Chapter 13 is a personal bankruptcy solution for lots of working people. Called “wage earner reorganization,” it’s for individuals with regular income and mainly consumer debts. This could be a perfect fit for you and your family.
Why Hire a Phoenix Chapter 13 Bankruptcy Lawyer?
There are three unique benefits to Chapter 13:
- Keeping non-exempt assets.
- Restructuring secured debts through the repayment plan.
- Obtaining a discharge.
Let’s go over these strategies and the basic steps in Chapter 13.
Keep Non-Exempt Assets in Chapter 13
In personal bankruptcy, you will be claiming property exemptions under Arizona law and non-bankruptcy federal law. Chapter 13 means keeping both exempt and non-exempt assets. Not so in Chapter 7. The Chapter 7 debtor keeps exempt property, but surrenders non-exempt assets to the trustee. There is no trustee sale in Chapter 13 debt relief.
For example, in Arizona law one vehicle is exempt up to a fair market value of $6,000. ARS § 33-1125(8). A car worth $25,000 has $6,000 exempt and $19,000 non-exempt. Chapter 7 allows the trustee to sell exempt property by giving the cash equivalent of the exemption to the debtor ($6,000) before distributing the remaining proceeds to creditors. In Chapter 13, the debtor has the $6,000 exemption and keeps the car through the plan.
Restructure Secured Debts in the Chapter 13 Plan
Restructuring secured debts is another benefit of Chapter 13. The repayment plan could reduce interest rates on certain loans, strip down a lien, and adjust the maturity date on a secured loan to match the three-year to five-year plan period.
By contrast, the Chapter 7 debtor is limited to reaffirming a lease or secured debt, reaching a new agreement with the creditor, or redeeming property by paying off the balance.
Right to Chapter 13 Debt Protection
You have the right to seek debt protection under any chapter of the U.S. Bankruptcy Code for which you are eligible. Not everyone qualifies for Chapter 7 after the Means Test. Earnings may be too high. There may be non-exempt assets you need to keep. Or it may be too soon after a previous Chapter 7 discharge to file again. The only option for some people is Chapter 13, which is absolutely voluntary. Meet with a Chapter 7 bankruptcy attorney in Phoenix to discuss your situation. Individual circumstances matter.
Who Are Chapter 13 Debtors?
Chapter 13 is for small business owners, sole proprietors, independent contractors, salaried employees, and hourly workers with a steady income. There are debt limits as well:
- Total allowable unsecured debts cannot exceed $419,275.
- Total allowable secured debts cannot exceed $1,257,850.
(Adjusted periodically, these are 2019 Chapter 13 debt limits.)
Those ineligible for Chapter 7 debt relief may file under Chapter 13. Generally, whenever earnings exceed the median family income, a legal presumption arises against maintaining the Chapter 7 case. This so-called “presumption of abuse” is rebuttable and there are exceptions. A Chapter 7 case may be converted to Chapter 13, too. If the Chapter 7 case is dismissed without prejudice, then a new petition may be filed.
Do you have a steady paycheck? Could you make sensible payments over a three- or five-year period? Chapter 13 offers flexibility, time to straighten things out financially, and still have unsecured debts discharged.
Basic Steps to Chapter 13 Discharge
Prepare for personal bankruptcy by gathering your financial documents. Carefully follow your bankruptcy lawyer’s instructions. There could be additional proceedings in your case, but expect these basic steps:
- Take credit counseling with an approved agency within 180 days before filing the petition. You’ll file the certificate of completion with your petition.
- Prepare your petition, calculation of commitment period and plan of reorganization, along with schedules and statements.
- File the legal papers with the Clerk of the U.S. Bankruptcy Court in Phoenix, Tucson, or Yuma, Arizona and pay the filing fee. (Hearings are also held in Flagstaff and Bullhead City.)
- Upon filing, the automatic stay goes into effect. A Chapter 13 Trustee is appointed. The § 341 Meeting of Creditors and plan confirmation hearing are scheduled. Creditors are notified to submit proofs of claim.
