THE CONSUMER'S GUIDE TO BANKRUPTCY LAWCaveat: Always check with an expert before making decisions or taking any action regarding the commencement of a bankruptcy case. The laws sometimes change, and new court rulings will occasionally affect the manner in which these laws are being applied and interpreted.

1. Legal Snapshot: A Quick Overview

Always get expert help. Bankruptcy is too complicated for you to jump into this without getting expert help. Many people do try file on their own, without an attorney. However, many of the “do it yourselfers” will make serious, costly mistakes that could have been avoided by an experienced bankruptcy law expert.

The laws are very complicated. The laws and rules governing bankruptcy cases are extremely complex. The purpose of this Guide is to offer you a simplified basic understanding of consumer bankruptcy laws. Self help books, and non-lawyers calling themselves paralegals or legal document preparers are no substitute for having the help of someone with the legal training, experience and analytical ability that only an experienced bankruptcy attorney can bring to your case.

Consult an attorney. Any person considering the possibility of seeking bankruptcy relief should first consult with a knowledgeable attorney who specializes in this field. Many people will hurt themselves and make costly legal mistakes by going into a bankruptcy case without an attorney, or by retaining an attorney who is not a specialist – mistakes which an expert may have easily avoided. Often, these mistakes are irreversible, and may result in the loss of your property and sometimes even result in the denial of the bankruptcy.

Caveat: Bankruptcy is an absolutely incredible legal remedy for people with debt trouble. It really can give a fresh start, if you play by the rules! However, inexperienced people can’t help but trip over the maze of those rules and regulations.

How bankruptcy works. Bankruptcy begins with the filing a Petition in the Federal bankruptcy court, seeking relief under one of the various chapters of the Bankruptcy Code. As soon as the Petition is filed, the bankruptcy law imposes an automatic stay, which operates as a restraining order against the creditors. In most cases this stops bill collectors from bothering you, lawsuits, foreclosures, even the IRS, and it creates a cooling off period while the court system sorts things out. When a bankruptcy is successfully completed, the court issues a discharge. A discharge is a permanent order from the court enjoining creditors from trying ever again to collect on a debt that has been discharged.

Don’t get discouraged. This is a “simplified guide”, and we have tried to keep it that way. In the interest of presenting a basic overview, we have chosen to skip certain complex details that are still important to legal professionals and to the courts. Don’t be disappointed if you don’t always “get it.” Some of the concepts discussed in this Guide are just too complex to be explained at a basic level. The laws and regulations that govern bankruptcy law are extremely complicated. Most judges and lawyers who work outside the field of bankruptcy don’t even understand these very well.

Who files bankruptcy? Bankruptcy cases are filed by people who are drowning in debts they can’t afford to pay. There were about 2 million bankruptcy cases filed in the year 2005. If you are thinking about bankruptcy, you are not alone. Most cases are filed to discharge credit card debts, stop a foreclosure sale, auto repossessions, medical bills and unsecured credit lines. Even income taxes can be discharged under certain circumstances. Most people make financial obligations they are able to afford at the time they incur them. Later on, sometimes years afterwards, unforeseen circumstances can make debt repayment an extreme hardship if not an impossibility. Many of the people who have filed bankruptcy found themselves in a debt problem because of a job loss, divorce, or serious illness. These are some examples of the circumstances that most people could not foresee at the time they made their financial obligations.

Chapter 7 and Chapter 13. Bankruptcy cases are adjudicated in the United States Bankruptcy Court. Branches of the court are located in almost all major cities. Most individuals will generally seek relief under either of two different kinds of bankruptcy cases, called Chapter 7 and Chapter 13. In appropriate cases, Chapter 7 bankruptcy allows a person to be legally excused from repaying most kinds debts, (but there are certain exceptions.) Chapter 13 is generally described as Reorganization, where a person pays some or all of their debts under a structured payment plan carried out under court protection and supervision.

