Depending on the debtor’s circumstances, a Chapter 13 bankruptcy can be a great option. In a Chapter 13 bankruptcy, the debtor can generally keep all of the debtor’s property including property that is not exempt under state laws. Chapter 13 trustees do not take any of the debtor’s property to sell. Instead, those who file Chapter 13 cases are required to pay the Chapter 13 trustee a set amount of money each month for a period of three to five years (36 to 60 months). The Chapter 13 trustee acts as a plan administrator taking the debtor’s monthly payment and distributing the money to the debtor’s creditors. It is important to speak with your Salt Lake bankruptcy attorney about the Chapter 13 option.
When people hear about a Chapter 13 repayment plan, they often worry about not having the resources to repay all of their creditors everything over a five year period. Some people assume that they will be required to repay 100% of their debt. But, in the vast majority of Chapter 13 plans, the debtors only pay back a percentage of what they owe to their general unsecured creditors. Some debtors have monthly plan payments that are as low as $50 per month, while others pay thousands of dollars each month. The types of debts that a person has, the value of a debtor’s non-exempt assets, and the debtor’s income are big determining factors in computing a debtor’s monthly payment amount. Your Salt Lake bankruptcy attorney will assist in preparing your Chapter 13 plan.
Just as in a Chapter 7 case, as soon as a person files a Chapter 13 bankruptcy petition all of the debtor’s creditors must immediately stop all collection activities against the debtor, including repossessions, foreclosures, garnishments and sheriff sales. The creditors must also immediately stop all of the harassing phone calls and letters. When a Chapter 13 case is filed the debtor proposes a Chapter 13 plan to the court that a judge must approve. This plan must conform to bankruptcy laws and rules, but the debtor has a lot of choices to make in structuring the plan.
Chapter 13 plans allow debtors some great benefits. Through a Chapter 13 plan a debtor can keep the debtor’s home and get caught up on back payments. A debtor may also be able to restructure and lower car payments through a Chapter 13 plan. Many tax debts need to be paid back in full through the plan, but once the case is filed interest and penalties usually stop accruing on those tax obligations. If a debtor has a second or a third mortgage, the debtor may be able eliminate those obligations by stripping them from title. Often, debtors are only required to pay pennies on the dollar to general unsecured debts like medical bills and credit cards. A Salt Lake bankruptcy attorney can help you with understanding these details.
About one month after the Chapter 13 case is filed, the debtor must attend a 341 meeting or Meeting of Creditors. The Chapter 13 trustee or the trustee’s representative conducts this meeting. The Chapter 13 trustee will ask some routine questions and then more case-specific questions. Typically these case specific questions are meant to clarify any issues or questions that the trustee may have regarding the debtor’s bankruptcy schedules and Chapter 13 repayment plan. Your Salt Lake bankruptcy attorney attends this meeting as well to represent you.
After a 341 Meeting, the debtor must have his Chapter 13 bankruptcy plan confirmed by a judge. The Chapter 13 trustee and creditors may object to the debtor’s proposed Chapter 13 plan if they have a valid legal reason for their objections. The debtor’s attorney works with the trustee’s office and creditors to resolve these objections. About a month after the 341 Meeting the court conducts a hearing called a confirmation hearing where the judge decides whether or not to confirm the debtor’s plan. If all of the objections have not been withdrawn by this time, the judge may hear arguments from both sides before ruling on the objections. The majority of cases are eventually confirmed, although throughout the process the terms of a Chapter 13 plan may need to be amended or tweaked in order to resolve the concerns of the Chapter 13 trustee or creditors.
Once a plan is confirmed, the debtor must keep making the monthly payments and must abide by the other Chapter 13 plan provisions. At the end of the case (usually three to five years down the road), the debtor will receive a discharge wherein any of the general unsecured debts that were not paid back through the plan are discharged or eliminated. At this point the debtor’s case is closed and the debtor can move on with life. It is very important to have your Salt Lake bankruptcy attorney assist you with this entire process.
TIME LINE FOR A CHAPTER 13 CASE
Below is a basic time line for a typical Chapter 13 bankruptcy case. This time line does not include all of the minor deadlines and events that make up a Chapter 13 case, but it does list all of the major events. A competent Utah bankruptcy attorney will be able to assist the debtor throughout this entire process.
- Pre-filing Credit Counseling Class—This is a basic credit counseling class that must be taken prior to the filing of the case. This class in usually taken online or over the phone but can be taken in person as well.
