Chapter 13 Bankruptcy

Your Chapter 13 plan says how much you will pay to the trustee each month, and the length of time you will make those monthly payments. The plan also tells the court and the trustee if you plan to supplement your monthly plan payments with a lump sum of money from voluntarily selling some property, from an expected inheritance, or any other source you had available when your plan was being formulated. The total of all of those payments, including any lump sums, is called the “plan base.” When the amount of your plan base has been fully paid, your plan is “paid in full.”

Keep in mind that your primary obligation as a Chapter 13 debtor is to make your plan payments. If you are employed, your plan payments can be automatically deducted from your wages and sent to the trustee, so you don’t have to worry about buying money orders and mailing them every month. Your plan payment will be large enough to allow the trustee to pay your creditors what is required under your plan, but you will be allowed to keep enough of your income to continue buying groceries, paying your utility bills, putting gas in your car, etc., as well as leaving you enough for a modest amount of recreation.

The means test is meant to keep high-income earners from having access to the benefits of Chapter 7 bankruptcy. It is a numeric test that your attorney will do for you based on your income and ability to pay off some of your unsecured debt. If your income is lower than your state’s median income, then you have already passed the test and you are eligible to file for Chapter 7. If your household income is higher than the average income in Pennsylvania for your household size, you may still pass the means test if your expenses are high.

Your attorney will be adept at factoring in the types of expenses which are used in the means test to determine whether you have any disposable income to pay your creditors. If you make $100K or are considered a high-income filer with no children or medical issues, you can still take advantage of your bankruptcy rights under a Chapter 13 repayment plan. Remember that you will not be required to pay back the majority of your unsecured debt under Chapter 13.

You will be required to provide the trustee with a report each month, showing your profits or losses, so that the trustee can monitor the profitability of your business. The trustee may question the feasibility of a Chapter 13 plan where the primary source of funding is projected profits from a business, if the business is not profitable. A self-employed Chapter 13 debtor is permitted to do all of the normal things involved in running the business, such as hiring employees, paying business expenses, and being paid by customers.

The trustee may ask from time to time for proof that all required tax returns are being filed, and that taxes which come due are being paid, because those matters are essential to the continuing success of the Chapter 13 plan. Failure of a self-employed debtor to file tax returns and to pay post petition taxes as they come due can result in the case being dismissed.

Your creditors and your attorney get paid in a simple hierarchy, with the funds you paid into the plan flowing first to certain creditors until they are current, then to the next category of creditors until they are paid, and so on. First, if you did not pay the filing fee for your Chapter 13 case when it was filed, the trustee will pay that fee before paying anyone else. After that, the trustee will pay the current monthly payments due on your mortgage, your car, your attorney fees, and so on and so forth. The trustee continues disbursing money in that sequence until you have paid the full amount required by your Chapter 13 plan, thus ending your obligation to make plan payments.

Your bankruptcy attorney is required to tell the court how much you agreed to pay for legal fees for representing you in the Chapter 13 case, and aside from the portion you paid before filing, as a retainer, those fees will be paid by the trustee from your plan payments. If things happen in your case which require your attorney to do more than was anticipated at the beginning, your attorney will ask the court to approve any additional fees, to be paid by the trustee from your plan payments, as opposed to sending you a bill.

If your Applicable Commitment Period (ACP) is three years, and three years or more have elapsed since your plan term began, the answer is usually yes. If your unsecured creditors are being paid in full, regardless of your ACP, the answer is usually yes. If you are not paying your unsecured creditors in full, then your plan may NOT end before the expiration of your ACP (three years or five years), even if you are able to pay the remainder of your plan base early.

A car lease is considered an Executory Contract, and those are listed in Schedule G of your bankruptcy petition. You car loan is a secured claim, listed in Schedule D. In the plan, secured claims and car leases are listed in different places. Executory contracts may either be assumed or rejected in a Chapter 13 plan.

If the lease was rejected, your spouse would have been required to return the car, but any remaining balance owing under the lease would have been treated as a non-priority unsecured claim. Even if your plan payments would get behind, preventing the lease payments from being fully paid by the end of the lease term, the car would have to be returned at that time, and the balance of the lease payments would still be payable a priority claim. If your spouse likes the car enough to want to buy it at the end of the lease term, by paying the amount stated in the lease agreement for the buyout option, your attorney will file a motion seeking court permission to do so.

You can sell your car or even your home as long as you contact your Chapter 13 attorney who will get permission from the court. If you want to sell something substantial, such as a car or your house, you will need court permission before doing so, because despite the fact that you remain in possession of your property during the Chapter 13 case, your assets are considered property of the bankruptcy estate until the plan has been completed and your case is closed.

If you wish to hire a real estate agent to sell property, you must ask the court to formally approve the retention of a broker and the listing agreement itself and you must make sure that your broker knows that you are currently in a Chapter 13 case. If you sell your home during Chapter 13 bankruptcy, you may be able to keep the “exempt” portion of the net sale proceeds remaining after payoff of any mortgages, other liens and closing costs. If the net proceeds are enough to pay all unsecured creditors in full, then you may be able to keep any amount remaining after payment of all unsecured creditors, even if that amount is more than the exemption you were able to claim in the property.

Your Chapter 13 plan addresses the back taxes you owed when the case was filed. If you owed income taxes to the IRS, and if they were incurred within the past three years, those will be paid by the trustee from your plan payments. Tax liens may have been filed against you, and if so, your plan provides payments to clear those liens from your property.

The objective of your Chapter 13 plan is to achieve a fresh start upon the completion of the plan, so that you will no longer have to worry about your property being sold on behalf of your creditors. The only liens which will remain on your home, for example, will be consensual liens which you voluntarily gave to creditors, such as the mortgage you used to buy the property. Unless that mortgage was nearly paid off when your Chapter 13 case was filed, you probably had more than five years left on the payments, and you will continue making those payments after the five years is up, but you will be current on those payments.

You must obtain prior court approval before hiring an attorney, an accountant, or other professionals to represent you in other matters during your Chapter 13 case. If you suffer an injury and want to take legal action against someone who was responsible for your injury, you will be permitted to do so, but you must ask the court for permission to hire any attorney who will be representing you.

It is also important that you tell that attorney or other professional that you are currently in a Chapter 13 bankruptcy case. Permission is obtained by filing a motion explaining why you need an attorney, and the proposed compensation which will be sought by the attorney. When the legal matter involves a claim for money damages, it is customary for the bankruptcy court to limit the approval of compensation to a contingent percentage fee.

Employment of professionals to be paid on an hourly basis may be approved if the services to be performed are likely to benefit the bankruptcy estate, or if contingent fees are not consistent with the type of services for which employment of a professional is sought, such as family law matters.

Many of my clients have gone through a divorce and are used to the Court process being adversarial and contentious, involving unpleasant court hearings. Here is where the bankruptcy system is fundamentally different. The court and the trustee want your plan to work, so that at the end of the process, you will enjoy the benefits of a successfully completed plan. Congress created the Bankruptcy Code with the understanding that unforeseen things happen. Bankruptcy helps and protects good, truthful people from creditors when they need it. The court understands this goal, and so does the Chapter 13 Trustee.