New bankruptcy laws. A “new” bankruptcy law (called BAPCPA) took effect on October 17, 2005. The new law contains many significant, complicated changes which affect individuals who seek bankruptcy protection. Among other things, the new law has revised the eligibility standards by excluding people who might be able to pay back part of their debts. Those who can pay something are usually required to file under Chapter 13 and reorganize. Reorganization requires giving up a part of your future income to pay some or all of what you owe, based on what the court decides you should pay. The rules governing how that gets decided are discussed further on in this guide.

New eligibility rules. The eligibility rules divide all bankruptcy filers into groupings of those who have above-median income and those who have below the median income. Those who have above-median income are subjected to a “means test.” The means test was devised to identify and then exclude from chapter 7 bankruptcy those filers who may be able to pay back some of their debts. The means test uses a calculation that combines a person’s real living expenses and certain hypothetical living expenses compared to that person’s “current monthly income”.

“Hypothetical living expenses” are determined by strict IRS rules, while one’s “current monthly income” is determined by one’s income in the 6 months prior to the bankruptcy filing (even if one’s income has dropped substantially since then – though some limited forms of income may be excluded under a Chapter 13 bankruptcy). The court does have discretion to waive this rule in the case of “special circumstances” such as a serious medical condition or a call to active duty in the U.S. military.

Bankruptcy terminology. The person who files bankruptcy is called the “debtor.” A case may be filed by an individual person, or a joint case can be filed jointly by a married couple. Every bankruptcy case is administered by someone called the trustee. A trustee is appointed by a branch of the U.S. Department of Justice to investigate the financial affairs of each person who files bankruptcy. The trustee has very broad powers to recover preferential transfers of money and other assets by an insolvent debtor, recover fraudulent transfers of assets, sell non exempt assets of the debtor, and even seek the denial of bankruptcy discharge or a dismissal of the bankruptcy on the grounds of debtorabuse. Every debtor is required to attend a hearing conducted by the trustee and answer questions under oath about their financial affairs. The trustee can require the debtor to supply copies of the debtor’s financial records, such as bank statements, cancelled checks and tax returns in order to aid the trustee to investigate the case. The trustee is paid with a portion of the debtor’s filing fee, plus additional compensation paid to the trustee out of assets recovered or liquidated by a trustee. The trustee is not a judge. Every bankruptcy case is assigned to a bankruptcy judge, who will make rulings if necessary if any type of controversy arises. Most cases are able pass thru the legal system without any controversy and will never be reviewed by a judge.

Filing fees and costs. The court charges a filing fee for each bankruptcy petition. In 2006, the filing fee is $299.00 for a Chapter 7 case, and $274.00 for a Chapter 13 case. Filing fees are subject to change, and can be determined from the web site of your local bankruptcy court.

Duties of the debtor. Every person filing bankruptcy is required to submit and sign under penalty of perjury a very complex set of financial data called bankruptcy schedules, listing all debts, (even debts they intend to keep paying such as car payments and house payments), all assets of every kind, no matter what it is, no matter where it is, and certain other detailed information about the person’s financial affairs. The debtor is required to provide all of their income records for the prior 60 days. In addition, the debtor must appear and answer questions under oath at an examination conducted by the trustee, submit a copy of their most recent tax returns, (and in a Chapter 13 case copies of tax returns for the last 4 years) and submit a schedule identifying all secured consumer debts and stating how the debtor is proposing to treat those secured debts.

Differences between Chapter 7 and Chapter 13. To understand the workings of Chapter 13 and Chapter 7 and to understand why to select one chapter over the other, let’s first take a look at Chapter 7, see what it does, and see what happens in the typical Chapter 7. Then, we will compare it to the relief afforded under Chapter 13.

2. The Chapter 7 Bankruptcy

Discharge of debt. The basic premise behind Chapter 7 is that the debtor is deeply insolvent and wants to gain a discharge of debts. Most Chapter 7 debtors today are primarily concerned with credit card debts. It is not uncommon to see Chapter 7 cases for individuals that have credit card debts exceeding their annual income, sometimes double or even triple what their annual income may happen to be. For such an individual, Chapter 7 holds out the promise of gaining relief from those debts.