- Petition Date—This is the date the debtor files the bankruptcy case with the Bankruptcy court. The debtor is required to file all of the required documents and schedules with the Court or the case may be dismissed. A Chapter 13 trustee is assigned to the case. Once the case is filed, all creditors must immediately stop all collection activities against the debtor.
- Post-petition Personal Financial Management Course—This is a class that the debtor needs to take after the bankruptcy petition has been filed. This class also needs to be taken before the last Chapter 13 plan payment is made. If the debtor fails to take this class on time the Chapter 13 will NOT be discharged. This class is usually taken online or over the phone, but it too can be taken in person.
- Notice of 341 Meeting Mailed to Creditors—Approximately 10-14 days after a case is filed, the Bankruptcy court mails notice that the bankruptcy case was filed and notice detailing where and when the 341 Meeting will take place. This notice is mailed to all the creditors that were listed in the debtor’s bankruptcy schedules. The debtor’s Chapter 13 plan is also mailed with the notice of 341 Meeting.
- 341 Meeting—This meeting occurs approximately 30-45 days after the petition date. This is also called the Meeting of Creditors. It is conducted by the Chapter 13 trustee and the debtor is required to attend the meeting. The debtor’s attorney also attends the meeting with the debtor. It is important that the debtor comply with all of the Chapter 13 trustee’s requests and objections in a reasonable manner. Generally the debtor’s Utah bankruptcy attorney assists the debtor in complying with all of the trustee’s objections as well as any creditor’s objections that are filed in the case.
- Confirmation Hearing—About one month after the 341 Meeting, there is a confirmation hearing scheduled in the bankruptcy court before the bankruptcy judge that is assigned to the debtor’s case. At this hearing the judge decides whether or not to confirm or approve the debtor’s Chapter 13 plan. Most plans are confirmed but some plans may need to be amended in order to reach final confirmation.
- Plan Payments—In Chapter 13 cases, the debtor is required to make Chapter 13 plan payments that last 36-60 months. The first payment is due around the time of the 341 Meeting and the rest of the payments are due on a set date each month thereafter.
- Review of Creditor’s Proof of Claims—Each creditor in the debtor’s case is invited to file a proof of claim with the Court. The Chapter 13 trustee will only pay creditors who have filed proof of claims with the court. The creditors only have a set number of days after the filing of the petition in order to file these claims. After the due date for proof of claims has passed, the debtor and the Chapter 13 trustee review the claims that have been filed with the court.
- Discharge—A bankruptcy discharge is granted after the debtor’s final plan payment has been made. The debtor must adhere to all of the plan requirements and must certify that certain conditions have been met in order to obtain a Chapter 13 discharge.
- Closure of the Case—After the discharge is granted and the Chapter 13 trustee files a final report in the case, the case is closed.
AM I ELIGIBLE TO FILE A CHAPTER 13 CASE?
There are several qualifications that need to be met in order for someone to be eligible to file a Chapter 13 case.
First, in order to be eligible to file a Chapter 13 case, there is a debt limit of $360,475 of unsecured debt and $1,081,400 of secured debt. A debtor’s total unsecured and secured debt must be less than these amounts on the date the bankruptcy petition is filed or a person cannot file a Chapter 13 case. These figures are based on Consumer Price Index increases and are adjusted every three years on the first day in April beginning with April 1, 1998. The last time prior to the publication of this book the amounts were adjusted was April 1, 2010. These dollar amounts will again be adjusted on April 1, 2013. A Utah bankruptcy lawyer can assist in determining what the current figures and numbers are when a debtor is ready to file bankruptcy.
A debtor must have some source of “regular income” in order to be able to file a Chapter 13 case. Regular income includes self-employment income, regular wages, child support, alimony, social security and disability income. Some judges even allow unemployment income and regular contributions from family members (if they are consistent and will likely continue into the foreseeable future). The debtor needs to demonstrate to the court that the debtor has sufficient income to cover basic needs like housing and food and then have enough left over to pay the monthly plan payment. The debtor’s Utah bankruptcy lawyer will assist in determining what income figures are acceptable to use. Debtors have some wiggle room in computing their budgets and many judges are inclined to give debtors a chance to try and make their plan succeed even if they do not have a lot of income and have a lean budget. There is no income limit on a Chapter 13 case. Sometimes debtors with bigger incomes are required to pay more back to creditors.
