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There are several different types of bankruptcy authorized under federal law described by the “chapter” of the bankruptcy law authorizing each. This includes: (i) Chapter 7 also known as straight bankruptcy; (ii) Chapter 9 for cities and other governmental entities; (iii) Chapter 11 for large businesses; and (iv) Chapter 12 for farmers and ranchers.
However, this article deals with Chapter 13 that allows individuals to reorganize their financial affairs, gain relief from creditors and bill collectors and stop foreclosures among other things. Because those filing Chapter 13 end up paying most of their debts over time, it is also called reorganization bankruptcy and sometimes a wage earner’s bankruptcy even though persons with regular income – not wage earners – may also file Chapter 13.
Everything discussed here is generic and not intended as legal advice to you because Chapter 13 is complicated and depends on your specific circumstances. If you are considering a Chapter 13, please call us toll free at (877) 886-5955 for a free consultation so we can provide legal advice tailored and specific to your unique situation. There is no obligation and the call is confidential.
This is you. When someone files a Chapter 13 bankruptcy, they are called the Debtor. If you file for bankruptcy, you are a Debtor. In Chapter 13 Debtors may keep some or all of their property by paying some or all of their debts over a three to five-year period. Chapter 7 is different because in that type of bankruptcy most debts are voided or “discharged” but some or most property may have to be surrendered to the Trustee or creditors.
All bankruptcy cases are handled in federal courts under rules outlined in the Bankruptcy Code. Oklahoma has three United States District Court Districts: (i) the Western District headquartered in Oklahoma City; (ii) the Northern District headquartered in Tulsa; and (iii) the Eastern District headquartered in Okmulgee.
The Western District of Oklahoma generally includes those counties touching and to the West of Interstate highway I-35. Bankruptcy hearings are conducted in Enid and Lawton as well as Oklahoma City.
The person with ultimate authority over your Chapter 13 case is the Bankruptcy Judge often just called Judge. Each District has at least one Bankruptcy Judge; the Western District has two. While the Judge has authority over your Chapter 13, the typical Chapter 13 Debtor rarely has any direct contact with the Judge.
The Trustee is a person – typically a lawyer – appointed to administer Chapter 13 cases, collect Plan payments from Debtors and disburse those receipts to creditors as specified in confirmed Plans among other things. The Trustee will preside at your 341 Hearing and in most cases be the only person affiliated with the bankruptcy court that you will deal. To some degree the Trustee represents the Judge and it is important that you cooperate with him.
Chapter 13 differs from Chapter 7 in a number of ways and may not make sense for you. Because Chapter 13 requires you to use your income to repay all or some debt over time, the Judge must be convinced that you can afford to pay what you say you can pay in your Chapter 13 Plan. Said another way the Judge must believe that your Plan is feasible and will be successful. If your income varies significantly or is inadequate, the Judge will not approve or confirm your Plan and your Chapter 13 may be dismissed or converted to Chapter 7.
If you have too much debt, you cannot file Chapter 13. Secured debts cannot exceed $1,149,525 and unsecured debts cannot exceed $383,175. A secured debt is where you have given a creditor a lien that includes the right to repossess or foreclose on property like your home or a vehicle if you fail to pay the debt. An unsecured debt like a credit card or medical bill does not give the creditor this right to foreclose or repossess.
You must receive credit counseling from an approved agency and pay its fee before filing Chapter 13. As your Chapter 13 lawyers, we will prepare a number of documents and forms required by the Bankruptcy Code using information that you provide us. These documents will be filed with the court to initiate your Chapter 13. You must also pay the filing fee imposed by the Bankruptcy Court at the time we file your Chapter 13.
Shortly after the Chapter 13 is filed, notices of the first meeting of creditors will be mailed to you and all creditors and interested persons as required by Section 341 of the Bankruptcy Code. The Debtor and his lawyer must appear at this 341 Hearing chaired by the Trustee to answer simple questions about their affairs and the Plan.
We have an agreement with the Trustee to participate in 341 Hearings in our office in Enid via teleconference so that our clients need not drive to Oklahoma City.
This 341 Hearing is typically the only time you have to appear in court and only on rare occasions are our clients required to appear before the Judge. You are required to provide certain documents like tax returns and wage statements to the Trustee prior to the 341 Hearing. If these documents are not provided the Trustee, your 341 Hearing will be continued to a later date and you and your lawyer will have to appear in Oklahoma City for this continued 341 Hearing.
The most important part of your Chapter 13 is your repayment plan called the Chapter 13 Plan or simply Plan. We will prepare the Plan using information you provide us outlining in detail how much each creditor will be paid, how long the Plan will last, the values of your property and more.
For example bankruptcy law deems some debts called priority debts so important that they must be paid in full. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.
Your Plan must also outline the regular payments you will make on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages or delinquent amounts of your debts – the amount past due that you are behind in your payments.
Finally, the Plan must dedicate any disposable income – above your normal and reasonable living expenses – you have left after making other required payments to repay your unsecured debts like credit card or medical bills. You do not have to repay these debts in full, or at all, in some cases. You simply must agree to pay any remaining income to unsecured creditors.
The length or term of your Plan depends on the amount of your income and the amount and type of your debt. If your average monthly income over the six months prior to the date you file for Chapter 13 is more than the median income for your state, you must propose a five-year Plan. Or, if your income is less than the median, you may propose a three-year Plan. This process to determine your means to pay your debts is known as Means Testing or the Means Test and is rather complicated; however, we can make this determination as a part of our consultation with you.
In some instances, below-median Debtors must extend their Plans beyond three years to repay a sufficient amount debt. Likewise, if an above-median Debtor can repay all debts in full – known as a 100% Plan – in less than five years, then a shorter Plan is possible.