3. Exempt Property – Assets That Are Protected

Asset protection. Providing the honest debtor with a “fresh Start” is the core principle of bankruptcy law. In order to make the “fresh Start” a reality, the law is very generous about the assets that a person in bankruptcy is allowed to keep. The categories of protected property are called “exemptions”, because such property is “exempt” from being taken to pay the creditors. However, the available exemptions do not necessarily cover everything that the debtor might own. Assets that are not exempt may be taken by the trustee.

Transfer of assets prior to filing. People will sometimes transfer assets prior to filing bankruptcy, because they think that this is how to protect it from being taken away. This is a good example of a costly legal mistake that people often make, which an expert would easily have avoided. Do not attempt to omit such assets from the bankruptcy schedules. Do not hide, conceal, transfer, or falsely encumber non exempt assets. Doing so carries the risk of being prosecuted for committing bankruptcy crimes, it is likely to result in the denial of a bankruptcy discharge, and the trustee can still recover such property, or its value, from whoever it was given to. If such property is recovered by a trustee, the debtor can not then claim it as exempt, even if it could have been properly exempted before such transfer. Surrendering non-exempt assets is a price the debtor pays for the privilege of seeking relief under Chapter 7. If the price is too steep, (you don’t want to risk losing non-exempt assets), then don’t file or else consider filing under Chapter 13. One of the requirements for gaining confirmation of a Chapter 13 Plan is that the Plan pays creditors the same value that they would have received from non-exempt assets if the case was administered under Chapter 7.

Caveat: Consult with a bankruptcy specialist before you file to determine if you have any assets that are not exempt. Do not engage in schemes to hide, transfer or conceal assets. Inexperienced people can’t help but trip over the maze of new rules and regulations.

Exemptions are provided under state law. The Federal bankruptcy laws allow each state to determine which assets a person is allowed to keep when a bankruptcy case is filed. [For instance, California is one of the most generous of all states when it comes to exemptions. The state exemptions are set forth in two separate lists, which are found in California Code of Civil Procedure (CCP) §703 and §704. One cannot “mix and match” from the two under California law. There are some similarities between these exemption lists, but also some major differences. Therefore, expert legal guidance is imperative for any person filing bankruptcy. ]

Risk of losing assets. If the property has more equity in it than can be covered by every applicable exemption, (sometimes an asset may be cross-covered covered by more than one exemption) the bankruptcy trustee may sell the property. When the trustee sells the asset, the trustee will pay the amount of the exemption to the debtor, and retain the non exempt amount of equity for the bankruptcy estate. Money kept by the bankruptcy estate is used to the expenses of bankruptcy administration, and the remainder is distributed to creditors.

Priority claims get paid ahead of other creditors from non exempt property. Money that is available in an estate to pay creditors is distributed according to a pro rata method of priority. Certain claims, such as family support and most types of tax claims enjoy priority, and are required to be paid ahead of non-priority unsecured claims, such as credit card debts. If there is not enough money to pay all the allowed claims in full, you would see a situation where priority claims may receive a distribution and leave no money to pay anything to non priority unsecured claims.

Caveat: Always check with an expert before taking any action, as the laws sometimes change, and court rulings will occasionally affect the manner in which these laws are applied and interpreted. For example, the bankruptcy law also places certain exclusions on property that can be claimed as exempt in situations where the debtor has not been domiciled in the same state for at least 730 days before the filing of the bankruptcy case, and if not, then the debtor may be required to use the exemptions of the state where the debtor used to live, instead of the state where the debtor now lives. These exception requirements are extremely complex and require careful analysis by an expert.

The new law imposes certain other limits. In addition to requirements regarding length of the domicile to determine which state exemption law to apply, the new bankruptcy law enacted October 17, 2005 imposes other limits such as the amount of the allowable “homestead” exemption. Consult an experienced bankruptcy attorney for more information.

Possible denial of exemptions. The exemptions claimed by the debtor are subject to being disapproved if the debtor has claimed the wrong or inapplicable exemptions, or if the debtor has engaged in inequitable conduct, such as a fraudulent transfer of the exempt property.

