The general rule in Chapter 13 bankruptcy is that the debtor makes one monthly payment to the Chapter 13 trustee who then distributes monthly payments to the debtor’s creditors- the trustee is the collection agent for all creditors. Some debtors ask whether they can pay one or more of their creditors directly each month; its called making payments "outside the plan."
Why would a debtor want to make payments outside the plan. Possibly, to minimize the costs of Chapter 13 bankruptcy. The bankruptcy trustee charges a fee to administer a Chapter 13 payment plan. The fee ranging from 6% to 10% is assessed against all plan payments collected and administered. Debtor payments outside the plan directly to creditors are not subject to the trustee fee.
Our bankruptcy court will permit payments to secured creditors outside the plan if the debtor has arranged for automatic payments to the creditor from the debtor’s employer or his bank account. The automatic payments system must have been in place before the debtor filed his Chapter 13 petition.
I have been representing debtors in bankruptcy cases filed in the Northern District of Georgia for over 20 years. Until the law changed in 2005, filing bankruptcy was a fairly straightforward process – often I would meet with a client, decide whether to file and select Chapter 7 or Chapter 13, collect information about creditors, develop a budget, then file that day.
Attorney's fees and filing fees in those days were relatively low and relatively hassle free. Most Chapter 7 cases processed through to discharge, and Chapter 13 cases worked as long as the debtor remained employed and committed to making his case work.
Fast forward to October, 2005 – the time that the BAPCPA amendment to the Bankruptcy Code went into effect. The system became significantly more complicated. Clients were expected to gather page after page of documents, lawyers were charged with performing extensive budget calculations (the median income and means test).
Fees went up because both the attorney's liability and the amount of work required increased greatly. And what is the end result? Many people with limited income and no hope of paying it back are filing Chapter 7. Others who would have fit into Chapter 7 sometimes do not qualify immediately and end up having to delay their filing for a few months. Folks with some capacity to pay end up in Chapter 13, but trustees are more demanding and Chapter 13 plans that would have worked under the old law do not always work now.
Honest, hardworking men and women have to jump through hoops and pay a lot more money. In my career I can count on the fingers of one hand the number of clients or potential clients who I felt were dishonest. Those with the goal of gaming the system are not deterred. If the purpose of the BAPCPA amendments were to ferret out fraudsters, it has been a complete waste of time.
Another unintended consequence of the BAPCPA laws – deserving debtors do not seek the relief to which they are entitled because they get frustrated with all the paperwork required. Many of these folks remain in financial limbo – unable to save or psychologically move forward because of crushing debt. In a macro-economic sense I wonder if the country is better off with these folks living in financial purgatory rather than moving on with a fresh start.
My colleague, South Carolina bankruptcy lawyer Russ DeMott, and I were chatting about this tendency of deserving debtors to give up or delay filing because of the burden that the Bankruptcy Code places on debtors in terms of document production, costly credit counseling that offers marginal benefit and record keeping. Russ calls this syndrome "financial repression" and he has written a compelling and thoughful article about this problem. Russ has given me permission to republish his article on this blog, which will be the next post published here. You should also check out Russ' Charleston bankruptcy blog. Your feedback is welcomed.
Here's a blog post of interest to anyone considering a Chapter 13 bankruptcy and who owns a car subject to a car lien. South Carolina Bankruptcy Lawyer Unleashes Vulcan Intellect on Hanging Paragraph. The post authored by South Carolina bankruptcy attorney Russell DeMott explains the law pertaining to the treatment of car loans in Chapter 13. If you purchased a car more than 910 days before filing Chapter 13 you can cram down the secured portion of the car loan to the car's current value. The balance of the car loan, the "upside down" amount, is treated just like an unsecured credit car. Part of the unsecured car loan amount may be discharged in a Chapter 13.
There is an exception to the rule. The rule prohibing cram downs of car loan made within 910 days of filing only applied to cars purchased for your personal use. Mr. DeMott's blog post explains a case where a husband purchased a car for his wife within the 910 days. The debtor husband, not the wife, signed the car loan. The husband and wife filed a joint Chapter 13. The judge ruled that the joint Chapter 13 plan could cram down the car loan even though it was taken out within 910 days of the bankruptcy.
The post quotes part of the bankruptcy attorney's argument:
““while section 302 permits the filing of a joint case, if the court were to find that the hanging paragraph applied to Mr. Brown’s purchase of the vehicle, it would result in the Browns being penalized for filing a joint case.”
Read the post for a full explanation. If you are filing Chapter 13 with a car purchased within 910 days make sure you consider whether the car was purchased for the personal use of the debtor who signed the car loan. Cars purchased for children, for business use, for your spouse may be outside the cram down restrictions.
posted by Jonathan Alper, banrkuptcy and asset protection attorney, Orlando, Florida
I received an email from a person who filed Chapter 13 bankruptcy and who expressed dissatisfaction with their attorney. The caller said that his company was downsizing, or going out of business, and he knew now that he would not be able to sustain her Chapter 13 plan payments. The person is current on Chapter 13 plan payments yet is sure that he will be unable to make future payments. The debtor wants to convert now to a Chapter 7 liquidation bankruptcy; by stopping the Chapter 13 payments he could conserve money for future expenses. He complained that when he called his lawyer’s office to ask about conversion he had to discuss this issue with the paralegal. He felt his questions should have been answered by the attorney and not the paralegal. The called said that, "I ...desire to ask questions of an attorney who actually seems to be interested in what is best for ...our future and my financial status."
