Tips And Guide For Debt And Loan Management

If you have determined that you fall within the Chapter 13 parameters and that it will solve your financial problems, things proceed in a somewhat similar fashion as in a Chapter 7. First of all, you will need to have your Chapter 13 petition and schedules drafted and filed.
You will also need to file a plan detailing how much you have to pay into the plan every month, how much total will be paid over the entire course of the plan, the percentage return you propose to pay your unsecured creditors, and how long the plan is expected to last. You will need to make your first payment into the plan within a month of filing your documents. Failure to make plan payments will get your case dismissed. A month or two after everything has been filed, you will attend the first meeting of creditors. Unlike Chapter 7 creditors’ meetings, Chapter 13 creditors’ meetings often require more than one appearance, and creditors often show up. Unlike a Chapter 7 creditor meeting, which is intended to quickly discover if there are any unlisted assets or changes in the paperwork, a Chapter 13 meeting is a chance for the trustee to go over the plan in detail. He will ask questions such as

• Does the plan meet all legal requirements?
• Is the plan proposed in good faith?
• Will the plan pay everyone back in the requisite number of months?

The trustee may request that the debtor make some changes to the plan or may ask that some documentation be provided.
After the meeting of creditors has been concluded, you may be required to attend a valuation hearing, which occurs only if a creditor objects to the value you list in your schedules for its secured merchandise.
For example, maybe you think that your car is worth only $4,000, and your lender thinks it is worth $8,000. A judge will decide who is right. Finally, your plan must be confirmed by the bankruptcy court after the trustee signs off on it. If it is not confirmed, your case will be dismissed. In some jurisdictions, confirmation is accomplished without an actual hearing. Confirmation usually occurs about two months after filing the case.
Plan payments will be due every month, and payments are made to the trustee’s office. Other than that, you will probably have little substantial interaction with the trustee for the duration of your case. After you have made all of your plan payments, you will get your discharge.

Unlike a Chapter 7, which permits anyone to file, regardless of employment status or debt levels, a debtor contemplating a Chapter 13 must meet certain requirements.
Unless you meet these prerequisites, your case will be dismissed:

1. Be an individual with regular income. Only individuals can file a Chapter 13. The only business entity that can file a Chapter 13 is a sole proprietorship, and even then, it can do so only in the name of the individual who owns the business. Corporations and partnerships must either file a Chapter 7 (which would cause the business to be shut down) or a Chapter 11 (which allows the business to stay open but is quite expensive).
2. Have regular income. The individual who files must have a source of regular and stable income (usually a job) so that the court can be assured that the Chapter 13 plan payments can be made. Social security, welfare, or owning a small business would also constitute stable income, as would alimony, child support, or rental income. Because unemployment benefits are for a limited duration, they probably would not constitute stable income.
3. Have disposable income. The heart of a Chapter 13 is the repayment plan. As such, you must be able to afford plan payments. So not only must you have regular income, but your income must also exceed your expenses by enough so that you will be able to repay your entire plan. When you fill out your budget (Schedules I and J), you must show that you have enough money left over at the end of every month to fund your plan. This strategy differs significantly from what you want to do in a Chapter 7.
4. Be under the debt ceiling. In a Chapter 7, there is no limit as to how much debt you can have. You can have $10,000 in unsecured debt or $500,000. You can have $10,000 in secured debts or $1 million. It makes no difference. In a Chapter 13, your unsecured debts cannot exceed $250,000, and your secured debts cannot exceed $750,000.
5. Give your “best effort.” The plan has to be the very best effort that the debtor can put forth. That means that the debtor will live frugally, without expending money for luxuries. Beyond that, best effort varies from district to district. In some places, it means that all creditors, secured and unsecured alike, must be paid in full. In others, it means that the debtor will pledge all disposable income to the plan.

In most places, as long as you propose a budget that is fair and modest (but not necessarily spartan), pledges all available extra capital to the plan, pays back secured and priority creditors 100 percent, and attempts to give your unsecured creditors something, the plan will be confirmed.

The advantages of filing Chapter 13 should be fairly apparent. You are able to keep your property, make up any arrears you may have on your own terms, rid yourself of debts that you could not get rid of in a Chapter 7, and discharge any other debts. Depending upon the circumstances and the laws in your district, you may be able to get rid of unsecured debts for pennies on the dollar. On the whole, a Chapter 13, if it applies to your situation, may be the best thing you can do for yourself.
On the downside, paying the trustee back each month, every month, will surely get tiresome. Attorney fees are significantly higher in a Chapter 13 case than in a Chapter 7 case because a lot of work has to go into the plan and the various hearings. Also, your credit rating will be negatively affected. And what if you cannot finish your plan payments? You may end up in Chapter 7 anyway at that point. This possibility is discussed in detail at the end of this chapter.

Either of the following is also a legitimate reason for filing a Chapter 13:

• You received a discharge in a bankruptcy within the past six years. If you received a Chapter 7 discharge, you must wait at least six years before filing Chapter 7 again. If you received a Chapter 13 discharge, you must wait at least six years before filing a Chapter 7 (unless you repaid your creditors at least 70 percent of what you owed them). But in either case, you can file a Chapter 13 at any time.
• You want to wipe out debts that cannot be discharged in a Chapter 7. One of the true advantages of a Chapter 13 is that you can get debts discharged that cannot be discharged in a Chapter 7. Debts incurred by fraud, larceny, embezzlement, credit card fraud, assault, battery, false imprisonment, or defamation are not dischargeable in a Chapter 7. But in a Chapter 13, these debts can be repaid.