4. Your bankruptcy case may be dismissed on the grounds of “abuse”.

Traditional basis for finding abuse. A chapter 7 case filed by a person with primarily consumer debts may be dismissed, (or converted to a Chapter 13 case with the consent of the debtor) in a situation where the court finds that the granting of relief under chapter 7 would be an abuse of the law. The standard that the courts have traditionally applied under this provision is primarily aimed at examining the debtor’s ability to pay all or a substantial portion of their debt (i.e. in a Chapter 13 case) over a reasonable period of time as an alternative to Chapter 7. Courts frequently will compare the likely result of a hypothetical Chapter 13 case for the debtor in order to determine whether or not an abuse of Chapter 7 is likely to occur. However, the amended bankruptcy law of 2005 has added a whole new dimension to this process. The amended law provides that in certain instances, the court shall presume that abuse exits where the debtor is subject to and fails what has become known as a “means test”.
The actual rules are extremely complex, and can be found in Bankruptcy Code §707(b).

Attorneys beware: There can be possible attorney liability and sanctions against you for the filing of a case that court finds is an abuse of Chapter 7!

5. Chapter 7 Effect On Liens

Liens normally remain. One of the most fundamental protections for creditors under Chapter 7 is the fact that liens normally pass through Chapter 7 unaffected by the debtor’s discharge.

Types of liens. A lien is a security interest affecting some type of property owned by the debtor. Most typically in a bankruptcy case it is going to be a lien or a mortgage secured by the debtor’s residence or other real property, or the title slip to a motor vehicle that has money owed on it. Basically, a “lien” is usually found on something that the debtor has not finished paying for. When the debtor files bankruptcy, the debtor can usually keep such assets, provided that the debtor continues to pay for the item and honor the original contract.

Avoiding liens. Some liens are avoidable (removable) by the debtor, but to avoid such a lien special action must be taken in the court. It does not happen automatically, and it is the debtor’s burden to prove in court that each of the circumstances that legally permit the court to make an order avoiding such lien in fact exists. Generally, liens can be avoided against assets but only to the amount of any exemption that the debtor was entitled to claim on the asset, and provided that the lien arose as a judgment lien, or as a nonpossessory, nonpurchase money lien on certain kinds of household goods and personal effects belonging to the debtor. The terms “nonpossessory, nonpurchase money” means that the debtor already owned the asset before it was ever pledged as collateral for the debt, and the creditor did not keep possession of asset as security for the debt.

Statutory liens are not avoidable by the debtor. There are certain liens called statutory liens that the debtor can not avoid. Examples are tax liens and mechanic’s liens.

Caveat: Certain liens against exempt property are avoidable by the debtor, but the lien avoidance does not happen automatically. The debtor must take affirmative legal action in court to secure an actual court order avoiding the lien, or else it remains against the debtor’s property and can still be enforced by the creditor, after the case is closed, even though it could have been avoided during the case. 

6. Reaffirmation Of Debts, Redemption of Collateral

Reaffirmation agreement. A reaffirmation is an agreement between the debtor and a creditor that a particular debt will not be discharged in the bankruptcy case. This is most typically done with secured debts covering personal property, such as motor vehicle loans and also with executory agreements like a vehicle lease. (In the case of a vehicle lease, the new agreement will most likely be called an assumption agreement.)

Reaffirmation agreements are controlled by Bankruptcy laws. One should consult a bankruptcy attorney for details, but note that reaffirmations are disfavored by many courts under Chapter 7 because it impedes the debtor’s “fresh start.” Many attorneys would also be reluctant to have their clients sign such agreements out of concern that it would cause them unnecessary hardships.

Caveat: Reaffirmation of a debt is often a dangerous pitfall for the debtor, because some creditors will use subtle forms of coercion and intimidation to squeeze an unnecessary reaffirmation out of the debtor. Reaffirmation leaves the debtor “on the hook” to pay a debt which would have been discharged. Particularly dangerous is any proposed reaffirmation of a mortgage. 