In order to receive a discharge in a current Chapter 13 case, a debtor must wait four years after receiving a discharge in a prior Chapter 7 case and two years after receiving a discharge in a prior Chapter 13 case. The tolling period is from the petition date in the old case to the petition date in the new case. A debtor may file a case even if these waiting periods have not lapsed, but the debtor will NOT get a discharge in the new case. If a debtor files a Chapter 7 and then three years later has a lot of new medical bills, a debtor may file a new Chapter 13 case but will not get a discharge in the new case. Often debtors will file a Chapter 13, knowing they are not getting a discharge, in order to stop garnishments or to put a stop to harassing creditors. The debtor’s Utah bankruptcy lawyer can readily assist in looking up old cases that the debtor may have filed.
WHAT IS A CHAPTER 13 TRUSTEE’S ROLE?
The trustee’s role in a Chapter 13 case is different than that of a trustee’s role in a Chapter 7 case. The Chapter 13 trustee’s first job is to review the debtor’s bankruptcy schedules and repayment plan. The trustee is also looking out of the best interests of general unsecured creditors. This means that the Chapter 13 trustee is reviewing the debtor’s schedules and plan to see if these documents are in compliance with the law and to see if the debtor is paying back the maximum amount that is required under the law. Throughout the Chapter 13 process the debtor’s Utah bankruptcy lawyer is there to help the debtor in dealing with Chapter 13 Trustee.
The trustee can file an objection to the debtor’s plan prior to the confirmation hearing. Typically, the debtor’s Utah bankruptcy lawyer will work through any issues with the trustee in order to ensure that the plan is in compliance with bankruptcy laws and that the plan qualifies for confirmation. Sometimes this requires amending certain things in the debtor’s schedules or amending the debtor’s plan. If the trustee and the debtor cannot agree or reach a compromise, certain issues may need to be decided by a bankruptcy judge at a confirmation hearing. The judge will hear arguments from both sides and then make a ruling.
Another part of the Chapter 13 trustee’s role is to conduct the 341 Meeting (Meeting of the Creditors). At this meeting the debtor will provide proper identification proving the debtor’s identity and then the trustee will ask the debtor questions. Generally, at this meeting the trustee will bring up any concerns that the trustee may have with the debtor’s plan or case in general. Aside from the IRS and state taxing authorities, most creditors do not bother to attend this meeting. Often the only people present are the debtor, the debtor’s Utah bankruptcy lawyer and the Chapter 13 trustee.
Once the plan is confirmed by the judge, the trustee administers the repayment plan. The debtor makes the monthly plan payment to the Chapter 13 trustee. The trustee takes the debtor’s payment and distributes it to the debtor’s creditors according to the provisions set forth in the debtor’s plan. The trustee may also object to any improper claims filed by creditors. If the debtor files any motions or tries to change the plan after the case is confirmed the Chapter 13 trustee can file objections if the trustee disagrees with what the debtor is attempting to accomplish.
CHAPTER 13 MEETING OF CREDITORS (341 MEETING)
The Bankruptcy Code requires that in every Chapter 13 case that is filed a Meeting of Creditors be held. The Meeting of Creditors is nicknamed a “341 Meeting” because Section 341 of the Bankruptcy Code is where this meeting is outlined. Some people mistakenly believe that this meeting is held in a court room setting. This meeting is not held before a bankruptcy judge and in most cases is not held in a court house. This meeting is similar to the 341 Meeting held in Chapter 7 cases. The Chapter 13 trustee, or someone from the trustee’s office, presides over this meeting. Creditors are invited to attend, but most creditors do not show up to this meeting. For the majority of these meetings the only people in attendance are the debtors, their attorneys and the Chapter 13 trustee’s representative. Occasionally, in Chapter 13 cases representatives from the IRS and Utah State Tax Commission will be in attendance. These meetings are open to the public, so anyone may attend them.
Debtors are required to attend this meeting. At the meeting, the debtors are required to prove their identity and they are required to prove the accuracy of their social security number. This is usually done by the individual debtor showing a driver’s license and a social security card to the trustee. Then the trustee’s representative proceeds to ask the debtor a series of questions. The trustee’s representative will often bring up any concerns that the trustee has with the debtor’s plan, budget or with the schedules that have been filed.
Even though the debtor’s Utah bankruptcy attorney is present, the trustee will generally ask all the questions directly to the debtor. The Utah bankruptcy attorney is there to ensure that the trustee’s questions are appropriate and sometimes the attorney will object to a trustee’s line of questioning in order to protect the debtor or to will provide clarification on an issue.