Another common reason that a person may choose a Chapter 13 over a Chapter 7 is that a Chapter 13 allows the debtor to keep all assets, not just exempt assets. For example, Florence has $100,000 in credit card debt and has a BMW worth $20,000 that is paid off. If she filed Chapter 7, she would lose her car to the trustee because it is far above the exemption limit. However, if she filed a Chapter 13, she could keep the car because there is no limit on exemptions in a Chapter 13 case. Is there a catch? But of course. One of the many requirements of a Chapter 13 is that your creditors receive at least what they would have received had you filed a Chapter 7. In the case of Florence, her creditors would have received at least $20,000, because that is the amount of her nonexempt assets.
Accordingly, she must present a Chapter 13 plan that proposes to pay back at least that much. Unlike the secured debts and priority debts mentioned previously, unsecured debts can be paid back less than 100 percent. Thus, Florence could offer a plan that would pay her creditors at least $20,000 over 60 months, or roughly $333 a month. Although this amount is still a hefty sum, she would get to keep her car and could wipe out her entire credit card debt for 20 cents on the dollar. At the end of her plan, the remainder of whatever Florence owed would be discharged, just as it would have been in a Chapter 7. Finally, the amount Florence (or any debtor) would have to pay back varies from district to district. The aforementioned test—creditors receiving at least what they would have received in a Chapter 7—is the minimum that a Chapter 13 debtor has to pay back to unsecured creditors. Some judicial districts require nothing more than that. Others mandate that unsecured creditors receive 100 percent of what they are owed. You need to find out the local rules in your area.

Like mortgage lenders, sometimes Uncle Sam, too, is unwilling to work with you when you fall behind. If you owe on taxes that are not dischargeable in a Chapter 7 you can always propose to repay them through a Chapter 13 plan.
The key to this is that you will have to propose a plan that would pay back all of the taxes, plus 10 percent interest, over a maximum of five years. If you cannot do that, your Chapter 13 trustee won’t approve your case.
Also, a Chapter 13 might make sense if you are behind on child support, alimony, or student loans. If such problems are causing your wages to be garnished or otherwise making your life difficult, a Chapter 13 would allow you to repay these debts over the course of your plan.
Again, these debts, just as with home arrears and taxes, must be repaid fully over the course of the plan to get a discharge. The rule here is that secured debts, such as mortgage arrears, and so-called priority debts such as taxes must be repaid fully over the course of a Chapter 13 case in order to get a discharge. We warned you this would not be easy.

If you want to file a Chapter 13 in order to catch up your mortgage arrears and keep your home, heed this warning: Fully 50 percent of all people who file a Chapter 13 never complete all plan payments. When that occurs, the Chapter 13 trustee dismisses the case and denies the debtor a discharge. When that happens, most Chapter 13 debtors convert their case to a Chapter 7, surrender their house, and lose all payments made to the Chapter 13 trustee. So you better be sure that you really want to keep your house and that your house is really worth keeping because paying the trustee a set amount every month is no easy task.

For example, Al fell three months behind on his mortgage payments for a total indebtedness of $5,000, including interest, penalties, and attorney fees. If Al wants to keep his house via Chapter 13, he will need to pay $168 per month for three years to the Chapter 13 trustee ($168 multiplied by 36 months equals $4,968) on top of all his normal monthly payments and his regular mortgage payment. For many people, making this payment is no easy task. If extra money were around, they would not be filing Chapter 13 in the first place. Paying several hundred dollars to a trustee on top of all regular payments is difficult at best when money is tight.
Is your house worth keeping? If you have little equity, the answer may be no. Little equity is any amount under $10,000. Because staying current with Chapter 13 payment plans is so difficult, if you have less equity than that, it may just be best to file a Chapter 7 and surrender your house.

Certainly, most people are better off by filing a Chapter 7 bankruptcy than a Chapter 13. Chapter 7s are relatively quick, simple, and easy to complete. Unfortunately, for some people, a Chapter 7 just will not work. Either it will not get rid of the type of debts they have, or it will cause them to lose nonexempt property. Chapter 13 was created for those people.
Although a Chapter 13 is neither quick, simple, nor easy to complete, it still can be a very useful debt-reduction tool in the right circumstances. Because most people do not want to be in bankruptcy for four months, let alone four years, you had better be sure that a Chapter 13 makes sense for you before plunging in. Furthermore, whereas a Chapter 7 can be handled without an attorney if need be, a Chapter 13 almost always requires the assistance of counsel, and attorney’s fees will probably cost at least $1,000. A Chapter 13 is generally similar to a Chapter 7, but the two are specifically different. As with a Chapter 7, the case begins when you file a petition and schedules, and an automatic stay is issued immediately. Schedules list all assets and debts. The discharge wipes out the debtor’s personal liability for those debts. The difference between Chapter 7 and Chapter 13 relates mostly to the length of the case and the fact that debts will be repaid (at least partially) instead of wholly discharged in a Chapter 13. Instead of wiping out all dischargeable debts in a few short months as a Chapter 7 does, a Chapter 13 lasts for at least three years and possibly up to five years, depending upon the circumstances. During that time, you promise to pay a certain amount of money every month through a Chapter 13 plan to the Chapter 13 trustee, who, in turn, uses the money to pay back your creditors. Think of a Chapter 13 as a legally sanctioned repayment plan.
Generally speaking, there are three reasons to file a Chapter 13. Either you are behind on your mortgage payments, you are behind on taxes, or you have assets that would be considered nonexempt if you were to file a Chapter 7.