OVERVIEW OF PRIVATE CHAPTER 13 BANKRUPTCY

Planning for the Chapter 13 bankruptcy

The move to file bankruptcy should be a once-in-a-lifetime decision. Careful planning can possibly save your personal and real property. Hasty filing can be costly. Once you've decided to file for bankruptcy protection there are many ways to plan the filing to maximize asset protection.

The Chapter 13 "Reorganization"

Chapter 13 is designed for individuals who wish to "reorganize their debts." A person who files for bankruptcy protection is called the "Debtor." The Chapter 13 case begins with the filing of a bankruptcy petition with the bankruptcy court. Under this Chapter of the Bankruptcy Code, the debtor is permitted to keep all property. Chapter 13 protects individuals from the collection efforts of creditors; permits individuals to keep their real estate and personal property; and provides individuals the opportunity to establish a plan to repay their debts through reduced payments. In return, the debtor receives a "discharge" which excuses the debtor's obligation to pay the debts listed in the bankruptcy petition. A debtor can file and receive a Chapter 13 discharge as many times as he/she completes their Chapter 13 plan. A Chapter 13 is especially useful for sole proprietors who have had a rough time but is now on their feet.

The "Discharge"?

If the debtor completes all Plan payments he/she will receive a discharge at the completion of the Plan. A Plan may not exceed 36 months unless cause exists to provide for a longer period of time. A discharge is a bankruptcy court order excusing the debtor from all dischargeable debts. It further acts as a bar against the creditors attempting to collect on the debts listed in the bankruptcy petition. Some debts are not dischargeable under Chapter 13.

Non-dischargeable debts

All debts of any kind or amount are dischargeable under Chapter 13 except those listed below.

• Debts for certain taxes, including taxes that became due within the last three years;
• Debts for alimony, maintenance and support, with certain very limited exceptions;
• Debts for government fines and/or penalties;
• Debts for educational benefits and student loans unless the bankruptcy court finds that not discharging the debt would impose an undue hardship on the debtor and his/her dependents;
• Debts that were or could have been listed in a previous bankruptcy case of the debtor in which the debtor did not receive a discharge.

Eligibility for filing

Any person who resides in, does business in, or has property in the United States may file under Chapter 13, except:
1. A person who has been involved in another bankruptcy case that was dismissed within the last 180 days and there is a Court order prohibiting the filing of a subsequent bankruptcy;
2. Persons whose unsecured debts exceed $307,675 and whose secured debts exceed $922,975.

Circumstances to consider regarding filing

Protecting assets that are valued in excess of all applicable and available exemptions; net income that is sufficient to repay a portion of the unsecured debt; a debtor engaged in a on-going business or profession; student loan debts; and tax debts.

The filing fee

The filing fee is $209.00. The cost for the preparation of a bankruptcy petition, consultation and attendance at a 341(a) meeting of creditors varies greatly among professionals. Many circumstances impact these fees. The Central District guideline is between $2000 to $2500 for most Chapter 13 filings.

Husband and wife filing jointly

A husband and wife may file jointly under Chapter 13. If a joint petition is filed, only one set of bankruptcy forms is needed and only one filing fee is charged. Since California is a Community Property state, the debts incurred by either spouse during a marriage are the responsibility of both spouses. Therefore, the discharge by one spouse does not relieve the community of the debts. However, there is a co-debtor stay (protection) with the filing of a Chapter 13 petition by either spouse.

The circumstances influencing the decision for a joint filing

A joint petition is recommended when the dischargeable debts were incurred during the marriage. If the debts were incurred prior to a marriage or after a legal separation the spouse not incurring the debts will not be liable for repayment of the debts.

The timing of the filing

Prior to substantial arrearages accruing on your home mortgage.
When all anticipated debts have been incurred.
When the debtor has converted nonexempt assets into exempt assets. When all non-exempt property has been received, i.e., an income tax refund.
Be alert to timing if property is to be acquired through inheritance, life insurance or divorce within 180 days of the filing.
To thwart a hostile creditor who threatens legal action or attachment on assets or future income.
To forestall a foreclosure action against the residence.
The effect of the filing of a bankruptcy on collection and other legal proceedings
The bankruptcy filing automatically stays (or stops) all collection and other legal proceedings pending against the debtor and allows the Debtor to reinstate/keep property by paying arrearages through the plan. The creditors are put on notice by the bankruptcy court to refrain from any further action against the debtor. Any creditor who violates the automatic stay may be liable for damages. Criminal proceedings and actions to collect post petition alimony, maintenance, or child support and tax audits are not impacted by the filing of a bankruptcy.

Extent of The Automatic Stay

Stops all debt collection, (except as in the case of child support or alimony). During the Chapter 13 the stay is in place unless terminated by the Court. The stay termination occurs when a creditor files a motion with the court, a hearing is held and the creditor is granted relief. This usually occurs when either real property or an automobile is involved and post petition payments are not kept current.

Your credit rating after filing

The bankruptcy is reported to all credit agencies and remains on your credit report for 10 years. It is an exchange for the relief that you get for the discharging of your debts; the saving of your home; the protection of your assets; continuing your business operations; and getting your fresh start.

It is a factor to be considered when applying for credit. For example-purchasing a home. The lending institution may:
1. Deny you credit.
2. Request a larger down payment.
3. Charge you additional points for the loan &/or
4. Offer you a higher interest rate.