All debtors need to attend this meeting. If a debtor is unable to attend the meeting and has an excellent reason for missing the meeting, the debtor’s attorney can file a motion to reschedule the meeting. Most trustees and bankruptcy judges do not like to make a habit of rescheduling these meetings very often. If this meeting is rescheduled, generally the confirmation hearing with the judge that occurs after the 341 Meeting will need to be rescheduled as well.
If the debtor misses the meeting and if the judge doesn’t agree to reschedule the meeting, then the case will be dismissed. The Bankruptcy court usually schedules a large number of these meetings for a trustee on any given day. It is not uncommon for there to be eight meetings an hour. Most meetings only last between five and ten minutes. This means that the trustee needs to be efficient with these meeting in order to stay on schedule. It is important that the debtor has all of the required documents out and ready for the trustee to examine the minute the case is called.
After the trustee is done questioning the debtor, the trustee generally asks if there are any creditors with questions for the debtor. If a creditor does show up to the meeting, the trustee will usually allow the creditor to ask a reasonable amount of questions to the debtor.
WHAT DEBTS NEED TO BE REPAID IN A CHAPTER 13 PLAN?
Bankruptcy law requires that certain debts be paid through a Chapter 13 bankruptcy plan. For instance, any debts that are considered “priority unsecured debts” need to be paid back in full through the Chapter 13 plan. Debts that are priority unsecured debts generally include some back tax debt and delinquent child support and alimony obligations that the debtor owes on the date the case is filed. Exactly what gets repaid can be quite complicated and it is important for the debtor to consult with the debtor’s Salt Lake area bankruptcy attorney to understand the process.
Any secured debt arrears also need to be paid back in full through the plan if the debtor wants to keep the property related to the debt. Mortgage arrears represent the amount it would take to get the mortgage loan current on the date the case is filed. For example, if a debtor pays $1,000 per month as a mortgage payment and is behind three months as of the date of filing, the mortgage arrears would be approximately $3,000. The arrears may also include late fees, penalties and attorney fees that the bank has incurred in servicing the loan. If the debtor wants to keep the house, the total mortgage arrears need to be paid back through the plan. The debtor’s Salt Lake bankruptcy lawyer can assist the debtor in computing these amounts.
For secured debt attached to property that the debtor desires to surrender, the arrears do not need to be paid back through the Chapter 13 bankruptcy plan. The debtor also no longer needs to continue making regular payments to these creditors because the property will be surrendered.
While arrears are paid through the bankruptcy plan, usually ongoing payments are made directly to the creditor starting the month after the case is filed.
Some people elect to pay their cars through the Chapter 13 plan. There may be some advantages to doing this. Often times by paying a car through the plan the debtor can “cram down” the interest rate and/or the amount owed, thereby reducing the car payment dramatically. We will discuss what “cram down” means in a separate chapter.
General unsecured debt also needs to be addressed in a Chapter 13 plan. Debt that is considered general unsecured debt includes credit card debt, medical bills, signature loans, personal loans and any other unsecured debt that is not priority debt or secured debt. The law states that debtors must contribute all of their monthly disposable income towards paying as much back to these creditors as possible. If the debtor has a lot of equity in property that is not exempt, the debtor may be required to pay more back to this group of creditors as well.
Some plans, where debtors have limited income and limited property, debtors may have to pay nothing or little back to general unsecured creditors. However, if debtors have a lot of assets that are not exempt or if debtors have a lot of income, they may have to pay a higher percentage (in some cases even 100%) back to this group of general unsecured creditors. When debtors have to pay everything back to creditors this type of plan is referred as a one hundred percent plan. Debtors usually come out ahead, even in one hundred percent plans, because they end up paying little or no interest on what is usually high interest credit card debt.
A small portion of the plan payment (usually 5-10% of the total payment) is used to pay the Chapter 13 trustee’s office so that it can cover operating expenses. Also, most plans include some attorney fees that are paid through the Chapter 13 trustee’s office. Most attorneys that file Chapter 13 cases charge only a small amount up front and then allow the remainder of their fees to be paid through the course of the plan. By incorporating most of the attorney fees into the plan payment, this allows debtors to get their case filed with a relatively small amount of money up front. Chapter 13 plans can be complex and Salt Lake bankruptcy attorneys can assist throughout the entire process.
