Chapter 13 Q&A and Chapter 13 Lien Avoidance

May a judicial lien be avoided?

A= the lien in question, plus all other liens against the property, plus the amount of debtor’s exemption.
B= the value of the property
Subtract B from A
The lien in question may be avoided to the extent that A exceeds B

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy is a debt repayment proceeding. The debtor turns over a specified portion of future earnings to a Chapter 13 trustee, who then distributes the money according to a confirmed plan to creditors who have filed claims. The method of determining the dividend distribution is determined by the Chapter 13 plan, which is filed with and confirmed or not confirmed, by the Bankruptcy Court. If the debtor completes the plan, the debtor receives a discharge of all dischargeable debts. What are the most common causes of Chapter 13 bankruptcy?

The most common reasons for consumer bankruptcy are (1) loss of a job or long-term layoffs; (2) loss of overtime hours; (3) lengthy illnesses and large medical expenses; (4) death or disability of a spouse; (5) separation, divorce and marital problems; (6) seriously over-extended credit; and (7) large unexpected expenses.

Who can file a Chapter 13 bankruptcy?

Only individuals may file under Chapter 13. You must reside or have a domicile, a place of business, or property in the United States or a municipality. You must not have had a bankruptcy filing dismissed for cause within the last 180 days. You must have a regular income. For cases filed between April 1, 2007 and March 31, 2010, your debts cannot exceed $1,010,650 in secured debt or $336,900 in unsecured debt. If your case was not filed during this period, you should consult with your attorney to determine what the applicable dollar amounts are. You must have completed an approved credit counseling briefing course within the 180 days prior to filing the petition. See Question 6 for more information regarding credit counseling.

Is there anything I need to do before filing for bankruptcy?

Yes. Within 180 days before actually filing the case, you will have to attend an individual or group briefing provided by an approved nonprofit budget and credit counseling agency. Upon completion, provide the credit counseling certificate to your attorney for filing with the Court with your case. You must also be able to show that you have filed all tax returns for the four (4) years prior to the filing of the current case.

Is there anything I should not do if I am contemplating bankruptcy?

There are several areas related to this question. First and foremost, you should consult your attorney. Under bankruptcy law, certain luxury purchases made within 90 days of the bankruptcy filing and certain cash advances taken within 70 days of the bankruptcy filing are presumed nondischargeable. In some instances, these purchases and advances are made for good reasons and are exempted. However, your attorney will advise you on these matters, depending on the type of bankruptcy you file. Who notifies the creditors and bill collectors about the bankruptcy filing?

After your bankruptcy is filed, the Court mails a notice to all the creditors listed in your schedules. This usually takes a week to ten days. If this is not soon enough, you should have your attorney inform the creditors immediately. However, you must list all your creditors and correct addresses in order for the court to give the proper notice.

If you have received any communication from the creditors in the 90 days prior to filing the bankruptcy, the creditor must be provided notice of the filing at the address on the communication. This is very important information, and should be provided to your attorney prior to the bankruptcy filing so the attorney can correctly list all the appropriate addresses.

What information do I need to provide?

Most attorneys have initial questionnaires that they use to collect information, and may request additional items of information particular to your circumstances. At a minimum, you must provide your attorney with a list of all of your property and all of your debts. You must have all of your pay advices for the six (6) months prior to filing the bankruptcy, and copies of your tax returns (federal, state, and county, if applicable) for the four (4) years prior to filing the case. These are required not only to verify your financial information, but are also documents that the trustee will review. If you have not filed all four (4) years of returns with the taxing authorities, tell your attorney, and make arrangements to get the returns filed.

If you are divorced and are required to pay domestic support obligation, most usually child support, you must provide your attorney and the trustee with the name and address of the person entitled to receive the domestic support payments. Under BAPCPA, the trustee must provide a notice to the recipient that you have filed for bankruptcy protection.

What if I forget to list a creditor on my bankruptcy papers?

You can file an amendment to your schedules up to a certain time before discharge. If the amendment is timely filed, then the omitted creditor is added to the bankruptcy. It is perjury to intentionally omit a creditor. Your attorney may charge an extra fee for adding creditors after the petition and schedules have been filed.

Do I have to go to court or to a hearing?

