How chapter 13 works
Filing the petition under chapter 13 automatically stays or stops most collection actions against the debtor or the debtor's property. However, a debtor who does not have income for a repayment plan should not file bankruptcy under chapter 13 to take advantage of the automatic stay. Such a case will get dismissed because a chapter 13 debtor needs ongoing income to payoff some of the debts. A Rinne Legal attorney will unlikely take on a case where a debtor cannot make due according to a repayment plan because the no nonsense judges of California courts do not look highly upon attorneys who take on any clients even when they do not meet filing requirements, and usually order these attorneys to disgorge attorneys’ fees received when a court dismisses a case.
The automatic stay arises by operation of law the moment a debtor files bankruptcy. Creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses the debtor provides. Meanwhile, the debtor may continue any lawsuits against other parties because a lawsuit where the debtor is a plaintiff is considered an asset to the bankruptcy estate.
Individuals may use a chapter 13 to save their home from foreclosure. The automatic stay stops the foreclosure proceeding. The individual may then bring the past-due payments current over 3-5 years according to a repayment plan. The debtor may still lose the home if s/he fails to make the regular mortgage payments due after filing bankruptcy.
In a chapter 13 petition, the bankruptcy debtor discloses co-debtors associated with the debts. Co-debtors are individuals or business entities required to pay a debt if the person/entity who incurs the debt does not pay. This usually happens when more than one person co-signs a loan for a car or house. When a co-debtor files bankruptcy, a creditor may go after the non-bankrupt co-debtor.
In chapter 13, there is an automatic stay that protects co-debtors. Unless the bankruptcy court allows, a creditor may not collect a consumer debt from any individual liable along with the debtor. An individual incurs consumer debts when the individual buys items for a personal, family, or household reason. If a debt comes from a business as when a bankruptcy petitioner co-signs a loan with a corporation s/he controls, there is no co-debtor automatic stay.
The San Francisco Bay Area or Sacramento region debtor should have an experienced bankruptcy attorney in Sacramento, Walnut Creek, Fairfield, or San Francisco read agreements with co-debtors to evaluate if the:
debt is secure (e.g. car loan) or unsecure (e.g. credit cards);
- bankruptcy debtor is the primary debtor on the contract;
- items used for debt collateral is in the possession of the bankruptcy debtor, and if the debtor surrenders the item in the bankruptcy.
An example of a co-debtor situation involving consumer debt: A father co-signs a $40,000 credit card with the son. The son files bankruptcy. The father is not part of the bankruptcy petition. If the son files chapter 13 and has income to pay back his unsecure creditors 100%, there is not much to worry about by the father because the father would unlikely be on the hook for the co-signed debt. The son could pay the debt 100% through the chapter 13 repayment plan. If the son does not have cash to pay the unsecured creditors in full, the co-debtor automatic stay triggers.
A bankruptcy discharge doesn't make the liability of a co-debtor go away. The co-debtor automatic stay in chapter 13 is only until the bankruptcy case closes, which may be 3-5 years after petition filing. The bankruptcy debtor may create payment classes in a chapter 13 repayment plan to pay co-signed debts 100% to protect a co-debtor from having to pay 100% of the co-signed debt. The co-debtor may be exposed if the co-debtor is the one who actually receives benefits for the debt (e.g. father co-signs a truck loan for the son, and actually uses the truck).
Motion for Relief From Automatic Stay
The creditor may seek relief from the court on the co-debtor stay in a motion for relief from automatic stay. The Bankruptcy Code provides circumstances under which creditors may obtain relief from the automatic stay to collect from a debtor or co-debtor while the bankruptcy case is pending after notice and a hearing. The creditor usually bases the motion on not being adequately protected like when a debt is secured by a depreciating asset, or the debtor not having equity in the property that secures the debt (e.g. car).
A claim is:
- a right to payment; or
- a right to an equitable remedy for a failure of performance if the breach gives rise to a right to payment.
In chapter 13, to participate in bankruptcy estate distributions, unsecured creditors must file claims with the court within 90 days after the first date set for the creditors’ meeting. An unsecured creditor that is a governmental unit has 180 days from the case filing date to file a proof of claim. The claim needs to attach evidence on the validity and amount of claims. If a scheduled creditor files a claim, a properly filed proof of claim supersedes any scheduling of that claim.