Redemption. Redemption is a procedure in which the debtor seeks an order from the court allowing the debtor to buy the collateral by paying the collaterals value to the secured creditor. This can be very advantageous to the debtor, because the collateral is usually worth a lot less than the amount of the loan. For example, a car loan might have a $10,000 balance, but the car is actually worth only $5000. Redemption allows the debtor to buy that collateral for the what it is currently worth. The “catch” is that the debtor can not force the creditor to accept installment payments of the redemption price, (the redemption must be paid in full at the time of redemption), and if the creditor and the debtor can’t agree on the value of the collateral, then the debtor has to seek a court determination, (which may require the assistance of an attorney and can be expensive).

Caveat: Sometimes the debtor can negotiate with the creditor for better terms, such as reduced interest and a significant reduction on the balance owed. This is common when the collateral consists of appliances, furniture and jewelry. When the collateral is a motor vehicle, creditors generally require a reaffirmation for the full balance unless the debtor is going to tender the redemption price in full.

7. Debts Not Affected By Discharge

Nondischargeable debts. Chapter 7 bankruptcy does not discharge every kind of debt. Section 523 of the Bankruptcy Code sets forth a laundry list of different types of obligations that are not dischargeable. The best way to understand the likely difference between the dischargeable debts and the non-dischargeable debts are to think of acts committed by the debtor which amount to intentional wrongs (“intentional torts”). Generally, intentional acts of wrongdoing, such as fraud, are not dischargeable.

Public policy. Other types of debts which are not going to be dischargeable are debts that have a very important social aspect to them, separate and apart from the monetary debt which the obligation represents.

Examples. What are talking about here? Taxes, student loans, alimony, spouse support, child support-these are all obligations that are evidenced by monetary debt, yet they also have extreme social, importance to society at large, separate and apart from the money that is owed. The public policy of every state is that persons must support their children. They must support the spouses when ordered to do so. They must pay their taxes, they must pay back their student loans and in fact the Bankruptcy Code very clearly provides that most of those kinds of societal obligations are not going to be discharged. In addition, Chapter 7 does not discharge debts arising from a divorce or marital separation agreement, (for example a property division or equalization judgment).

There are some minor exceptions:

Discharging Income Taxes. Taxes owed to the United States or any state, county, or other governmental entity are normally nondischargeable, however, income taxes will discharge if all of the following criteria are met:

1. The taxes are more than three years old at the time the Bankruptcy was filed. (The three-year period begins to run from the time the returns were due, plus any periods of extension);

2. If the return was not filed on time, more than two years has expired since the return was filed;

3. If there was an assessment, more than 240 days have expired from the date of the assessment before the bankruptcy is filed;

4. There has been no fraud.

Caveat: If you intend to discharge taxes with your bankruptcy filing, we recommend that you obtain a complete history of your tax obligations for each specific year in question from the I.R.S. and consult a tax professional before filing the bankruptcy. Also note that a bankruptcy discharge does not automatically remove any filed or recorded tax lien on any property which you own.

Discharging Student loans. Student loans that were made under the auspices of, or guarantied by, or at least partly funded by a governmental entity or nonprofit institution are normally nondischargeable, as are any student loan that carries payments which are qualified under the IRS Code for income tax deductibility. However, such loans can be discharged – but only upon a showing that not discharging the loan would be an undue hardship upon the debtor and any dependents of the debtor. Unfortunately, the process of seeking the undue hardship exception is extremely difficult for most debtors. The process entails filing a lawsuit against the creditor, and the debtor has the burden of proof. Such suits are very complicated and time consuming to pursue, and the assistance of legal counsel can be very necessary but very expensive.

8. The Automatic Stay

A big “Stop Sign” to the creditors. The automatic stay is probably the most important feature of Chapter 7 Bankruptcy, separate and apart from actually receiving a discharge of debts. The commencement of a bankruptcy case imposes an immediate automatic restraining order upon all creditors, regardless of the bankruptcy chapter that is filed. The source of this law is contained in Section 362(a) of the Bankruptcy Code, which sets forth a list of the different types of actions against a debtor which are automatically stayed by commencement of the bankruptcy case.