Yes. Within about 30 to 45 days after you file the bankruptcy, you will have to attend a meeting over which the trustee or the bankruptcy administrator presides. This meeting is called the First Meeting of Creditors or Section 341 Meeting. At this meeting, the trustee or the bankruptcy administrator will ask questions of you under oath regarding the content of your bankruptcy papers, assets, debts and other matters. After the trustee or bankruptcy administrator is done, your creditors will have an opportunity to ask you questions regarding the location and condition of your property, hazard insurance coverage and matters related to your financial affairs.

Don’t worry. Your attorney will be there to represent you and your attorney will help you prepare for the meeting. Sometimes, after your meeting is over, your creditors will approach you through your attorney to discuss the status of secured property. Your attorney will negotiate with them, with your knowledge and approval. In some jurisdictions, you will have to attend another meeting, but this is dependent upon the local court rules. Within 20 and 45 days of the First Meeting of Creditors, you may have to attend a confirmation hearing in order to finalize the plan you are proposing. Also, if you have filed bankruptcy previously, you may have to attend a hearing that determines whether you and/or your estate are able to obtain a stay of action by filing the bankruptcy. Whether you have to attend any further hearings is something you need to discuss with your attorney, as the attorney will be the best one to advise you based upon your jurisdiction and case.

If I am self-employed or own a business, are there any additional requirements?

Part of your trustee’s responsibilities includes verifying your income. For most debtors, this is easily accomplished by providing the trustee with copies of paycheck stubs from their employer. However, debtors that are self-employed or own a business generally do not have paycheck stubs to provide to the trustee. In these situations, the trustee may require additional documentation, such as profit/loss statements, monthly business operating statements, and/or tax returns to verify the income.

As a self-employed debtor or business owner, you are generally permitted to continue the regular operation of your business. If your business enterprise incurs trade credit in the production of income or otherwise meets the threshold, your trustee may determine that you are “engaged in business.” If the trustee determines that you are “engaged in business,” you will likely need to provide additional documentation such as tax returns, financial records, and other business records to the trustee. These documents enable the trustee to perform an investigation of the business and prepare a Statement of Investigation, as required by BAPCPA. In addition, the business may be subject to periodic monitoring by your trustee.

Will my employer find out about my bankruptcy?

Under normal circumstances, unless your employer is a creditor, your employer will not know that you have filed bankruptcy. However, there is a growing trend in bankruptcy courts to require wage withholding to fund the Chapter 13 plan. This means that your employer may receive an order from the Court to deduct your Chapter 13 payment from your check and send it directly to the trustee. Consult your attorney about local procedure.

Can I keep my home?

YES. One of the main reasons people file a Chapter 13 bankruptcy is to keep their home. Usually, if you are behind on your house payments, your Chapter 13 plan will provide that you begin making your current monthly payments and not get any further behind. Any payments you are behind will be included in your plan payment and paid to the mortgage company through the trustee. In some areas, the trustee will make your current mortgage payments as part of your Chapter 13 plan if you have been delinquent with mortgage payments prior to filing bankruptcy. See Question 29 for more information regarding foreclosure.

Will I be able to keep all of my personal property?

YES, generally, if you want to. By filing a Chapter 13 Plan, you arrange for the repayment of your debts and for the repayment of liens on your property. Sometimes, a debtor may want to surrender a particular asset in order to get rid of the debt associated with the asset or to just return the asset itself. Most personal property can be kept after filing, but some items of personal property that are not necessary to allow you to reorganize your debts may have to be surrendered. These items are referred to as luxury items, and if you owe money on them, you may have to give them back or increase the distribution to your unsecured creditors. Some trustees may require you to turn over proceeds from personal injury lawsuits. Certain non-exempt property can be retained as long as you compensate creditors for its value. This is a very complicated area of the law and is something that has to be reviewed given your specific facts and the jurisdiction in which your case is filed. See Question 25 for more information regarding what happens to assets after filing for bankruptcy protection.

Can I keep my car after bankruptcy?

Yes. However, there are special requirements for retaining a car that was purchased within 910 days (2.49 years) prior to filing for bankruptcy protection. If your car is secured by a loan to a creditor and purchased within 910 days of filing, your plan must pay the creditor the full amount of the debt against the car, plus interest, in equal monthly payments. In most jurisdictions, if the equal monthly payments do not begin in month one (1) of your plan, you must pay the creditor special payments called “adequate protection” until regular payments begin, so the creditor receives the full amount of its secured claim while you continue to use the car during your bankruptcy. Consult your attorney if the interest rate on your automobile loan is very high. See Question 24 for more information regarding adequate protection payments.