In Chapter 13 you must pay some debts in full; others may be paid in part. Different types of debts are paid in different ways in a Chapter 13. Bankruptcy law groups your debts into classes and requires your Plan to pay these different classes of debt in particular ways. Common classes of claims in a Chapter 13: are (i) secured claims, (ii) unsecured priority claims and (iii) general unsecured claims.
Secured claims are claims for debts that are secured by liens on property or collateral. If you do not pay a secured debt, the creditor can repossess the collateral and sell it for payment. Common secured claims are home mortgages, property taxes that are liens on your property and car loans. If you file a Chapter 13 and intend to keep the property that secures the debt, you must pay the debt.
Secured claims typically must be paid in full with interest in a Chapter 13. The interest rate depends on the debt. Depending on the circumstances, you may be able to satisfy the claim by paying less than the full amount owed – known as a cramdown. If the secured debt payments last longer than your Plan – say 10 years remaining on your mortgage – the full debt need not be paid off during your Plan. In that case you continue with your regular monthly mortgage payments during the Plan and also continue with that regular payment after the Plan is completed – until your mortgage is paid in full.
Mortgage debt. Mortgages need not be paid in full in a Chapter 13. Mortgage payments are made monthly during the Plan and continue to be made after the Plan is completed. If there is a past due balance – an arrearage – it must be paid in full through the Plan. To illustrate: If a $500 monthly mortgage payment is unpaid for five months when your Chapter 13 is filed and $500 in late fees and interest are also due – a $3,000 arrearage – you must begin making the $500 regular monthly mortgage payments as they are due and also pay through the Plan the $3,500 arrearage with interest.
Property taxes. All past due property taxes plus interest customary in the area must be paid through the Plan.
Car payments. If a loan on a vehicle is due in full during the Plan, you must pay the full balance in the Plan. How much you must pay, however, depends on a number of factors. If the vehicle is worth less than the debt and you bought the car more than 910 days ago, the secured claim is limited to the value of the vehicle. You pay market value of the vehicle plus interest through the Plan. The balance becomes part of your unsecured debt. This is an oversimplification that we can explain during your consultation with us.
Unsecured priority claims are claims not secured by collateral; however, the Bankruptcy Code has granted certain creditors priority over other unsecured debts. Unsecured priority claims typically must be paid in full through the Plan. Unsecured priority debts may include: (i) past due child support, (ii) past due spousal support, (iii) certain income tax debts and (iv) other past due domestic support obligations. Unsecured priority debts also include administrative expenses, such as attorney's fees and Trustee's fees. The Trustee normally receives about 10% of the Plan payments as compensation.
Importantly, the bulk of your attorney’s fee can be paid in the Plan often using money that would otherwise be paid general unsecured creditors like credit card debt.
General unsecured claims are claims that are neither secured nor priority. Common general unsecured debts include: (i) personal loans, (ii) medical bills, (iii) credit card debts and (iv) utilities. General unsecured claims are paid a portion of their debt depending on your disposable income and the value of your bankruptcy estate. Simply put, your creditors receive (i) whatever your best effort at payment will yield and (ii) at least as much as they would receive had you filed Chapter 7, which is often nothing. Debtors in Chapter 13 typically pay a very small portion of their unsecured debts in the Plan.
For your Chapter 13 to succeed the Judge must first approve or “confirm” your Plan in writing with a Confirmation Order. The Trustee and creditors can object to various aspects of the Plan; however, we will aggressively represent you in dealing with any inappropriate objections. Ordinarily we will know at the conclusion of your 341 Hearing if your Plan will be confirmed; however, formal confirmation will not occur until about 30 days later when the Judge signs the Confirmation Order.
Bankruptcy law allows you to keep certain property designated as exempt under Oklahoma law – exempt assets. These exempt assets primarily include your home, most of the contents of your home, clothing, tools of the trade, pension plans, guns and one vehicle among other things – all in limited amounts. We can advise you exactly what you own that is an exempt asset.
Importantly if you have given a creditor a lien on any of your exempt assets, you must pay that debt to keep the exempt asset with some limits.
If you cannot complete the Plan – for example, should you lose your job during the Plan and cannot make the Plan payments – you may seek to modify your Plan. Or, the Judge might discharge your debts because of hardship. Hardship could be something like a sudden plant closing in a one-factory town or a debilitating illness.
If the Judge refuses to modify your Plan or grant a hardship discharge, you may opt to convert to a Chapter 7 or ask the Judge to dismiss your Chapter 13 returning you to the status you were in before you filed Chapter 13.
Once you complete all payments required under your Plan, all remaining debts eligible for discharge will be cancelled or discharged. This means that you are no longer legally obligated to pay such debts. Before you can receive a discharge, you also must show the court that you are current on your child support and alimony obligations, if any, and that you have completed an approved budget counseling course.
As you can see, filing a Chapter 13 Plan that will be confirmed and completed is very complex. This is just an abbreviated description of what is required with a number of details omitted to keep this from being overly long. While it is possible to file a Chapter 13 without a lawyer, that is ill advised and short sighted. Without competent advice it is possible you will lose property unnecessarily or pay more than required. We encourage you to call us for a free consultation to determine if you are eligible for Chapter 13 and whether a Chapter 13 is in your best interests.
This is not intended as legal advice because bankruptcy is complicated and depends on the specific circumstances unique to the Debtor. If you are considering a bankruptcy, call us toll free at (877) 886-5955 for a free consultation so we can provide legal advice tailored to your specific unique situation. There is no obligation and the call is confidential.