EXEMPT PROPERTY IN CHAPTER 13 CASES
In Chapter 13 cases, the trustee does not take and sell the debtor’s property, but exemptions still play an important role in calculating what the Chapter 13 plan payment will be. If the debtor has a lot of equity in assets that are not exempt this could dramatically increase the plan payment. The Bankruptcy Code states that the general unsecured creditors (this includes medical bills and credit cards) are entitled to receive the same amount of money in a Chapter 13 case as they would have received had the debtor filed a Chapter 7 case. In each Chapter 13 case, the debtor needs to run a hypothetical analysis wherein the debtor figures out how much the general unsecured creditors would get if a Chapter 7 trustee were to sell all of the debtor’s property that is not exempt. This process is called a “Best Interest of Creditors Test.” This bottom line amount is the minimum amount that the debtor would have to return back to general unsecured creditors. This test is explained in detail in the next section of this book.
GENERAL UNSECURED CREDITORS IN CHAPTER 13 CASES
In Chapter 13 plans one of the biggest factors that affects the plan payment is the amount of money that the debtor is required to return to the general unsecured creditors. The general unsecured creditors include medical bills, credit cards, signature loans and personal loans. This class of creditors also includes second and third mortgage liens that have been successfully stripped and foreclosure and repossession deficiencies for surrendered homes and vehicles. What the debtor has to pay back to this group of creditors is determined by two tests.
Best Interest of Creditors Test
The first test is called the “Best Interest of Creditors Test.” This test essentially means that unsecured creditors in a Chapter 13 plan are entitled to receive what they would have received if the debtor had filed a Chapter 7 case. In order to determine what this amount would be, the debtor needs to run a hypothetical analysis where the debtor pretends that he or she has filed a Chapter 7 bankruptcy. The debtor needs to reasonably value all of the debtor’s assets and act as if a Chapter 7 trustee were to sell all of the assets with equity above and beyond all of the allowed exemptions. The debtor then figures out how much the unsecured creditors would get and this amount is what the debtor is required to return to general unsecured creditors under this test. This test can be tricky and a Utah bankruptcy lawyer can be extremely helpful in correctly performing this test.
To illustrate this test let us assume that a debtor’s only asset is a car that is worth $15,000 and that has a secured car loan against it for $7,000. Let us also assume that the car exemption in the debtor’s state is $2,500.
Here is how the test would work:
|Value received from sale of car||$15,000.00|
|Less cost of selling car at auction (15%)||(2,250.00)|
|Less amount needed to pay off car loan||(7,000.00)|
|Less amount paid to debtor for exemption||(2,500.00)|
|Net amount available before Chapter 7 trustee fee||$3,250.00|
|Hypothetical Chapter 7 trustee fee (25% of first $5,000)||(812.50)|
|Amount available to unsecured creditors||$2,437.50|
Some Chapter 13 trustees or courts may compute this figure differently, but this is currently how this amount is computed in Utah. Based on the above example, if the debtor filed a Chapter 7 case, the debtor would have to return at least $2,437.50 to the general unsecured creditors. This is the bare minimum that needs to be paid back to this group of creditors in a Chapter 13 plan regardless of the debtor’s income.
Disposable Income Test
Once the “Best Interest of Creditors Test” has been performed the debtor also needs to run a second test called the “Disposable Income Test.” This test was developed by Congress in 2005 when the Bankruptcy Code was overhauled. This is a fairly complex and complicated test. This second test lives up to its name in that it determines the debtor’s current monthly disposable income. Your Utah bankruptcy lawyer can assist your with this test as well.
The first determination that needs to be made in completing this test is whether the debtor’s income is above or below the median income for the debtor’s state. If the debtor’s income is below the median income, then only a small portion the test needs to be completed and the test will not usually impact the return that the debtor needs to make to general unsecured creditors.
If the debtor’s income is greater than the median income for the debtor’s state, then the entire test needs to be completed. The Disposable Income Test starts by inputting the debtor’s average gross monthly income over the past six months. For regular employees, this starting point includes all income received as income from the debtor’s employer (including salary or hourly income and any bonus income). If the debtor is self-employed the starting point includes the debtor’s net income (gross receipts less allowable business expenses). The debtor also lists income from all other sources, with some notable exceptions.
The debtor is then allowed to take certain expenses that can be deducted from this gross income amount. Congress was somewhat rigid when it came to the types of allowable expenses that a debtor is entitled to deduct. Consulting a bankruptcy attorney is important, because an attorney can assist the debtor in identifying allowable expense deductions. If debtor’s disposable income is miscalculated and is too high because the debtor failed to take all of the allowed deductions, the debtor’s plan payment may end up higher than necessary for up to five years.
