Thursday, January 15, 2015

Chapter 13 Bankruptcy In Depth





Eligibility.

        You are not eligible for a Chapter 13 discharge if  you received a Chapter 7 discharge in a case filed within 4 years of the Chapter 13 filing, or received a Chapter 13 discharge in a case filed within 2  years of the the Chapter 13 filing. 

Chances of Completing the Plan are Slim.

      You should know going into Chapter 13 that about 90% of plans are not completed.  The vast majority of plans are dismissed or converted to Chapter 7.  Chapter 13 filings have historically been about 30% of total filings.  So, on average, if I file 100 bankruptcy cases, 70 will be Chapter 7 and 30 will be Chapter 13.  Of those 30 cases, only about 3 will complete their plans.

      Washington State is in the top 5 states for per case yields to all creditors.  That means the Chapter 13 Trustee is squeezing as much money out of debtors as possible without regard for whether doing so decreases the likelihood of plan completion.

       This is accomplished primarily in 4 ways:

(1) Mortgage arrears must be caught up by including the regular payment plus the arrears (not just the arrears) divided by 60 months in the plan.  The Trustee takes a 5% fee on the whole amount.  Debtors should catch up their mortgages before filing if possible.

(2) All vehicle payments in Chapter 13 must be made through the plan regardless of whether payments are current.  This requires debtors to pay an additional 5% on their regular car payment to cover the Trustee's fee.  It also causes Debtors to have late vehicle payments during the 3 to 5 months prior to confirmation of the plan.  In my opinion, Debtors should be allowed to pay vehicle payments outside the plan if they choose to do so, but the Bankruptcy Court disagrees.

(3) Non-dischargeable student loans are (sometimes) required to be paid in full within 5 years.  This increases the payment amount and adds the 5% Trustee's fee.  In my opinion, Debtors should be allowed to pay non-dischargeable student loans outside the plan.

(4)  All tax refunds in excess of $1,500 are committed to the plan even though Debtors are paying 100% of disposable income into the plan.  In my opinion, Debtors should be allowed to claim tax refunds as exempt if the income from which the taxes were paid was exempt. 

          To make matters worse, you can expect objections and Motions to Dismiss your case from the Chapter 13 Trustee's office even when you are proposing to pay 100% to creditors.  Debtors should be assisted and encouraged by the Trustee in the completion of their Chapter 13 plans (The Bankruptcy Code requires this, and the Trustee is being paid 5% on all distributions - even those that are totally unnecessary).  That is not what happens.  Chapter 13 is a battle to get your basic rights as a Debtor to information you need about your case, and a struggle against objections made before Debtors even have a chance to respond.  This results in enormous inefficiency as well as ineffectiveness.  The Chapter 13 Judges are primarily former partners in large law firms that represented creditors.  So, when a Debtor goes to a hearing in Chapter 13, there are 3 creditor lawyers (the Trustee, the Judge, and Counsel for the creditor) and the Debtor's counsel.  Many provisions of in the Bankruptcy Code are drafted after substantial lobbying by creditors.  Bankruptcy Judges have very little discretion.  They can't even waive the credit counseling requirement, for example.

          Chapter 13 is much more of a last resort than Chapter 7 because at least in Chapter 7 you have a very high probability of obtaining the Discharge you seek.  Chapter 13 Discharges are so relatively rare, that Debtors should have realistic expectations about the likely dismissal of their case before completion which may or may not result in refiling under Chapter 7 depending upon eligibility.


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chris@mulvaneylawoffices.com