Feeling guilty and/or embarrassed

Bankruptcy has become a fact of life many individuals and businesses who relied on continuing economic prosperity. The social stigma attached to bankruptcy has changed given the reality of today's economy. Bankruptcy is a legitimate way to handle creditors while protecting business and family assets. Bankruptcy provides a fresh start.

Publication of the filing

When a Chapter 13 case is filed it becomes public record. The filing is reported to the credit agencies. However, newspapers do not usually report or publish the names of consumers who file for bankruptcy. Business filings are reported. However, if you are engaged in business, it may be published in business newspapers.

Notification of employers

Employers are not notified when a bankruptcy is filed. You cannot lose your job simply because you filed for bankruptcy.

Impact on legal rights

None. Filing a bankruptcy petition is not a criminal proceeding. Employers or governmental agencies cannot discriminate against persons who file a bankruptcy
It is also illegal for local, state, or federal governmental units to discriminate against a person as to the granting of licenses (including a driver's license), permits, and similar grants because that person filed a bankruptcy

The bankruptcy procedure

The first appearance by the debtor is at the "³341(a) meeting of creditors." This hearing usually takes place about 4 to 5 weeks after the bankruptcy case is filed. You and your creditors are notified by the Court as to the time and date. Attendance by creditors is possible, but not required. (If present, they will have a limited opportunity to ask questions of the debtor.) The debtor is under oath. The Chapter 13 trustee will review the petition and plan with the debtor, ask for verification of employment either through pay stubs or tax returns. This is the time that the first plan payment is due. The trustee will have questions that are specific to each debtor. If your plan requires an amendment, you will be advised at that meeting. If the trustee is satisfied she will recommend the plan be confirmed and place the case on the "consent" calendar. The debtor or debtor's attorney must appear at any confirmation hearing unless specifically excused by the Chapter 13 Trustee at the 341(a) meeting of creditors.

The Chapter 13 "Plan"

As a part of the Chapter 13 bankruptcy petition, the debtor proposes a plan of reorganization in which the debtor provides for regular monthly "Plan" payments to the Chapter 13 trustee. The Plan payment is made to the Chapter 13 Trustee and typically provides for any arrearages on the debtor's home mortgage, payments to other secured creditors where the debtor was in default at the time of the filing, and payments, if any to debtor's general unsecured creditors. After confirmation of the Plan, the debtor makes the regular mortgage payments directly to the mortgage holder. Regular mortgage payment due dates continue pursuant to the original contract term. Plan payments become due 30 days after the filing of the petition, and continue to be due every 30 days for the life of the Plan. Failure to make payments will be cause for dismissal of your Chapter 13 case.

The Chapter 13 Trustee

The Chapter 13 trustee is a standing trustee appointed by the court. The Central District has 2 in Los Angeles, 1 in Santa Ana and 1 in San Bernardino.

The debtor's responsibilities to the trustee

The Bankruptcy Code requires the debtor to cooperate with the trustee in the administration of the case. If the debtor does not comply with the trustee's requests, the case may be dismissed and the debtor will be denied the discharge.

The Chapter 13 estate

The estate consists of the assets of the debtor listed in schedules A & B of the bankruptcy petition plus the post-petition earnings of the debtor. These assets are important to the Chapter 13 process as they provide a basis for the liquidation analysis that is paramount to the proposal of a Chapter 13 plan in "good faith."

The exempt assets

All property of the debtor, real or personal, is included in the bankruptcy estate. The Bankruptcy Code provides for an individual debtor to exempt certain property, giving the debtor a "fresh start." Thus, exempt property is the property the debtor may keep during and after bankruptcy.

The secured creditor

A secured creditor retains rights to certain of Debtor's property. A debtor has 2 choices regarding this property. 1. Retain the property. The debtor may continue to pay the regular contract payments and retain the property. If the debtor is behind in the payments, he or she must provide for the arrearages in the Chapter 13 Plan.

2. Abandon the Property. The debtor gives the property back to the creditor and the debt is discharged.

The unsecured creditor

An unsecured creditor has no liens or mortgages against property of the debtor. This is the typical bank credit card, medical bills, trade creditors, etc. The unsecured creditors will be paid a percentage of what is owed to them according to the debtor's "disposable income". Disposable income is the determined by the amount the debtor can afford after paying necessary living and business operations expenses.

Exemption Planning

In a Chapter 13 case the debtor is not required to turn over to the trustee all property he/she possessed when the case was filed. The debtor is allowed certain exemptions which are important to the liquidation analysis and for which proper legal planning should be considered.

Dealing with the utility company

If an utility company is a creditor the debtor, within 20 days of the filing of a petition, furnishes the utility company with a deposit or other security to insure the payment of future utility services. It is illegal for a utility company to discriminate against the debtor.

Duties of the debtor

The debtor must keep the bankruptcy court and the Chapter 13 trustee informed of his/her current address at all times and comply with the bankruptcy code.

Creditors attempting to collect on a pre-petition debt

The discharge includes an order prohibiting the creditors from attempting to collect any discharged debt. Any creditor who violates this court order may be held in contempt of court and may be liable for damages. If a creditor attempts to collect on this old debt the debtor should give the creditor a copy of the discharge. If the creditor persists, the debtor should bring an action in the bankruptcy court for violation of the automatic stay.

The impact of the bankruptcy on cosigners

A discharge is only for the debtor. However, during the life of the plan there continues to be a stay (protection from collection of a debt) for the benefit of co-obligors on any of Debtor's listed debts.