Who makes a good candidate for Chapter 13?
At the outset, let us acknowledge that Chapter 13 is not for everyone. Individuals who perform best in Chapter 13 frequently have two characteristics.
- stable income
- ability to commit to long term (up to five years) financial plan
Not every debtor has these characteristics. During the initial interview with a debtor, counsel should determine whether the debtor would be a good candidate for Chapter 13 by investigating each of these characteristics. The stability of a debtor's income in the future is crystal ball gazing at its best, but some debtors can demonstrate good work history and/or be persuasive about their future job prospects.
Just as important is a debtor's ability to commit to a long term financial plan. If a debtor has had trouble with self control in the use of credit cards and/or frequently fallen behind in mortgage or car loan payments, that individual may be a poor candidate for a Chapter 13. A Chapter 13 plan requires a debtor to stay on a cash budget for a 3 to 5 year time period. Some debtors can handle that responsibility easily, while others find it impossible to manage. It is important for counsel to have a heart to heart talk with a debtor to determine whether the debtor is up to the task.
"Who can file a Chapter 13 bankruptcy?"
Any individual who is a wage earner or operating a sole proprietorship can file a Chapter 13 bankruptcy, provided that their unsecured debts do not exceed $336,900 and their secured debts do not exceed $1,010,650. In addition, the individual must have sufficient income to live on a cash basis for three to five years (the length of the term of the payment plan) and be able to pay a Chapter 13 Trustee enough money so that the Trustee can pay creditors at least as much as those creditors could have received if the individual filed a Chapter 7 bankruptcy.
"What role does the Trustee play in a Chapter 13 bankruptcy?"
A Chapter 13 Trustee usually does not liquidate property for distribution to creditors. Instead, the Trustee collects the funds paid by the debtors over the three to five year payment plan (as well as other liquidated funds from the sale of property) and distributes the funds to creditors on a monthly basis. The Trustee also reviews the debtors' documents filed with the Court, meets with the debtors and counsel, and monitors the debtors' progress with the payment plan. If debtors are unable to comply with the payment plan, the Trustee makes a report to the Court, and/or requests the Court dismiss the case or convert it to a more appropriate chapter (such as Chapter 7).
"What must I do to receive a discharge in a Chapter 13 bankruptcy?"
For a debtor to receive a discharge in Chapter 13, not only must the debtor perform the same tasks listed above for a Chapter 7 discharge, but the debtor must have successfully completed the three to five year payment plan by making all payments to the Trustee during the required time period and otherwise followed all of the other requirements of Chapter 13 by reporting changed income, filing income tax returns on time, and staying current on bills that come due after the filing of the Chapter 13 bankruptcy.
Four Reasons to Choose Chapter 13
Assuming that counsel concludes that the debtor has sufficiently stable income and the tenacity to follow through with a Chapter 13 Plan, what are the top nine reasons to choose a Chapter 13 over a Chapter 7?
- Curing Mortgage Arrears - Foreclosure
If a debtor is behind in his or her mortgage payments and facing a foreclosure, Chapter 13 can permit the debtor to cure the defaults and reinstate the mortgage. See 11 U.S.C. Section 1322. The mortgage arrears are paid as part of the Chapter 13 plan payment to the trustee while the debtor commences regular monthly mortgage payments post petition. This technique creates havoc for the mortgagee's computer system, but is well understood and accepted by mortgagees. Debtors who use Chapter 13 for this purpose will be closely monitored to be certain that they do not fall behind on their mortgages after filing. The Court is less than sympathetic with a debtor who fails a second time in his or her mortgage payment responsibilities.
- Retain Non-Exempt Property.
Chapter 13 enables debtors to retain property which would otherwise be liquidated in a Chapter 7. As long as the debtor can pay the Chapter 13 Trustee, over a 3 to 5 year time period, money that equals or exceeds the value of the property the debtor wishes to retain, the property remains with the debtor. The property in question is usually non-exempt property; accordingly, it is important for debtor's counsel to appreciate the difference between exempt and non-exempt property. Occasionally, a debtor forgets to list an asset on his or her bankruptcy schedules. In a recent case before the Bankruptcy Appellate Panel, In re Kuntz, 233 B.R. 580 (1st Cir. B.A.P. 1999), a debtor in a Chapter 7 case failed to disclose the existence of a certain asset, and upon discovery of the asset, attempted to convert his case to a Chapter 13. The Panel concluded the conversion was not in bad faith, and permitted the debtor to proceed in Chapter 13.
- Co-debtor Stay
11 U.S.C. Section 1301, otherwise known as the "co-debtor stay", prevents a creditor from pursuing a co-debtor on a consumer debt. In order to prevent the creditor from seeking relief from stay, the debtor must propose in his or her Chapter 13 plan to pay the co-signed debt in full. There is no equivalent provision in Chapter 11 or Chapter 7. This provision is said to be the primary reason why there are so many Chapter 13 cases filed in Puerto Rico - most creditors on the island require a debtor's relatives to co-sign obligations of a debtor.
The mortgage cure provision can be effective in a Chapter 13 plan up to the date of the foreclosure sale. 11 U.S.C. Section 1322 (c) (1). This author recently filed a Chapter 13 case to save a debtor's home at 12:00 noon on Friday when the foreclosure sale was scheduled for 2:00 p.m. that same day.
- Sale of Property
The fourth reason to file a Chapter 13 is where a debtor seeks to control the sale of his or her property in a bankruptcy setting (free from the immediate pursuit of creditors). 11 U.S.C. Section 1303 provides the debtor, exclusive of the trustee, the right to sell property under Section 363 of the Code. This benefit permits a debtor to liquidate property in a manner and at a time which can generate the highest value. Although Chapter 7 Trustees attempt to liquidate property at market value, potential buyers may not be inclined to make their best offer in a setting viewed as liquidation. Where receiving a high price for property is essential for a debtor's financial rehabilitation, Chapter 13 is the best mechanism to achieve the goal.