I explained to this caller that he could not convert to a Chapter 7 because he expected future job problems. If and when his income actually dropped significantly he then could convert to Chapter 7 if his future income and expenses passed the means test. Maybe a month or two prior to his job termination he might be able to skip his Chapter 13 payment which would cause the Trustee to file a motion for dismissal. In Chapter 7 this debtor would have to account for the non-exempt cash not paid to the Chapter 13 Trustee.
The debtor told me the name of his attorney. I know the attorney to be a competent and experienced bankruptcy attorney. It is not unusual for this type of question to be handled adequately by a bankruptcy attorney’s paralegal. The issue is not a difficult legal question that requires the attorney’s research or judgment. An experienced bankruptcy paralegal knows the answer to this debtor’s question and should be able to explain the answer to their client. Just because this debtor’s attorney chose not to, or was unable to, answer the question personally does not mean the attorney is not interested in the case or the client.
If want your bankruptcy attorney to personally respond to your every question you need to make your expectations known when you hire your attorney. Understand that those attorneys who are more personally involved in their clients’ bankruptcy cases tend to charge higher fees because they commit more time to each case. If you need unrestricted access to your bankruptcy attorney make sure you find an attorney whose practice meets your expectations and be prepared to pay for the service.
posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida
Bankruptcy Attorney Jamie Ryke of the Second Start Bankruptcy Law Firm talks about the Truth about Bankruptcy. Find out how we can help you get out of debt and get a fresh start by filing either a chapter 7 or chapter 13 bankruptcy.
In bankruptcy Chapter 13 mortgage foreclosure is either stopped or at least temporarily avoided. Here’s how.
First, just in case you are not familiar with a Chapter 13 bankruptcy, it is a bankruptcy court approved payment plan where the debtor (the person filing bankruptcy) pays a bankruptcy trustee each month and then the trustee pays the debtor’s creditors.
There are several aspects of a Chapter 13 bankruptcy that work to help people facing mortgage foreclosure. The first aspect is actually applicable to all bankruptcies. It is called the “automatic stay”.
By law, whenever anyone files bankruptcy, regardless of the type of bankruptcy, there is an immediate “automatic stay” (automatic temporary stopping) of most civil proceedings against the person filing bankruptcy. What this means is that if someone is facing mortgage foreclosure and the person files bankruptcy, the mortgage lender has to immediately stop its’ foreclosure action until it gets permission for the bankruptcy court to proceed.
In a Chapter 13, the bankruptcy court will not lift the “automatic stay” and grant the mortgage lender permission to proceed with a foreclosure until the debtor (the person filing bankruptcy) fails to make his payments to the bankruptcy trustee. As long as the debtor pays the monthly payments to the trustee and pays his regular mortgage payments, the “automatic stay” will remain in force and the mortgage lender can not do anything.
The second aspect of a Chapter 13 that works in favor of people facing foreclosure is that it allows a debtor to pay mortgage arrearage over time, normally 3 to 5 years. In most foreclosure cases, a person has not paid his monthly mortgage payment for several months and the mortgage lender demands full payment of the delinquent monthly payments (arrearage) in lump sum before the lender will consider stopping foreclosure. Most people cannot pay the lump sum.
In a Chapter 13 bankruptcy, a debtor can pay the arrearage over time. He does not have to pay it all at one time. Spreading the lump sum over time means paying smaller monthly payments until the total arrearage is paid. A creditor can object to the amount to be paid each month towards the arrearage, but once the bankruptcy court approves the payment plan, the creditor can not do anything except take the payments.
A third aspect of a Chapter 13 bankruptcy that helps people facing mortgage foreclosure is that unsecured creditors may be paid a portion or all of what is owed to them. What this is really doing is reducing the amount of debt that a person has to pay back each month. By paying unsecured creditors less each month, there is more money available with which to pay a secured creditor such as a mortgage lender. Therefore, it should be easier for a debtor to pay his monthly mortgage payment.
This is general information. If you need specific information or have any questions of any nature whatsoever, talk with a lawyer licensed in your state.
This article may be republished, but the wording must not be changed and the author links must remain active.
Stop! Did you know that bankruptcy was created to give people a fresh start? Find out more at bankruptcy information. And click here for more insights on Chapter 13 bankruptcy.
I have been representing debtors in bankruptcy cases filed in the Northern District of Georgia for over 20 years. Until the law changed in 2005, filing bankruptcy was a fairly straightforward process – often I would meet with a client, decide whether to file and select Chapter 7 or Chapter 13, collect information about creditors, develop a budget, then file that day.