- Appear at the confirmation hearing. To proceed, the judge must confirm your plan. Creditor objections will be heard. To get your plan confirmed, demonstrate a regular income stream with sufficient disposable income to put toward the plan.
- Appear at the § 341 Meeting of Creditors.
- Make payments under the confirmed plan – these are distributions to creditors. Include the first payment when you submit your plan.
- A secured creditor may motion to lift the automatic stay. For example, if you missed a plan payment or two, then a lender could ask the judge to lift the stay so it can repossess collateral or foreclose.
- Take the debtor education course by an approved agency. File your certificate of completion with the bankruptcy clerk.
- When your plan is completed, the discharge order follows.
- Your case is finalized and closed.
Need more information? Attorney Scott David Stewart discusses all of this in his Arizona Personal Bankruptcy Handbook. Contact us so we can get it to you right away.
What Does a Chapter 13 Plan Look Like?
As you’ll see, the Chapter 13 plan includes important provisions.
1. Commitment Period
The duration of a plan is called the “commitment period.” How many months are committed to making payments will depend upon your disposable income.
- 3-Year Plan: If your income is below Arizona’s median family income level, then make a three-year plan. The judge could grant a special request for a longer plan period.
- 5-Year Plan: A five-year commitment period is required if your earnings are above the median family income level.
- Shorter Plan: You could offer a plan of fewer years by arranging to pay all allowed unsecured creditors’ claims in full. 11 USC § 1325(b).
2. Restructured Secured Claims
Your plan could restructure various secured debts. Here’s how.
- Lien Stripping. When a secured creditor is under-secured, your plan could strip down that debt to the value of the collateral. Under-secured means the value of the secured property is less than what’s owed.
- Collateral Surrender. You may surrender collateral to the lender. Turning the car over to the bank to be sold with proceeds applied to your debt will transform the balance into an unsecured claim. (A secured creditor could consent to a more favorable agreement with you. Talk to your Bankruptcy lawyer.)
- Cure Default. The plan could cure a default during the commitment period. This gets the loan back on track with original terms. If you defaulted on the mortgage and foreclosure is imminent, then you could cure the delinquency incrementally over the plan period. This Chapter 13 strategy allows families to stay in their homes, cure the default, and stay current with mortgage payments.
A Chapter 13 plan can free-up resources, adjust secured debts, and give you time to cure a default during the commitment period. So long as plan payments are made and you stay current on the mortgage, the lender cannot foreclose.
Restructuring secured claims is complicated, but the potential rewards are substantial. It’s important to get the plan right. A creditor’s objection will instigate closer scrutiny by the court. In fact, an entire body of case law has developed over Chapter 13 restructuring issues. There are numerous legal requirements and just as many exceptions. Heed our advice and consult a competent bankruptcy lawyer to guide you.
3. Treatment of Unsecured Creditors
How does your plan treat unsecured creditors? The plan must pay unsecured priority claims in full, such as domestic support obligations. There are exceptions, as when the debtor’s disposable income is insufficient to pay the DSO in full over a five-year plan.
Uniformity is another requirement. Creditors with similar claims should receive equal treatment.
You’ll also need to show how unsecured creditors are better off under your Chapter 13 plan than in Chapter 7. This is the best interests of creditors test.
The projected disposable income test establishes your net disposable monthly income amount. What if a creditor objects? Show how your plan pays all unsecured creditors in full. Alternatively, show how every penny of your projected disposable income is already going toward plan payments. Even bankruptcy can’t squeeze blood from a turnip!
4. Good Faith, Ability to Pay, and Tax Returns
File your Chapter 13 petition in good faith. Be capable of making plan payments. And file all federal, state, and local tax returns required.
5. Plan Payments
Scheduled payments of a set amount are made monthly or bi-weekly to the Chapter 13 trustee. The trustee distributes your payments to creditors according to the plan.
Chapter 13 Plan Modification
What if your circumstances change? You can request plan modification if your income substantially decreases, but a creditor could seek modification if it increases. 11 USC § 1329.
Each of our clients receives the individualized care necessary for a successful bankruptcy. Our Phoenix bankruptcy lawyer can help you, too.