Bankruptcy Law

Hello and welcome to YourBestLawyer.com. In this video, we'll offer a comprehensive overview of Chapter 13 Bankruptcy. It's essential to understand that bankruptcy proceedings are governed by federal procedures, which supersede any conflicting state laws. With that said, delving into the intricacies of Chapter 13 can be quite complex. All pertinent details regarding bankruptcy can be located in Title 11 of the United States Code, commonly known as the bankruptcy code.

Any person, whether self-employed or managing an unincorporated business, qualifies for Chapter 13 relief provided that the aggregate sum of the individual's secured and unsecured debts is below $2,750,000 at the time of filing for bankruptcy relief.

Chapter 13 bankruptcy is a legal process by which a debtor can restructure their secured debt, catch up on delinquent secured debt payments, and eliminate some or most of their unsecured debt. In this process, debtors propose a plan to make regular payments to a Chapter 13 bankruptcy trustee over a period of three to five years, who then disburses the payments to creditors. The amount a debtor must pay to the Chapter 13 Trustee is based on their "disposable income" and is calculated using their state's median family income. If the debtor's monthly income is below the state median income, the plan is typically set for three years, unless the court approves a longer duration for specific reasons. On the other hand, if the debtor's monthly income exceeds the state median income, the plan generally spans five years. Currently, the median income in Arizona for a single person is $63,717; for a family of 2 is $80,352; for a family of 3 is $90,789; for a family of 4 is $103,676. Regardless, the law prohibits plans that extend beyond five years. Throughout this period, creditors are legally prohibited from initiating or continuing collection efforts by the court-enforced "automatic stay." This arrangement provides a manageable framework within which individuals can gradually settle their financial obligations.

Chapter 13 provides individuals with several advantages compared to the liquidation process in Chapter 7, two of which are worth noting in some detail. First, a debtor can stop a home foreclosure by filing a Chapter 13 case. The law allows the debtor to begin making regular monthly payments again on their mortgage plus a fractional portion of the amount they are overdue once the Chapter 13 has been filed. The fractional portion is either 1/36th of the amount of the total amount past due or 1/60th of the amount that is past due, depending on how long the debtor's plan is. This payment is made to the Chapter 13 Trustee who pays it to the creditor. If the debtor fails to timely make the mortgage payments during the Chapter 13 plan, the lender can file a motion for relief from the automatic stay, which if granted will allow the lender to proceed with foreclosure. Also, if the foreclosure sale occurs before the filing of a Chapter 13, the debtor may still lose the home.

The second significant advantage of filing a Chapter 13 case is the ability to restructure secured debts (excluding the primary residence mortgage) and extend their repayment over the duration of the Chapter 13 plan, potentially reducing the payments. Many debtors restructure their vehicle loans while in Chapter 13 because the bankruptcy code allows debtors to "cram down" secured debts to the value of the property securing the debt. For example, if a debtor owns a vehicle on which they owe $15,000 but is worth only $10,000 on the date of the bankruptcy filing, the debtor may "cram down" the debt to $10,000 and pay it off during the life of the Chapter 13 case. The remaining $5,000 of the debt will be treated as an unsecured debt under the Chapter 13 plan and eliminated upon discharge. To take advantage of this provision, the vehicle must be for personal use and purchased 2 1/2 years before the bankruptcy filing.

Chapter 13 also includes a special provision extending the automatic stay to third parties responsible for "consumer debts," offering protection to co-signers.

In essence, Chapter 13 functions like a consolidation loan. Individuals make plan payments to a Chapter 13 trustee, who then distributes these payments to creditors. This setup ensures that individuals are shielded by the automatic stay from direct contact with creditors while benefiting from the protective umbrella of Chapter 13.

How it works: A Chapter 13 bankruptcy starts with the filing of a petition in the bankruptcy court where the individual resides. Alongside the petition, the debtor must submit various documents, including schedules of assets, income, expenditures, executory contracts, and financial affairs statements. Additionally, a certificate of credit counseling class, a debt repayment plan, evidence of recent employer payments, monthly net income statement, and information on federal or state education accounts are required.

