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Chapter 13 Bankruptcy
1. THE BASICS OF CHAPTER 13 BANKRUPTCY
a. In a Chapter 13, intended primarily for consumer debtors, the debtor proposes and the Court confirms a plan, which devotes a portion of the Debtors future income to pay creditors.
b. In return, the debtor is allowed to keep some property; which could be liquidated by Chapter 7 Trustee.
c. The debtor is also allowed to catch-up the arrearages on secured debt over an extended time period.
d. As discussed in greater detail, the discharge available to a debtor in a Chapter 13 is broader than that available in a Chapter 7.
e. BAPACPA significantly narrows the Chapter 13 discharge, but it is still broader than that available in a Chapter 7.
f. To be eligible for Chapter 13, the debtor (i) must have regular income and (ii) can have no more than $307,675.00 in unsecured debt and $922,975.00 in secured debt. These amounts are adjusted periodically for inflation.
2. THE CO-DEBTOR STAY
a. To prevent Chapter 13 plans from collapsing because of indirect creditor pressure, a filing under Chapter 13 (and Chapter 12) also stays action against a co-debtor or co-pledgor of a consumer debt, of the debtor, unless:
(1) the co-debtor became liable in the ordinary course of its business; or
(2) the case is closed, dismissed or converted.
b. The creditor may obtain relief from the co-debtor stay for the following reasons:
(1) The co-debtor actually received the consideration for the claim held by the creditor;
(2) The Plan filed by the debtor proposes not to pay such claim; or
(3) The creditor would be irreparably harmed.
c. Nothing in the New Law limits the effect of the co-debtor stay upon multiple filings within a single year.
3. APPOINTMENT OF CHAPTER 13 TRUSTEE
a. In every Chapter 13 case, a Trustee is appointed to receive income from the debtor and disburse it to creditors.
b. The Trustee receives a commission on all payments disbursed to creditors.
c. In order to receive distributions from the Trustee, a creditor must file a Proof of Claim.
4. THE DEBTOR PROPOSES A CHAPTER 13 PLAN
a. Objections:
(1) In most jurisdictions, creditors have 45 days to object to the first Plan filed and 30 days to object to any modified Plan.
b. Common Grounds to Object to Chapter 13 Plans:
(1) Failure of the debtor to provide all future disposable income to the Plan.
(2) Excessive expenses in the debtor’s budget.
(3) Unfair classification of similar types of creditors.
(4) A proposal to cure delinquent payments on secured debt over a period greater than thirty-six months or failure to properly state the pre-bankruptcy delinquency.
(5) In a cramdown situation, failure to (i) provide for interest, (ii) properly value the collateral, or (iii) correctly state the balance due.
(6) Lack of good faith in filing the case or the plan.
(7) Failure to provide at least as much as would be provided in a Chapter 7 liquidation.
(8) If the Plan runs for less than thirty-six months, failure to pay unsecured creditors 100%.
(9) Lack of feasibility of the Plan.
c. Few Chapter 13 Plans ever pay out in full. Most Chapter 13 debtors default under the terms their Plan, resulting in dismissal or conversion of their cases.
d. A Chapter 13 Plan typically lasts from 3 to 5 years.
e. Unsecured Creditors:
(1) The Plan will provide for unsecured creditors to receive a percentage of their claims. This percentage is typically less than 100%. Frequently payouts are significantly greater than forecasted by the debtor because so many creditors fail to file proofs of claim.
f. Secured Creditors:
(1) Cramdown
(a) A cramdown allows the debtor to pay the creditor the present value of its collateral as a secured claim and to treat the deficiency as an unsecured claim.
(b) For example, a $10,000 loan secured by a $7,000 car, would net the creditors: (i) $7,000, plus interest over the life of the plan; and (ii) $3,000 paid pro-rata with other unsecured creditors.
(c) Cramdown is not applicable to the debtor’s principal residence and is most often applied to automobile loans. The value of the collateral is frequently litigated.
(2) Other Methods of Treatment of Secured Creditors
(a) Frequently, a debtor will propose to maintain regular, post-bankruptcy payments and repay a pre-bankruptcy delinquency over a period of time, typically no longer than thirty-six months. The debtor can also make regular payments to a secured creditor through the Trustee.
(b) The failure of the debtor to make regularly scheduled payments to the secured creditor (or to the Trustee) is grounds for relief from the automatic stay.
5. DISCHARGEABILITY UNDER CHAPTER 13
a. The discharge granted in a Chapter 13 is much more liberal than that granted in Chapter 7.
b. The policy based exceptions to discharge include spousal and child support, student loans, injuries caused by driving while intoxicated, and criminal restitution.
c. Fraud, use of a false financial statement and most of the other Chapter 7 dischargeability objections do not exist in Chapter 13 under the current law.
d. Long-term debt: Any debt on which the last payment is due after the final date of the Plan, however, is typically not discharged in a Chapter 13.
e. The availability and scope of the Chapter 13 discharge has been significantly narrowed under BAPCPA:
(1) A debtor may not obtain a Chapter 13 discharge in a case filed within 4 years of receiving a discharge in a previous Chapter 7, 11 or 12 case, or within 2 years of a previous Chapter 13 case.
(2) The debtor may be prevented from obtaining the discharge of a debt incurred through false pretenses, false representation, actual fraud, use of a false financial statement, embezzlement, larceny, breach of fiduciary duty, certain previous dischargeable tax debts, or for restitution or damages awarded in a civil action as a result of willful and malicious injury that caused personal injury or death to an individual.
NOTE: This offers a creditor an opportunity to challenge dischargeability of fraudulently incurred debt by filing a dischargeability complaint in a Chapter 13. This is a significant opportunity for recovery for unsecured creditors that should not be overlooked.
(3) The debtor may not obtain a discharge until completion of a personal, financial management course.
(4) The debtor may not obtain a discharge unless the court determines at a hearing held no more than 10 days before discharge that:
(a) there is no reasonable basis to believe that the debtor has been convicted of a felony under circumstances that demonstrate that the filing of the case was an abuse of the Bankruptcy Code; or
(b) there is no reasonable basis to believe that the debtor is or may soon be found liable for a debt arising from:
(iv) a violation of federal securities laws, fraud, deceit or manipulation in a fiduciary capacity of a registered security; or
(v) a civil remedy under the Racketeer Influenced and Corrupt Organizations Act; or
(vi) any criminal act, intentional tort, willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.
For more information or to request a presentation regarding BAPCPA, please contact Spotts Fain attorneys, Robert H. Chappell, III (804) 697-2025 or Jennifer J. West (804) 697-2094.
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