Thursday, November 27, 2014

Chapter 13 cases

Chapter 13 is the most common type of reorganization bankruptcy.  Chapter 13 cases can last from 3 to 5 years, and involve the debtor making payments towards the debt they owe.

The first question most people ask about Chapter 13 is "how much will I have to pay each month?"  Sadly there is rarely an easy answer to this question.  The plan payment is affected by a number of factors.  First is the means test, a ten page document prepared by your attorney that sets the statutory minimum payment.  If your means test says you'll have to pay $300 per month, you aren't likely to confirm a plan with a $100 plan payment.  Second is your goals in Chapter 13.  If you aren't eligible for Chapter 7 and just want the quickest, cheapest Chapter 13 discharge possible, you won't care about this factor.  But if you are trying to save your home from foreclosure, this will be the most important factor affecting the amount of your plan payment.  Your plan must have enough money in it to pay all the missed mortgage payments to the mortgage company, even if your means test doesn't require such a large plan payment.  Your assets might also affect the amount of your plan payment.  If you have non-exempt assets (like equity in a rental home) you must pay at least the value of these assets into your plan.  One frustrating thing is that the amount of claims your creditors file in your case can affect the amount of your plan payment; the frustrating part is that they might not get around to filing those claims for 3-4 months after you file bankruptcy.

Chapter 13 is a marathon and not a sprint.  Anyone can tighten their belt for a couple of months, but adhering to a budget for five years is very difficult.  This is the most difficult aspect of Chapter 13.  The vast majority of Chapter 13 plans get court approval, but less than half are ultimately completely paid off.  Unexpected expenses or job loss can make a manageable budget impossible.  I like to think that the people that make it all the way through a Chapter 13 have acquired important life skills.  Sometimes these unexpected problems can be fixed with a modified plan.  The sooner your lawyer knows about the problem, the more likely he is to come up with a solution.  If a client misses a mortgage payment and calls me that month I can usually craft a solution.  If (as recently happened) a client misses a year of mortgage payments, they create a problem so large there are few solutions.  Stay in touch with your lawyer in a Chapter 13 case any time anything changes.