Examples. The automatic stay stops (among other things) phone calls from bill collectors, the commencement of lawsuits against the debtor for the collection of money, enforcement of judgments, collection letters, and demands for payment. Perhaps even more powerful is that the automatic stay stops foreclosure of real property and repossession of a vehicle. This allows the debtor to gain time to try and resolve the debt problem and come up with a method of curing a default.

9. Why Chapter 13?

Drawbacks of Chapter 7. Chapter 7 provides a fairly wide range of debt relief for a prospective debtor but it does not do all things for all people. There are some debt problems that Chapter 7 just does not help. A Chapter 7 case will temporarily stay a foreclosure but the filing of the case and the imposition of that stay does not give the debtor any mechanism to force a creditor into accepting a payment schedule for the cure of the default. When the Chapter 7 is discharged the automatic stay normally ends. This frees a secured creditor to proceed with lien enforcement and let’s them pick up where they left off when the bankruptcy was filed and finish the foreclosure. (In some California foreclosure cases, the stay will not stop the running of the statutory time that the borrower has under state law to cure a default.) In a case of an automobile loan that is delinquent, the vehicle will eventually be repossessed. Thus, Chapter 7 is an imperfect remedy for individuals who have defaulted on secured obligations and who are desirous of keeping the collateral.

Typical Chapter 13 cases. In the past, the typical Chapter 13 case was usually filed by someone who is trying to stop the foreclosure sale of their home. The balance of Chapter 13 cases are probably filed by individuals who are trying to reorganize tax debts, deal with a default situation on motor vehicles, or retain nonexempt assets that would be liquidated if the case was administered under Chapter 7. Of course, now that the new bankruptcy laws have gone into effect, there will also be some Chapter 13 filings by individuals who have been excluded from a Chapter 7 because of the means test.

Chapter 13 Can Cure A Default

Stoping foreclosure. In the case of a real estate foreclosure, the debtor files the Chapter 13 case which imposes an immediate automatic stay and stops the foreclosure. This must be done before the foreclosure auction takes place and notice of the automatic stay needs to be given to the necessary parties.

Plan to cure the default. The debtor now has to do something in the case to cure the default on the loan. The court is not going to simply let the debtor sit there and enjoy the benefits of ownership without the burdens of making payments. So what actually happens is under the Chapter 13 law and the local rules of the bankruptcy court the debtor is required to commence making regular monthly payments again on the mortgage. Payments must commence with the next payment that comes due following the filing of the bankruptcy case. Now in addition to paying regular monthly payments, the debtor has to do something to catch up the default.

Gradual cure of default. The best way to understand the process is that the debtor is drawing the line in the sand and says, “I am buried up to my neck in debt and delinquent payments; I am not going to go any deeper in the hole; I am going to start making regular monthly payments and in addition to that I will pay some extra money to gradually catch myself up”. It’s the payment of those extra monies that will allow the debtor to cure the default on their property over a reasonable period of time. The concept is really fairly simple although in practice it can become quite complicated.

Ch. 13 Example – Motor Vehicles

Chapter 13 cram down. In the case of an automobile suppose the debtor possesses a car worth $5,000.00 but there is $10,000.00 owed against it. Lets also suppose the debtor is running two, three, four months behind on their automobile payments and the car is about to get repossessed. Again the filing of the Chapter 13 case will immediately protect the debtor’s possession of the collateral and in the debtor’s plan the debtor is entitled to propose payments to the creditor for the current market value of that automobile without regard to the actual contractual balance. We call this process a “cram down”, because the secured claim has been “crammed down” to the current value of the collateral.

Caveat: Under the new current law, the debtor may not force a “cram down” on a secured purchase money motor vehicle obligation that was incurred within 910 days prior to the bankruptcy filing. However, the cram down should still be effective on any non motor vehicle obligations, such as appliances and furniture.

The Chapter 13 Plan 

Lets move on to the Chapter 13 Plan itself because this is really the fine work of the Chapter 13 case, its the road map that tells the court and the creditors where this case hopefully is going at least as proposed by the debtor. The bankruptcy code requires that every debtor file a plan within 15 days after commencement of the case. The plan must describe in some detail the method by which the debtor proposes to handle all of the debts.