There are three types of claims:
- secured; and
Priority claims include most taxes and the costs of bankruptcy proceeding. Secured claims are claims when a creditor has the right take back collateral like a house or car if the debtor does not pay the underlying debt. Unsecured claims are those for which the creditor has no rights to collect against particular property owned by the debtor.
The repayment plan must remedy priority claims fully unless a priority creditor consents to different treatment of the claim or, in alimony or child support, the debtor contributes all disposable income to a five year repayment plan.
If the San Francisco Bay Area or Sacramento region debtor wants to keep the collateral like a car securing a claim, the repayment plan must provide the holder of the secured claim like the car dealer with at least the value of the collateral like the Kelly Blue Book value of a car. If the obligation underlying the secured claim is used to buy the collateral (e.g. vehicle loan), and the debt is incurred within certain time frames before the bankruptcy filing, the plan must provide for full debt payment, which may more than the value of the collateral because of depreciation. Payments to certain secured creditors (i.e. home mortgage lender), may be made over the original loan repayment schedule, which may be longer (i.e. 30 years) than the repayment plan, as long as any arrearage (unpaid amounts) is made up during the repayment plan. The debtor in the San Francisco Bay Area or Sacramento region should consult an experienced Rinne Legal bankruptcy attorney to evaluate the proper treatment of secured claims in the plan.
The plan does not need to pay unsecured claims (e.g. credit cards, medical bills) in full as long it provides the debtor pays all projected disposable income over a 3-5 year period, and as long as unsecured creditors get at least as much under the repayment plan as they would if the debtor filed chapter 7.
In chapter 13, disposable income means income other than child support received by the debtor minus amounts for maintenance of the debtor or dependents minus charitable contributions up to 15% of the debtor's gross income. If the debtor operates a business like a family restaurant, disposable income excludes amounts necessary for operating expenses like food inventory.
The plan repayment period depends on the debtor's current monthly income. The period must be three years if current monthly income is less than the California median for a family of the same size, and five years if the current monthly income is greater than a family of the same size.
Within 30 days after filing bankruptcy, even if the plan has not yet been approved by the court, the debtor starts making plan payments to the trustee. If any secured loan payments or lease payments come due before the debtor's plan is confirmed, the debtor must make adequate protection payments directly to the secured lender or lessor, deducting the amount paid from the amount that would be paid to the trustee.
No later than 45 days after the meeting of creditors, the chapter 13 trustee, and creditors who wish to attend, go to court for a hearing on the feasibility of the debtor's repayment plan. The chapter 13 plan is similar to debt consolidation, but not the same as private debt consolidation. In private debt consolidation, the company may pool a debtor’s debts together and charge a fee for the service. The creditors do not need to sign up for the service, and can still file suit against the debtor for not paying. In chapter 13, when a judge approves a plan, the debtor pays the trustee monthly. The trustee in turn distributes payments between the creditors.
Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 15 days after filing the petition. Frequent creditor objections involve payments offered under the plan being less than what creditors would receive if the debtor's assets were liquidated or that the debtor's plan does not commit all of the debtor's projected disposable income for the three or five year applicable commitment period. A confirmed chapter 13 repayment plan binds the debtor and each creditor.
The bankruptcy judges in San Francisco who preside at confirmation hearings are generally serious. They move cases along when people do not show up. Sometimes if there are other hearings going on at the same time, the judge may pass and recall an item to ensure due process so a case does not get dismissed in the event a person is late or an attorney is covering another matter at another floor or court location. For instance, there may be a conflict for a San Francisco attorney representing different debtors when there is a creditors’ meeting on the 8th floor in the trustee’s office, and a confirmation hearing on the 23rd floor; or there may be a conflict for an Oakland attorney if there is a creditors’ meeting at 1301 Clay Street, Oakland, CA, and a confirmation hearing at 1300 Clay Street, Oakland, CA. When a Rinne Legal attorney has a conflict, s/he usually informs a court ahead of time so a client’s interests are not sacrificed.