If the test is completed the debtor has a positive monthly disposable income, the debtor is required to contribute all of the debtor’s monthly disposable income towards the Chapter 13 plan and towards the payment of general unsecured creditors.
The debtor’s income plays a large part in determining what the plan payment will be. If the debtor has a lot of income compared with the debtor’s allowable expenses, the plan payment may be higher because of the excess disposable income. If debtor has little or no “disposable income” then the debtor may have to pay little or nothing back to the general unsecured creditors and the debtor may have a relatively low plan payment.
The debtor’s budget (found on bankruptcy Schedules I and J) can also play a significant role in determining the debtor’s plan payment.
Consulting a Utah bankruptcy lawyer is vital in order to properly determine the debtor’s return to general unsecured creditors.
SECURED DEBTS IN CHAPTER 13 CASES
All secured debts need to be dealt with in Chapter 13 cases and need to be addressed in Chapter 13 plans. There are several options in dealing with secured debt in a Chapter 13 plan. If the debtor wants to keep the property, the debt can be paid outside of the plan, the debt can be paid through the plan or the secured lien can be stripped or removed from the property and then treated as a general unsecured debt. If the debtor wants to surrender the property, the property can be surrendered to the creditor, sold by the creditor to satisfy the debt and then any deficiency will be treated as a general unsecured debt.
If the debt is paid through the plan it may be eligible for “cram down” treatment. A “cram down” is discussed below. Debt that is not eligible to be “crammed down” may also be paid through the plan. There may be some distinct advantages to paying debt through the Chapter 13 plan. Often times the debtor can reduce the amount owed, the interest rate and the overall payment on the debt. For debt that is paid through the Chapter 13 plan, the debtor no longer makes any direct payments to the bank. Instead the debt is paid to the creditor indirectly through the plan.
Some secured debts are paid directly by the debtor to the creditor. These are secured debts that are paid outside of the Chapter 13 plan. The terms of these debts (which include interest rate and payment amount) remain the same as they were prior to the filing of the Chapter 13 case.
Some debts are paid both through the plan and outside of the plan. This is normally the case with mortgage debt where the debtor is behind on the payments at the date of filing. For mortgage debt, the debtor generally makes the ongoing payments directly to the creditor while any mortgage arrears (back payments due at the date of filing) are paid through the Chapter 13 plan.
Some secured debt is eligible to be stripped and removed from the title of the property. This is commonly done with second mortgages, third mortgages and judgment liens on homes. Stripping eligible debts from title can place the debtor in a much better financial position. Once stripped, these debts are treated as general unsecured debts.
If a debtor wants to surrender the property that is secured by a secured debt, the debtor can accomplish this through the Chapter 13 plan. This is usually done with homes or vehicles where the debtor no longer wants to keep the property and deal with the underlying debt obligation. Once the property is surrendered in the plan, the debtor must surrender possession of the property to the creditor. In the case of vehicle loans, the creditor will generally repossess the vehicle. With homes, the creditor will usually foreclose the property. Once the property is repossessed or foreclosed and sold at auction, the creditor can file a general unsecured debt in the Chapter 13 case for any deficiency of the secured debt. The debtor’s Utah bankruptcy attorney can assist the debtor is making a wise decision as to whether or not to surrender property in conjunction with the Chapter 13 plan.
Treating secured debts properly can be complicated and with the help of a Utah bankruptcy attorney debtors are generally able to address all of the debtor’s secured debts in the Chapter 13 plan.
“CRAM DOWN” ON SECURED DEBT
“Cram down” is a term used frequently in the bankruptcy world. Many debtors have no idea what this term means. The best way of explaining this concept is through an example. Keep in mind that a debtor can only implement a cram down in a Chapter 13 case. This remedy is not available in Chapter 7 cases. A “cram down” can really help a Chapter 13 debtor and the debtor’s Utah bankruptcy lawyer can help the debtor understand its advantages.
To illustrate this point, let’s assume a debtor owns a reliable car that the debtor wants to keep. The car is worth $10,000 and the debtor owes $15,000 on the car. Under certain conditions, the debtor can pay the car through the Chapter 13 plan (meaning it is included in Chapter 13 plan payment) and the debtor can pay only what the car is worth and not what the debtor owes on the car. This will effectively create two claims for the bank financing the car loan. One claim will be a secured claim in the amount of $10,000 (the amount equal to the value of the vehicle). This secured claim will be paid back in full usually at a set interest rate. The second claim is for $5,000 and this claim is an unsecured claim and will usually be paid with the other general unsecured claims, like credit cards.