If the car was purchased more than 910 days prior to filing for bankruptcy protection, you will be expected to pay an amount to the creditor at least equal to the value of the automobile at the time you file your Chapter 13 plan. Any amount due to the creditor over the value of the car will be paid as an unsecured debt. You must maintain property insurance on the vehicle if you own money on it.

What is adequate protection and how and when is it paid?

Under BAPCPA, there are several manners in which a creditor may get payment before the plan is confirmed. Typically, these are called “adequate protection” payments because the creditor is receiving money on a monthly basis so their interest in the secured item is not diminished. Typically, the trustee will begin making adequate protection payments when a plan is filed that states payments will be made and after the creditor files a proof of claim. Assuming the plan and the creditor’s claim reflect the same information, the trustee will start disbursing payments. A creditor may also get adequate protection payments by filing a motion with the Court requesting payments. If the Court grants the motion, the trustee will disburse payments as required by the Court’s order. In some jurisdictions, you may be expected to make adequate protection payments directly to your creditors upon filing for bankruptcy protection. Whether the trustee makes adequate protection payments or you make the payments directly is based upon local rules and customs. Your attorney can advise you of the proper procedures for your area.

What happens to my real property and other assets after I file for bankruptcy protection?

Once the Chapter 13 bankruptcy is filed, all property of the debtor at the time of filing and certain other property to be received in the future becomes the property of the bankruptcy estate. Depending upon the bankruptcy laws and state laws where you live, some property can be excluded from the bankruptcy estate through properly claimed exemptions. Other property that does not qualify from exclusion from the estate is considered to be non-exempt, and the trustee takes control of all non-exempt property for purposes of satisfying the creditors. Once the Chapter 13 plan is confirmed (approved by the Bankruptcy Court), control over all your property, except for future wages, may be returned to your control, depending on the local plan form and local court rules. Consult your attorney about exemption issues.

Can I obtain credit while I am in bankruptcy?

You can obtain credit while in bankruptcy, but the circumstances in which you may get credit are limited by the local rules of the Court. To properly obtain credit, which includes any purchases in which you would pay over time, including the refinancing of your home mortgage, you must make a request to either your trustee or the Court. The Court in each jurisdiction has established procedures that you must follow in order to have the credit request approved or denied. Consult your attorney as to how your jurisdiction handles such requests.

Will bankruptcy stop a wage garnishment?

Yes. Consult your attorney if a creditor continues with garnishment after notice of the filing.

Will bankruptcy stop a foreclosure?

Generally, yes. A home is an asset usually secured by a mortgage. New provisions in BAPCPA now govern whether the Chapter 13 bankruptcy will stop a foreclosure if you have filed for bankruptcy before. If you have filed a prior bankruptcy case or cases within certain time limits, the automatic stay may terminate within 30 days of the current filing, or never go into effect at all, unless your attorney files a motion to the Court within the first 30 days after filing asking the Court to reinstate or continue the protection of the automatic stay. This is a very complex area of the law and requires prompt action to allow you to retain protection of the bankruptcy stay.

While a Chapter 13 bankruptcy may stop a foreclosure, unless you begin making current payments after filing, the mortgage creditor will be successful in obtaining permission from the Court to start or continue a foreclosure proceeding. Assuming you can make your monthly payments after you file a Chapter 13 plan, you can catch up your arrearages under Chapter 13 and maintain current monthly payment to avoid a foreclosure sale of your home.

Will bankruptcy stop an eviction action?

Yes. However, unless you can begin making your future rent payments on time, Chapter 13 will only stop an eviction for a while. Like a home mortgage payment, unless you can stay current from the date of filing a Chapter13 case forward, the owner will be entitled to possession of his property and, at best, you will be able to remain in the property until the owner can obtain an order from the Court granting relief from the automatic stay and begin eviction proceedings in state court. If you can stay current, then you can catch up your back rent through the Chapter 13 plan.

Will bankruptcy stop collection on a judgment?

Yes. Most judgments are stopped by bankruptcy. There are some exceptions to this, including claims for criminal restitution or a fine based upon the conviction of crime. Also, an exception exists if the judgment is one in which the debtor is found guilty of a willful or malicious injury to another which results in an injury or death. There may be other judgments that are not stopped by the bankruptcy. Your attorney is the best person to advise you concerning any judgments entered against you.

Will bankruptcy remove a lien?