When attending a confirmation hearing, review calendars prior to entering the courtroom. Calendars are available via the Internet on the court’s website. There may be over 40 cases sometimes. Some senior attorneys may be seen typing away on iPads or reading novels in the audience not paying attention before their cases are called because they are familiar with the drawn out process. Some hearings take over 2 hours, with each case taking around 15 minutes. Confirmation hearings are open to the public.
A case may be listed in one of three calendars: dismissal, not contested, contested. When a case is not contested, it means there are no objections to the plan by a creditor and the debtor has all paperwork in order. If the court declines to confirm the plan, the debtor may file a modified plan, or to a liquidation under chapter 7. If the court dismisses the case, the court may authorize the trustee to keep some funds for costs, but the trustee must return all remaining funds to the debtor, other than funds already disbursed or due to creditors.
Bankruptcy Case Dismissal
Debtors in Sacramento, Walnut Creek, Fairfield, San Francisco, and their lawyers must follow local court rules, or the case may be dismissed. Even though bankruptcy is based on federal law, each court has rules that differ. The local rules of the Northern District may be different from the Eastern District. When a court dismisses a case, the debtor may file a new case, but the debtor must pay court fees again, unless the debtor wins a Motion to Vacate Dismissal. In a Motion to Vacate Dismissal, the debtor gives reasons for not following court rules or moving the case along. The court likes it when cases move along because if there are too many cases on the calendar, it makes the court system more expensive with the need to hire extra staff or account for extra paperwork. For example, the debtor’s attorney may be suddenly ill with cancer, preventing the debtor from submitting necessary documents to the trustee because of hospitalization.
When a debtor files a motion, the court sets the matter for hearing to give the debtor due process, but before the day of the hearing, the judge may issue a Tentative Ruling. The hearing is meant to give people a chance to object to the Tentative Ruling by going to court to present evidence or law not included with the motion. The court does not like it if the person goes to the hearing without any argument beyond what is in the court filings because the Tentative Ruling results after an evaluation of all the court filings, and is meant to save time on the day of the hearing. On the day of a hearing, there are other cases scheduled at the same time. The judge does not like wasting time with people who do not present new information at a hearing, when there are other cases scheduled. The court adopts the Tentative Ruling if there is no opposition from either the person who makes the motion or someone who opposes the motion.
A judge may deny a Motion to Vacate Dismissal according to Bankruptcy Code. The Bankruptcy Code mandates dismissal when required documents are not filed within 45 days of a petition filing. Dismissal is automatic, and a court may not set aside the dismissal, unless, according to Warren v. Wirum, 568 F.3d 1113 (9th Cir. 2009), a party like the trustee, who seeks to dismiss the bankruptcy case for missing debtor information does not wait the time required for filing the dismissal.
When a debtor is not able to vacate a bankruptcy dismissal, the court lifts the automatic stay. This means the creditors can go after the debtor as if the debtor never filed bankruptcy. If the debtor owns a house in the San Francisco Bay Area, for example, the lender can file a notice of default. The court may ask the lawyer who worked on the first filing to disgorge fees so the debtor can find a new attorney for another bankruptcy filing, or if the debtor stays with the same lawyer, the court may request the lawyer to file the new case without charge.
Bankruptcy motions may require strategic legal argument, requiring the assistance of an experienced California bankruptcy law firm like Rinne Legal.
After Plan Confirmation
When a court confirms a plan, the debtor makes regular payments to the trustee either directly or through payroll deduction. Confirmation entitles the debtor to retain property as long as payments are made. The debtor may not incur new debt without consulting the trustee. Additional debt may compromise the debtor's ability to complete the plan.
If the debtor fails to make the payments due under the confirmed plan, the court may dismiss the case or convert it to a liquidation case under chapter 7. The court may also dismiss or convert the debtor's case if the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony), or fails to make required tax filings.
Financial Management Training
Before discharge, the debtor needs to complete a personal financial management training from a US trustee approved provider found on the US trustee’s website at www.usdoj.gov/ust. Taking a class from an unapproved course provider does not count. The Federal Trade Commission warns that bankruptcy credit counseling and pre-discharge debtor education may not be provided at the same time. The post-filing class teaches a debtor how to develop a budget, manage money, and use credit. The typical class fee is between $50 and $100. The class may take two hours to finish.