There are some limitations on what types of debts can be crammed down in Chapter 13 cases. For vehicle loans where the loan was used to purchase the vehicle (this is called a purchase money security interest), in order to cram down the amount of the loan, the vehicle purchase needs to be at least 910 days (2.5 years) before the date the case was filed. For all other purchase money loans for other personal property, like furniture or water softeners, 365 days needs to have passed from when the loan was incurred to the date the case was filed. If the loan was refinanced and the debtor is trying to cram down a refinanced loan, this 910 day waiting period does not apply and the debtor can proceed with the cram down.
Another restriction is that the debtor cannot cram down mortgage liens against the debtor’s primary residence. A second or third mortgage lien strip may be allowed depending on the value of the home, but cram downs are not allowed for the debtor’s primary residence.
Interest rates on certain secured debts can also be crammed down in Chapter 13 plans. Interest rates can generally be crammed to the national prime rate plus an enhancement of usually one or two percent. Interest rates can be crammed down on all vehicle loans and other personal property loans (like furniture loans) regardless of whether the principal amount can be crammed down. This means that if the debtor has a purchase money car loan that was incurred eight months before the case was filed, the debtor can cram down the interest rate even though the loan amount cannot be crammed down.
Crammed down loans are paid through the Chapter 13 trustee through the Chapter 13 plan. If debtor is not cramming down a secured loan and is current on the payments when he or she files the case, most Courts allow the debtor to pay the claim directly outside of the plan.
CAN I SURRENDER PROPERTY IN CHAPTER 13 CASES?
Lots of debtors wonder if they can surrender vehicles or homes where they are upside-down with the loan and they no longer want to keep the property. The answer to this question is “yes.” Debtors do not have to continue paying on the secured debts that are secured by property that they do not want to keep. If a debtor wants to surrender a vehicle or home, the bank will generally repossess the vehicle or foreclose the home and then the bank, if allowed under state law, can file a deficiency claim in the Chapter 13 case. This claim will be treated as a general unsecured debt and in most plans will be paid out a small percentage of the total amount owed.
STRIPPING A 2ND OR 3rd MORTGAGE IN A CHAPTER 13 CASE
Many homeowners have a second mortgage lien or Home Equity Line of Credit (HELOC) attached to their homes. Some homeowners obtained these loans when they purchased their homes and some of these loans were incurred at a later date. After decades of home value increases, in the past several years, home values nationwide have plummeted. While generally this is a very bad thing for homeowners, this reduction in home values may create an opportunity for some to improve their financial positions while retaining their homes.
An unprecedented number of homeowners are now upside down in their homes throughout the nation. Many people are choosing to simply walk away from their homes because they see no reason to keep a property that has a dramatic amount of negative equity. However, many other people love their neighborhoods and homes and wish to retain their homes through and beyond the bankruptcy process.
In Chapter 13 cases where homeowners have a second or even a third mortgage attached to their homes there is a way to obtain a judicial order stripping these junior liens from the title of the home. In order to strip, or get rid of, a second mortgage the homeowner needs to be upside down or under water with the first mortgage. This means that if the home is worth less than what is owed on the first mortgage, the homeowner can eliminate the second mortgage through a court order. If the home is worth less than the first and second mortgages combined, then the homeowner could strip or eliminate the third mortgage or any other secured liens attached to the property.
This process is relatively simple. First, the homeowner needs to prove the value of the home. This is commonly done by obtaining an appraisal or a desktop appraisal from an appraiser. Value can also be shown through a Broker’s Pricing Opinion (BPO) or Comparative Market Analysis (CMA). Both a BPO and CMA are provided from realtors and usually cost less than appraisals. Once value has been determined, the homeowner needs to verify that the home is worth less than what is currently owed on the first mortgage. The exact amount owed on the first mortgage can be obtained through a recent mortgage statement or even a payoff from the mortgage company.
Judicial lien stripping of junior liens in Chapter 13 cases is a legal right of the debtor. The test is simple math. If the home is worth less than the amount owed on the first mortgage, the court will strip the second mortgage lien from title. Now if there are three mortgages, and the home is worth more than the first mortgage but less than the first and second mortgages combined, then the debtor can still strip the third mortgage even though the second will not be stripped.