The court charges a $235 filing fee and a $75 administrative fee, payable either upon filing or in court-approved installments. Failure to pay these fees may lead to case dismissal.

To complete the official bankruptcy forms, the debtor needs information on creditors, income, property, and monthly living expenses. Married individuals may file a joint case and must provide this information for both spouses. Upon filing, an impartial Chapter 13 trustee is appointed to administer the case, evaluate the debtor's Chapter 13 Plan, and disburse payments to creditors in accordance with the Plan.

Filing under Chapter 13 initiates an automatic stay, halting most collection actions against the debtor or their property. This stay does not apply to specific actions and may have a limited duration. Creditors receive notice of the bankruptcy case from the clerk and are given instructions on how to file Proofs of Claim, which are used by the Chapter 13 Trustee to determine whether the Debtor's Chapter 13 Plan is feasible. Debtors are able to object to any claims filed by creditors if they disagree with the amount of the claim or how the creditor has categorized the claim. For example, if an unsecured creditor has filed a secured claim, the Debtor will object to the Proof of Claim because secured claims must be either paid in full or crammed down in a Chapter 13 Plan, whereas unsecured creditors do not have to be paid in full.

Section 341 Meeting of Creditors: Within 30 days of the filing of the petition, the debtor must attend a meeting of creditors which is sometimes called a "341 Meeting" after the code section which requires it. The debtor, Chapter 13 Trustee, and any creditors interested in questioning the debtor attend. Typically, the Trustee asks the debtor questions about the income and debts listed on the petition to ensure that the debtor qualifies for Chapter 13.

Chapter 13 plan and confirmation hearing: The debtor must file a repayment plan with the bankruptcy court, either with the petition or within 14 days. The plan, requiring court approval, outlines fixed payments to the trustee, who then distributes funds to creditors. Claims fall into three categories: priority, secured, and unsecured. Priority claims must be fully paid and include debts like past-due taxes or child support claims; secured claims include debts such as mortgages and car payments; and unsecured claims include debts like credit cards, medical bills, and personal loans. Under the plan, secured claims must be repaid at least the collateral value. Unsecured claims need not be fully paid, but the plan must commit the debtor's "disposable income" over an "applicable commitment period" to the Plan. A debtor's disposable income for the purposes of a Chapter 13 Plan is calculated by subtracting certain allowable expenses, such as housing, utilities, vehicle and healthcare expenses from the debtor's household income.

The debtor initiates plan payments within 30 days of filing, even before court approval of the Chapter 13 Plan. Adequate protection payments are often made directly to creditors for obligations due before plan confirmation, but are sometimes made to the Chapter 13 trustee.

A confirmation hearing, within 45 days of the creditors' meeting, determines the plan's feasibility. Creditors receive notice and can object at the hearing if they believe the debtor will be unable to sustain plan payments or believe that the bankruptcy case was filed in bad faith.

If confirmed, the trustee distributes funds promptly and will continue payments to creditors over the life of the plan. Once all plan payments have been made, the debtor receives a discharge, which eliminates the debtor's pre-petition debt. If the plan is not confirmed, the debtor can file a modified plan or convert to Chapter 7, if they qualify. If the court dismisses the case, remaining funds are returned to the debtor.

Changes in income level may prompt plan modification, initiated by the debtor, trustee, or an unsecured creditor, before or after confirmation. In addition, if the debtor needs to incur new debt -- to buy another car, for example -- the debtor must seek the approval of the Chapter 13 Trustee and the court.

To succeed under a Chapter 13 reorganization, a debtor must be able to sustain a regular monthly income to support the plan payments and will devote three to five years making payments under their Plan. While filing a Chapter 13 is a derogatory event on an individual's credit that can remain on a credit report for seven years, it is often a path to financial recovery if the debtor is motivated to complete their reorganization plan.

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Credit for this script:

Author: Felix Martinez

Attorney that checked for correct information and to make sure there was no legal advice given: Jennifer Nichols-Moore

Other information obtained from:

• https://www.justice.gov/ust
• https://www.azb.uscourts.gov/
• https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/33/01133.html