CHAPTER 13 BASICS
Chapter 13 bankruptcy is a reorganization of all debt into a repayment plan. The repayment plan or “Plan” is comprised of various categories of debt. The debt is divided into a hierarchy by type of debt in which a chapter 13 trustee will pay to your creditors on your behalf. The categories of debt are as follows:
- Administrative debts. Administrative debts are those owed to your bankruptcy attorney and the chapter 13 trustee. Typically, chapter 13 case attorney fees are divided. A portion of the fees are paid to the attorney upfront and the other portion is paid to your attorney by the chapter 13 trustee throughout the duration of the repayment Plan. The chapter 13 trustee will also be paid a percentage of your plan payments for the administration of your case, usually about 10%.
- Secured debts. Secured debts are any debt attached by collateral to the loan. These debts typically are your home/home mortgage and car/car note.
- Priority Unsecured debt. Priority Unsecured debt is more often than not two types of debt, which are (a) taxes owed to the government, state or federal, or (b) domestic support obligations such as child support or spousal maintenance. And
- Unsecured debt. Unsecured debt is pretty much everything else including credit cards, personal loans, medical debt, student loans, canceled debts that have been written off, registration loans, old tax debts that may be dischargeable, and anything else that doesn’t fit into one of the three categories above.
FORMULATING THE PLAN
Formulating the Plan consists of taking all the debt owed and placing it into the correct category, so the chapter 13 trustee knows which debts are what and when to pay them. The initial plan is a proposed plan. Creditors will receive a copy of the proposed plan and will have the opportunity to file a claim. Creditors who file a claim will get paid by the Chapter 13 trustee. Creditors who do not file a claim will not be paid and will be discharged at the end of the case. Secured creditors (category 2 above) may also object to the proposed plan.
For example, let’s say you purchased a vehicle from a car lot in Phoenix. You propose a payment on your car loan of $10,000. The secured creditor shows by its records and submits proof that you owe $11,000. The creditor may object to the plan’s proposal to only pay $10,000. Objections must be resolved before the proposed plan may be approved by the court. The objection may be resolved by a negotiation of an amount to be paid that both parties approve, or a judge may have to resolve the objection after going to court.
COURT APPROVAL OF THE PLAN
After a deadline passes for creditors to file their claims, the chapter 13 trustee will make recommendations on items that may need to be resolved or fixed prior to court approval. These items are basically housekeeping rules that the bankruptcy code or law states must be itemized before the chapter 13 trustee will recommend approval of the Plan to the court. Once these items are resolved, the chapter 13 trustee and the bankruptcy filer may submit a stipulated plan agreement to the court for approval.
If both parties agree, then the court will usually agree as well and submit the approval of the Plan. Otherwise, if an agreement cannot be reached between the parties, then a contested plan approval hearing may be held where both parties state their case and ask the court to approve or deny the Plan. Once all issues are resolved, the court will approve the Plan. Chapter 13 plans must be feasible, which means the bankruptcy filer must show the court and the chapter 13 trustee that they make enough money to be able to make the proposed plan payment as well as meet the basic necessities of life.
WHEN DO PLAN PAYMENTS BEGIN
The bankruptcy filer must begin making the payments on the proposed plan within 30 days of when the case was filed. The chapter 13 trustee’s in Arizona use an automated payment processing system under a website called www.tfsbillpay.com. Bankruptcy filers may also mail in their payments to the trustee using certified funds. Plan payments may be anywhere from 36 months to 60 months. However, to formulate a plan under 60 months, the bankruptcy filer must meet a qualification test for income requirements. If income is too high, the plan must be for no less than 60 months.
WHAT IF I CAN’T MAKE MY PLAN PAYMENTS?
The chapter 13 bankruptcy code offers help if you cannot make your payments temporarily. A moratorium may be filed, which gives the bankruptcy filer a few months off from making payments. However, you must be careful with this as chapter 13 plans cannot go further than 60 months. So any missed payments must be recalculated into the remaining months of the plan, which will make payments increase once they resume. If you have a permanent situation where you can no longer make any more payments, then you can consider converting your case to Chapter 7 bankruptcy or you have the right to ask for dismissal of your case at any time.
CAN I FILE CHAPTER 13 WITHOUT AN ATTORNEY?
Chapter 13 bankruptcy requires an extensive knowledge of the bankruptcy code. The rules are complex even for some bankruptcy lawyers. It cannot be advised to file a chapter 13 case without the help of an experienced bankruptcy lawyer. Most lawyers charge a flat fee for bankruptcy cases which means once the flat fee is paid, the lawyer cannot charge you more money unless specific circumstances arise in your case involving extra services. Some lawyers charge their hourly rate for chapter 13 cases and will bill you by the hour. These lawyers require a large upfront fee so they can bill you for work as they go.
Depending on the complexities of your case, one type cannot be recommended over another. However, at Jim Gaudiosi Attorney at Law, I am an experienced lawyer. My staff and I are based in Maricopa County, but we are available for clients throughout the entire state of Arizona. If you are looking at filing chapter 13, please give us a call at 623-777-4760 or visit us at www.gaudiosilaw.com for a free consultation so we can go over your case today.