Ch. 13 Plan – Classification Of Debts 

Priority claims. The typical plan should divide the debts into logical categories. For example, certain debts which are required under the bankruptcy code to be satisfied in full (such as non-dischargeable tax obligations) are typically going to be put under a priority classification along with family support. This “priority” class of debts might also contain a provision for payment of the debtor’s attorney fees. A large percentage of debtors will pay all or most of their attorney’s fees for their legal representation as a component of the Chapter 13 plan. The plan also will divide debts into other logical categories such as: a category for general unsecured claims without priority, a category for secured claims which are secured by the debtor’s principal residence, perhaps a category for secured claims secured by collateral other than the debtor’s principal residence, perhaps a category of claims for debts that are secured by personal property such as motor vehicles, big screen TV’s and other appliances.

A general requirement is that the debtor is required to pay interest to the creditor on value of the secured portion of such claims.

Duration of the Plan. No plan is allowed to extend beyond the duration of 60 months. If the debtor enjoys an above-median income level, the plan duration, called a “commitment period” is required by law to be 60 months, (but less only if the plan pays all claims in full)so as to maximize any possible repayment to unsecured creditors. Otherwise, the commitment period is 36 months for those with below-median income, unless there is “cause” to extend the duration for up to 60 months total duration.

Ch. 13 Plan – The Confirmation Process 

Feasability of plan. Every debtor who proposes a Chapter 13 plan must show proof that the plan is “feasible” and that the it is proposed in good faith. Usually this requires evidence of regular income (including income documents for the 60 day period prior to the bankruptcy filing, along with copies of tax returns for the past 4 years). The court will also consider evidence of income from third parties (family members, roommates, etc.).

Eligibility. Another key requirement of every Chapter 13 plan is that the debtor is eligible for the relief available under Chapter 13. Section 109(e) of the bankruptcy code establishes that the criteria for debtor eligibility is limited to individuals with regular income who have non-contingent liquidated unsecured debts which total less than $307,675, and non-contingent liquidated secured debt not exceeding $922,975.

Chapter 13 – The Discharge of Debt

Basic discharge. When the debtor completes a Chapter 13 case, the discharge eliminates all of the remaining balances owed on all general unsecured debts without priority that were provided for in the Plan. Those unsecured debts will by then already have received payment based on what the debtor could reasonably afford, provided they are paid at least as much as the creditors would have received if the debtors non-exempt assets had instead been liquidated under chapter 7. Sometimes this will be payment in full, sometimes it will be a percentage of the claims, sometimes it may even be nothing (under the right circumstances).

Distinction in discharge between Chapter 7 and Chapter 13. The discharge of debts provided for under Chapter 13 is still broader than the discharge under chapter 7, but changes to the law have narrowed the differences considerably. With minor exceptions, debts that are nondischargeable under Chapter 7 have now been made nondischargeable under Chapter 13. The main exceptions to this are that Chapter 13 will discharge debts (other than debts in the nature of support), arising from a divorce or separation agreement, and debts arising from committing a willful or malicious injury, (unless there has already been restitution or damages awarded in a civil action against the debtor).

10. Creditor’s Rights – Protecting the Chapter 13 Creditor

A) Secured creditor

Lien protection. Secured creditors are protected by the value of their interest in the debtor’s collateral, and the plan must provide for payment of the secured portion of the creditor’s claim, plus interest on value of the secured claim during the duration of plan. Secured creditors in Chapter 13 cases are usually going to be the mortgage holder on the debtor’s real property, and the creditor’s remedy is going to depend on what stage the Chapter 13 case happens to be at. Upon commencement of a case, the creditor should promptly file a proof of claim and a request for notice.

Post-petition delinquency. In the period of time immediately after the commencement of the case but prior to confirmation of the plan, if the debtor has defaulted in making mortgage payments, the secured creditor might bring a motion for relief from the automatic stay. However, it is usually more productive to simply file an objection to the confirmation of the plan on the grounds that the debtor is now post-petition delinquent.

