An Overview of Ch. 13 Bankruptcy
Substantive Issues and The Bankruptcy Process
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.
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.
While secured debts are generally not dischargeable in a Chapter 7 proceeding, 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 fiver-year or less length of the debtor's Chapter 13 plan. 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 or 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.
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 another 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 want 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.
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 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.
Possible Recovery for Unsecured Creditors
A Chapter 13 plan can provide anywhere from a 0-100% 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), 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 debtor's 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.
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 in 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.
Schedule a Free Consultation
To learn more about how Chapter 13 works, get in touch with Attorney Marc G. Aster today. We offer free initial consultations, quality services at competitive rates, and effective representation.
From his office in Hackensack, New Jersey, Attorney Alster's services extend throughout the state of New Jersey, as well as New York. Some areas he serves in New Jersey are Passaic County, Bergen County, Hudson County, Essex County, and more; in New York, he serves Rockland County, Queens, and the Bronx.