Under some circumstances, once the bankruptcy proceedings have started, a special motion can be filed to remove certain liens. It will take an order from the Court to remove them. This is a very complicated area of the law and you should consult with an attorney.

I am divorced. Will bankruptcy wipe out my obligation to pay joint debts?

In some cases, yes. Generally, obligations arising out of a divorce or property settlement agreement are nondischargeable. If your Chapter 13 plan provides for payment in full of these obligations, then they will be discharged. However, if your plan does not provide for payments in full, these obligations will not be discharged at the end of your Chapter 13 bankruptcy and you will still have to pay them outside of the bankruptcy. While you are in Chapter 13 bankruptcy, creditors will not be permitted to collect the joint debts either from you or your former spouse without a specific court order allowing them to proceed. Whether or not the bankruptcy discharges the joint debts from a divorce is largely dependent on the state laws that govern the divorce. You will need to provide a copy of the divorce decree to your bankruptcy attorney in order to properly determine if they will be discharged.

Does a Chapter 13 bankruptcy relieve me from having to pay domestic support obligations (including child support)?

NO, quite the contrary. In order to have your plan confirmed (approved by the Court), you must be current in child support payments after you file. You can pay payments that were behind at the time of filing through the trustee as part of your plan.

I am a co-signer for a debt. How does bankruptcy affect my obligation?

If the debt is primarily your debt, then you must provide for payment under your Chapter 13 plan. If the debt is primarily the debt of the person with whom you co-signed, then you may provide for payment of the debt under your Chapter 13 plan. If your plan does not provide for full payment of the co-signed debt, the creditor could get permission from the Court to collect the debt from the co-debtor. While you are in Chapter 13, and if your plan provides for full payment of the debt, the co-debtor is protected against collection efforts outside the Court.

How long will a Chapter 13 plan last?

Under BAPCPA, Congress has created a mathematical equation, sometimes referred to as a “means test,” that determines a variety of issues in your case. A full review of your finances for the six (6) months prior to filing your bankruptcy determines whether your plan needs to be 36 months or 60 months long. If your income from the preceding six (6) months is more than the average household income for a similar size household in your area, then you are referred to as an “over median” debtor. If your income is over median, then you typically have to file a plan that extends to 60 months. This is not required in all jurisdictions, and you need to consult your attorney as to the case law in your area. If your average income from the preceding six (6) months is less than the average household income for a similar size household in your area, you are referred to as an “under median” debtor. If you are under median, then you do not have to propose a plan any longer than 36 months, but you may propose a longer plan if necessary to resolve your financial issues. This is a decision to be made with your attorney. For information regarding the means test forms, see Official Form 22C. See Question 37 for more information regarding Chapter 13 payments.

What kinds of debts may not be discharged?

Some debts that are nondischargeable include domestic support obligations (debts for spousal or child support, alimony or maintenance), most government-funded or guaranteed educational loans (student loans) or benefit overpayments, court fines, debts for personal injury caused by a debtor’s operation of a motor vehicle while intoxicated, debts for certain condominium or cooperative housing fees, and most taxes, just to name a few. These exceptions to discharge can and will apply automatically. Creditors may also seek to have a debt declared nondischargeable by the Court based upon a statement that credit was obtained through the use of false financial information provided by a debtor. The list of potentially nondischargeable debts is quite comprehensive, and your attorney can help you with this issue.

How do I re-establish my credit after bankruptcy?

There are at least two ways to get credit after a bankruptcy. First, one of your existing creditors may continue to grant you credit based upon your past dealings with them. Second, today there are several banks offering secured credit cards. This means that the credit limit is based upon the amount of security (usually cash) given to the card issuer. There are people who “specialize” in the business of credit repair. BEWARE. Some of the schemes they offer to you are not only worthless, they may be illegal. Consult your attorney first. You will almost certainly receive at least one solicitation from one of these "professionals."

If I need to file bankruptcy again, how long do I have to wait?

You may file a Chapter 7 case every eight (8) years. If you filed a Chapter 13 case and paid at least 70% of your unsecured debts, there is no waiting period to file a Chapter 7 case. There is no restriction on an individual for filing Chapter 13 cases, other than if the Court dismissed a prior case for a willful failure to obey a court order, or you voluntarily dismissed the prior case after a creditor filed a motion for stay relief. However, one must be cautious here: you may only have a limited stay, if any, and you may not be entitled to a discharge.