Remedy for post-petition default. After a plan is confirmed a secured creditor needs to monitor the debtor’s tender of the regular monthly mortgage payment and if a default occurs after confirmation, the creditor’s best remedy is to file a motion for relief from automatic stay. The courts in the 9th Circuit make it very clear that the post-petition default of payments is a material breach of the debtor’s plan and constitutes “cause” under Bankruptcy Code Section 362(d) for relief from the automatic stay.

Proof of claim. All creditors should file a proof of claim. The bankruptcy code and the bankruptcy rules of procedure provide that most claims must be filed within 3 months after the debtor’s meeting of creditors. A creditor that neglects to file a proof of claim should not expect to receive payment in the case. However, some courts have ruled that when a secured creditor neglects to file a proof of claim, the debtor’s property is still encumbered by the lien. The lien securing all sums due will survive the discharge.

B) Unsecured Creditors

Filing proof of claim. It is extremely important for an unsecured creditor to file a proof of claim. An unsecured creditor that neglects to file its proof of claim not only will not participate in the Chapter 13 payment process but if the debtor completes the plan and receives a discharge, the unsecured creditor will have received nothing even though the plan might have provided to pay all or part of unsecured claims. If there is some type of post-petition default on plan payments an unsecured creditor might choose to file a motion seeking dismissal of the Chapter 13 case – although this is a procedure that is really more in the province of the Chapter 13 trustee who is monitoring the debtor’s payment status.

Objecting to confirmation of the plan. Creditors that have unsecured claims are typically the losers in the Chapter 13 process because so may Chapter 13 plans are going be approved that provide for payment of little or nothing to unsecured creditors. There are some tactics though that can be employed by an unsecured creditor in order to object to the confirmation of the plan. The best line of attack for an unsecured creditor is to fall back on the eligibility and good faith requirement for Chapter 13 debtors. For example an unsecured creditor can try to establish that he debtor is not eligible, that the plan is not feasible, that the debtor is not a regular wage earner, or, more importantly, that the debtor’s plan has been proposed in bad faith.

Bad faith. Bad faith may be shown by a variety of factors: where there have been repetitive Chapter 13 filings in order to frustrate the collection of legitimate state court judgment; the commencement of a Chapter 13 case which is strategically timed to interrupt an ongoing state court trial, to prevent the entry of a judgment or to prevent the deliberation of a jury.

Complaint to determine nondischargability. Generally, debts that are nondischargeable in Chapter 7 are now also nondischargeable under Chapter 13 due to the new bankruptcy law amendments [effective October 17, 2005]. However, the creditor must be extremely vigilant to file and successfully prosecute a timely complaint. Debts incurred by a debtor that result from acts of intentional wrong doing, such as intentional torts, fraud, conversion, embezzlement can be nondischargeable in Chapter 13. However, if the debtor is able to confirm a plan, collection of the nondischargeable debt will remain stayed until after the debtor’s case is closed. Such a claim can not be collected from property and earnings of the debtor acquired during the administration of the case, because post-petition income and property acquired by the debtor during the case is property of the estate and protected by the automatic stay.

Pursue simultaneous remedies. Prosecuting an objection to confirmation, with a simultaneous motion to dismiss and a complaint to determine nondischargability, will, if justified, put the creditor on a much faster tract towards collection than simply determining nondischargability. Even if the debt is found to be nondischargeable, a confirmed plan places the creditor in the position of having the collection of a nondischargeable debt stayed for as long as the duration of the plan, which may be up to 60 months.

Creditors should have legal representation. Creditors in a bankruptcy case are every bit as much in need of legal representation as the debtor is. The failure to timely pursue remedies can make all the difference between collecting on a debt, or losing it. In fact, creditors that are corporations and other non-individuals are not allowed to appear in court, except through an attorney.

[Note from This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information can not be guaranteed. Readers act on this information solely at their own risk. Neither, or any of its affiliates, shall have any liability stemming from this article.]