Chapter 13 Bankruptcy – Part 2

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Question: Why don’t I “qualify” for a Chapter 7 Liquidation?

Not every consumer debtor is eligible to file a Chapter 7 bankruptcy, and there might be several reasons why you might fall into that category.  One common reason would be that you have filed bankruptcy in the past.  A debtor may not receive a discharge in a Chapter 7 bankruptcy if the debtor has been granted a Chapter 7 discharge within the prior 8 years; or if the debtor has been granted a Chapter 13 discharge in the prior 6 years (unless the plan repaid at least 70% of the debts and was proposed in good faith) [see Bankruptcy Code Section 727(a)(8)-(9)].  Congress changed the Code in 2005 to increase the time between filings from 6 years to 8 years for Chapter 7.  But even if you are not eligible for a Chapter 7 bankruptcy, the Chapter 13 will offer significant relief from creditor harassment by providing an “automatic stay” [See 11 U.S.C. Section 362] which does not allow creditors to commence or continue collection actions in most situations.

Another reason that you may not be able to file a Chapter 7 bankruptcy is that you earn too much money.  Again, Congress modified the Bankruptcy Code in 2005 and really took a lot of discretion away from debtors and their attorneys whether they are eligible for a Chapter 7.  Congress created a very mechanical approach in determining whether a debtor could repay some of his or her debts with a calculation called the “means test.”  In short, the bankruptcy means test is a formula that looks at your current monthly income and subtracts allowable expenses (many of which are fixed national or local standards) to determine whether a debtor has the “means” to repay any of the unsecured creditors.  The test is not always practical or pragmatic.  For instance the income side of the equation looks at income received from all sources in the six full months prior to filing regardless of whether the debtor will have that income in the future.  If a debtor has had to pull money from a retirement account in order to survive, this influx of money may incorrectly increase the appearance of current income even though the debtor does not plan on withdrawing funds in the future.  Such a strict calculation can also lead to “game playing” such as filing a bankruptcy for a teacher immediately after summer break to list three months of no income at all!  In addition the expenses can be purely fictional too.  Debtors that use propane for heating may not be entitled to their actual utility expense, but instead would be limited to the lower local standards set for that expense.  It appears that Congress would suggest that debtors should freeze in the winter so long as money is being paid to the unsecured creditors.  Sometimes I refer to this calculation as the “mean test.”

However, the United States Supreme Court stepped in and gave its opinion in the case Hamilton v. Lanning [130 S.Ct. 2464 (2010)].  The Lanning Court held that the mechanical approach of the means test clashes with other provisions of the Code and gave bankruptcy judges some discretion modifying the means in test in special circumstances.  A bankruptcy judge “may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation [of a Chapter 13 plan].  So while the means test may still require a Chapter 13 filing, at least the judge can lower the amount that must be paid to creditors if a debtor truly cannot afford the payment.

BUT WAIT … there are many reasons why a debtor might benefit from a Chapter 13 bankruptcy EVEN IF that debtor qualifies for a Chapter 7 liquidation.  You might be able to think of a few, but maybe I will surprise you.  Please stay tuned for the next Chapter. I appreciate all of your positive feedback and questions – keep them coming!

 

Chapter 13 Benefits

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Welcome to our Tom Scott & Associates (TSA) bankruptcy blog. My name is John Hauber and I am a staff attorney at TSA.  Each week, Tom Scott and Associates will post a new blog regarding an aspect of consumer bankruptcy.  This blog will start with a 13 part discussion of Chapter 13 bankruptcy and the various benefits and potential disadvantages.   We will always welcome your questions and comments.

Let’s get started!

Question 1)  What is a Chapter 13 Bankruptcy?

There are many Chapters in the Bankruptcy Code (Chapters 7, 9, 11, 12, 13, and 15), but generally only Chapters 7 and 13 deal with individual consumer debts. The “goal” of any Chapter of bankruptcy is to try and get some money to creditors in exchange for getting rid of (or “discharging”) that remaining debt.  A Chapter 7 bankruptcy is a “liquidation” which is generally limited to individual households with low income or extraordinary monthly expenses.  Individuals with above-average income or those who have filed a Chapter 7 in the prior eight years may be required to file a Chapter 13 bankruptcy.  A Chapter 13 is a reorginizational bankruptcy whereby an individual debtor with regular income offers to repay a portion of his or her debts over a period of time, ranging from three to five years.  A debtor proposes a plan of repayment, offering a monthly amount to the Chapter 13 bankruptcy trustee for a specified period of time; the total offer is the base amount.  The trustee then distributes it to creditors as directed by the plan and once the plan is complete the remaining unsecured debts are discharged. The benefits of a Chapter 13 include: 1) The automatic stay – a ”stay” is just that … the court ordering your creditors to “stay” (just like a dog).  From the moment you file bankruptcy creditors are prohibited from taking any steps to collect a debt and any collection that has started (including garnishment and foreclosure) must cease; 2) Repayment based upon what you can afford to pay – Tom Scott and Associates will closely review you income and subtract from that the expenses that are “reasonable and necessary for the support of yourself and your family.”  The amount that is left over is the amount that will be repaid by the court to your creditors.  In other words the amount that you repay is not related to the amount you owe, but instead is based upon what you can afford to repay.  A Chapter 13 bankruptcy is not a negotiation with your creditors. but is only based upon your income and expenses; 3) Discharge of debts – A plan can be created that will get you current on a home, lower a car payment, repay tax obligations with no penalties, repay child support, and maybe even remove a second mortgage on a home with no equity.  Once the plan is complete the court will enter a Discharge Order that will discharge any unpaid unsecured debt.

Stay tuned for week 2 when we start our discussion regarding why someone who qualifies for Chapter 7 might find MORE relief in a Chapter 13.  In the meantime, please feel free to contact me directly at JHauber@TomScottLaw.com with any questions or to schedule a free consultation to discuss you financial condition in more detail.