This test is all or nothing, meaning if there is one dollar of equity for the second mortgage, then the whole mortgage is still attached. There is no partial lien stripping of second mortgages. For example, if the house is worth $100,001 and the debtor owes $100,000 and there is a $30,000 second mortgage, because there is one dollar of equity above the first mortgage amount, the second mortgage lien is fully attached. Now in the above example, if the home is worth $100,000 and the first mortgage is at $100,001, where the debtor is one dollar upside down with the first mortgage, then the entire second mortgage can successfully be stripped. Judgment liens may also be through this process in a similar manner.
In order to strip a junior mortgage lien, the debtor first needs to file a Chapter 13 case. Junior mortgage lien stripping is not allowed in Chapter 7 cases. Then the debtor needs to file a motion or an adversary proceeding against the second or third mortgage company in the case. This usually occurs shortly after the case is filed. The motion or petition needs to be served on the bank in accordance with the rules of the court. Then the debtor needs to wait to see if the mortgage company responds. The bank can file a response and has a right to do so. The only issue at stake is the value of the property. Since the valuation of homes is a subjective process, the bank has the right to perform its own valuation.
Often times, the banks do not respond. But in the event that the bank disagrees with debtor’s valuation and wants to contest the action, the bank may file an answer. If this occurs, the bank and the debtor will present their evidence to the bankruptcy judge at a hearing. The judge will hear the evidence and make a ruling as to what the Judge feels the value of the property should be and this will determine the outcome of the action. In cases where the bank simply does not respond, the debtor will file a default order stripping the lien from the property.
Since the issue may go to hearing before the judge it is important that when the debtor obtains a valuation from a professional disinterested third party. If the appraiser is the debtor’s brother, the judge will be less likely to give the brother’s testimony as much credibility as the bank’s appraiser. Also, for this reason it may make more sense for the debtor to use an appraiser to value the property, because an appraisal is usually more thorough than a realtor’s CMA or BPO report.
A judicial order stripping a junior lien may be filed with the recorder’s office against the property. This order will remove the lien from the property. In some jurisdictions this order does not go into effect until the Chapter 13 case is discharged. This means that debtor does not have to make any more payments to the second or third mortgage company. This debt is treated in the Chapter 13 plan as a general unsecured debt along with medical bills and credit cards. The lien is forever removed from the title of the property, meaning that ten years down the road when the debtor goes to sell the property, this junior lien does not need to be paid off as it has been judicially removed from the property.
CAN I CONVERT MY CHAPTER 13 CASE TO A CHAPTER 7 CASE?
A three to five year period is a long time to be making Chapter 13 plan payments. Sometimes circumstances change for debtors and they are no longer able to make their plan payments. Converting a case from a Chapter 13 to a Chapter 7 is a very easy process. It can be done by filing a motion or a notice with the Court. The law allows a debtor to convert the case at any time and for virtually any reason. It does require a small filing fee.
Before a debtor converts the case, the debtor needs to understand the ramifications of converting to a Chapter 7 case. If a debtor has too much equity in a house, a car or other property that is not protected by state exemption laws, the Chapter 7 trustee could take and sell that property for the benefit of unsecured creditors.
CAN I DISMISS MY CHAPTER 13 CASE?
Generally, a debtor may dismiss a Chapter 13 case at any time. This can be done in several ways. The debtor can simply stop making plan payments and eventually the Chapter 13 trustee will file a motion to dismiss the case for non-payment. If a debtor wants to quickly dismiss the case, the debtor can file a motion to dismiss the case and the case will be dismissed. If a Chapter 13 case is dismissed prior to a discharge being granted, the debtor will cease to have protection against creditors upon dismissal. If the debtor wants to re-file another Chapter 13 case after the existing case is dismissed there could be complications if the debtor filed a motion to dismiss the case instead of the Chapter 13 trustee filing the motion to dismiss the case. It is important for the debtor to discuss these details with the debtor’s attorney prior to filing a motion to dismiss the case.
Any secured debts (such as vehicle loans) that were being paid through plan will revert back to the original terms of the loan. This usually means that the debtor will immediately be delinquent on those debts because secured debts being paid through the plan are usually paid a monthly payment that is less than the original terms of the loan. If a debtor wants to keep the property, the debtor will usually need to call the creditor directly and work out new terms if the creditor is willing. If the creditor is unwilling to work with the debtor, the creditor may repossess the property.