If the debtor does not finish the course, the court closes the bankruptcy case and enters a no entry notice of discharge. The debtor remains responsible for the debts as if s/he did not file bankruptcy. Before taking a class, the debtor should find out the following from the provider:
- What qualifications do counselors have?
- Are counselors accredited or certified by an organization?
- What training do debtors receive?
- What information the provider keeps about the debtor (e.g. address, phone number, financial information).
- Will debtor information be kept confidential and secure?
- How are the counselor’s employees paid?
Chapter 13 Discharge
Discharge applies to debts a person or business does not pay before bankruptcy filing. Creditors may still go after debts that arise after a bankruptcy filing. The bankruptcy law on the scope of the chapter 13 discharge is complex so debtors in Walnut Creek, Fairfield, Sacramento, San Francisco might consult competent legal counsel at Rinne Legal before filing bankruptcy on the chapter 13 discharge.
A chapter 13 debtor in Walnut Creek, Fairfield, Sacramento, San Francisco gets a discharge upon finishing all payments under the repayment plan so long as the debtor:
- certifies all domestic support obligations like alimony and child support that came due before making such certification have been paid;
- has not received a discharge in a prior case filed within 2 years for prior chapter 13 cases and 4 years for prior chapter 7, 11 and 12 cases; and
- finishes a US trustee approved course in financial management.
The court will not discharge until it determines, after notice and a hearing, there is no reason to believe there is any pending proceeding that might limit the debtor's homestead exemption. The homestead exemption involves equity exemption in a home the owner lives in as opposed to rent. California does not allow for an unlimited homestead exemption like some other states. Unlimited exemptions let people who file bankruptcy keep millions of assets from creditors. California’s homestead exemption is often less than the market value of the home.
The discharge releases the debtor from all debts accounted for by the repayment plan, including debts arising from divorce property settlement and debts for intentional injury to property. Creditors accounted for in full or in part under the chapter 13 plan may no longer initiate or continue legal or other collection action against the debtor.
Debts not discharged in chapter 13 include certain long term obligations such as a 30 year fixed home mortgage, debts for alimony or child support, certain taxes like income or payroll, debts for most educational loans, debts arising from death or personal injury caused by driving while intoxicated or under the drug influence, and debts for restitution to a victim of a crime or criminal fine. If there are domestic support obligations, the trustee usually asks the debtor to provide an agreement or court order on the support to evidence the amounts. If non-dischargeable debts are not fully paid under the chapter 13 repayment plan, the debtor will be responsible for the debts after the bankruptcy case.
Debts for money or assets gotten by false pretenses like someone caught in a ponzi scheme, debts for fraud like identity theft, and debts for restitution or damages awarded in a civil case for intentional actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and wins an action to have such debts declared non-dischargeable.
Chapter 13 Hardship Discharge
After repayment plan confirmation, circumstances like unemployment due to personal injury may arise that prevent the debtor from completing the plan. The debtor may ask the court to grant a hardship discharge. Such a discharge is available only if:
- debtor's failure to complete plan payments is due to circumstances beyond the debtor's control and through no fault of the debtor;
- creditors have received at least as much as they would have received in a chapter 7 liquidation case; and
- modification of the plan is not possible.
The hardship discharge does not apply to any debts nondischargeable in a chapter 7 case.
Retaining and attracting business customers or rebuilding personal credit after bankruptcy comes from reliability. The debtor rebuilds credit by attaining a secured business or individual credit card. A business owner or individual may need to pay an initial deposit to secure the card. These cards may have high interest rates and card fees, but the card issuer extends a line of credit equal to the amount of the deposit to allow the card holder to earn a credit line after consistent timely payments for a certain period. In addition to getting a secured credit line, establish lines of credit with vendors or other creditors. Then, make sure to pay all obligations on time.
Before filing bankruptcy, contact Rinne Legal, with staff able to translate in Korean, Spanish, Russian, for a free consultation on the bankruptcy process and pre-bankruptcy planning. Bankruptcy stays on a credit report for up to ten years, and can make it hard for an individual to obtain credit or a business owner to open another business.