meeting. If there are no formal plan objections, the debtor may proceed towards confirmation (Court approval) of the Chapter 13 Plan.
Curing Defaults On Mortgages Over 3-5 Year Payment Plan
Chapter 13 is the ideal vehicle for a debtor facing foreclosure. The filing of a Chapter 13 bankruptcy case results in an “automatic stay” which can stop a foreclosure sale. By commencing a case under Chapter 13 a debtor may be able to permanently stop any foreclosure sale by providing to cure any defaults on the mortgage(s) within a reasonable period of time, 3-5 years, in the Chapter 13 Plan. You must continue to pay your regular and also pay 1/36 or 1/60 of the arearage each month.
Cram Down/Strip Down of Mortgages 2nd and 3rd Mortgages in Chapter 13
This Cram Down/Strip Down option cannot be employed to reduce the Secured Claim of the holder of any first mortgage on your residence. However, if you have a second or third mortgage on your home, and the value of your residence is less than the balance owing on your first mortgage, you can strip off the second and other mortgages and secured liens and treat them as unsecured claims under your Chapter 13 Plan. However, you can only strip a second mortgage if there is not one single dollar of house value to “secure” it. You must stay in your Chapter 13 until its completion for the lien strip to be finalized.
Examples of Strip Down applied to a second mortgage
Two examples will illustrate how a lien strip can be applied to a $50,000.00 second mortgage or home equity loan on your residence worth $300,000.
If the first mortgage has a balance due of $295,000.00, then the entire $50,000.00 second mortgage cannot be Stripped Off, because there is $5,000.00 worth of equity left to secure the second mortgage.
However, if the balance due on the first mortgage is $305,000.00, the entire $50,000.00 second mortgage can be stripped, as there is no equity in the residence for it to attach to.
Obviously, if a second (or third) mortgage can be stripped, it can dramatically improve your financial position as you will no longer have to make any payments on it. In this instance the amount owed to the second (or third) mortgage holder would be treated as any other unsecured debt and repaid through the Plan payments made to your Chapter 13 Trustee, often resulting in the mortgage holder receiving only a fraction of the amount actually due.
The debtor is required to file a Chapter 13 plan within 15 days after the filing of the bankruptcy petition. The debtor(s) must commit to pay into the Chapter 13 Plan all projected “disposable income” for the duration of the plan. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents. If the debtor operates a business, disposable income is defined as excluding those amounts which are necessary for the payment of ordinary operating expenses.
As stated above, the Chapter 13 plan dictates which creditors are paid and how much of their allowed claim they are paid. While secured creditors are specifically provided for in a Chapter 13 plan, unsecured creditors are not. Unsecured creditors will only receive a distribution from the Chapter 13 Plan if they file a proof of claim with the bankruptcy court within 90 days after the 341 first meeting of creditors. A governmental unit, however, may file a proof of claim until the expiration of 180 days from the date the case is filed.
The Bankruptcy Code affords both the Chapter 13 trustee and the debtor’s creditors the opportunity to object to the confirmation of the Chapter 13 plan. If the trustee or a creditor objects to confirmation of the Chapter 13 plan, a hearing is scheduled before the Bankruptcy Court. There are a number of objections that can be made by trustees and creditors, but the most frequent objections are: (1) the total plan payments are less than creditors would receive if the debtor’s assets were liquidated under Chapter 7 of the Bankruptcy Code; or (2) the debtor’s plan does not commit all of the debtor’s projected net disposable income for the minimum three-year period. If the objection is sustained and the plan is not confirmed, the debtor may attempt to modify the plan, convert the case to a Chapter 7, or allow the bankruptcy case to be dismissed.
On occasion, changed circumstances will affect a debtor’s ability to make plan payments, or a debtor may have inadvertently omitted a creditor. In such instances, the plan may be modified either before or after confirmation. A motion to modify the Chapter 13 plan may be made by the debtor, an unsecured creditor or the trustee.
The provisions of a confirmed plan are binding on all interested parties. Creditors must refrain from any collection activities for the duration of the Chapter 13 Plan. The debtor must continue to make the plan payments in a timely fashion for the life of the plan. A failure of either party to the plan (creditor or debtor) will result in negative consequences. For the debtor, a breach of the plan might lead to dismissal or a motion for relief from the automatic stay, which, if granted will allow a creditor to go forward with collection efforts including foreclosure or repossession.
The Chapter 13 debtor is entitled to a Discharge upon successful completion of all payments under the Chapter 13 Plan. The Discharge releases the debtor from all claims provided for in the plan or disallowed by the court. It is the creditor’s duty to file a claim in the case. Those creditors who were provided for in full or in part under the Chapter 13 Plan, even if not paid because they failed to file a claim, may not initiate or continue legal action to collect the discharged obligations.
In return for adhering to the requirements of a repayment plan for three to five years, the debtor receives a discharge of all debts provided for by the plan or disallowed, except certain long term obligations (such as a home mortgage), debts for alimony or child support, debts for most student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine, and other non-dischargeable debts set forth in the Bankruptcy Code. To the extent that these types of debts are not fully paid pursuant to the Chapter 13 Plan, the debtor will still be responsible for these debts after the Chapter 13 case has successfully concluded.