100% Chapter 13 Plans: What Are They?

What is a 100% Chapter 13 Plan? When you file a Chapter 13 Bankruptcy case, you present the court with a plan. That plan in most cases is 5 years long, and it essentially says: “For the next 60 months, I’m going to pay X dollars per month to a trustee, and here are the instructions on how that money is to be distributed.” While you’re in your plan, you are under the court’s protection, and no one can attempt to collect on a debt from you without getting special permission.

There are certain parties that need to be paid in full through your Chapter 13 Plan. Your attorney may be getting part of his or her fees paid through the plan. The trustee takes a portion for administering the plan. Car loans are usually paid in full through the plan, as are recent income taxes. Most importantly, if you’re behind on your mortgage and want to keep the house, those arrears are usually paid in full through the plan, too.

All your other creditors (your general unsecured creditors, such as credit cards, personal loans, and medical bills) get paid something somewhere between 0% and 100% of what they’re owed. How much they get is largely based on two factors: your income and your assets.

On the income side, there’s a document called the Chapter 13 Means Test. It’s a complicated calculation that basically comes down to: Based on your last 6 months’ income, minus necessary expenses, how much can you afford to pay your unsecured creditors per month? Whatever that number is, your unsecured creditors have to get at least that much per month from your plan.

As to assets, the question is: Are your assets so valuable that, if you were in a Chapter 7 case, some of those assets would be subject to liquidation? If so, your unsecured creditors need to get at least as much through your Chapter 13 Plan as they would in that hypothetical Chapter 7 case.

Which brings me to the point of this post: A 100% Chapter 13 Plan is one where, based on income or assets, you have to pay back to your unsecured creditors 100% of what they’re owed.

I’m seeing more and more 100% Chapter 13 Plans these days, and they’re almost always due to one thing: assets. From 2008 through 2012, it was very rare to see 100% Chapter 13 Plans. That was because, due to the housing market crash, hardly anybody had any equity in their homes during that time.

These days however, are an entirely different matter: I practice in the San Francisco Bay Area, where the housing market is very hot. Home values are higher now than their pre-bubble peaks. As a result, almost everyone I see now who owns a home has equity in their home. That’s good, right? Absolutely. But the consequence is that if you have to file a Chapter 13 case, you’re going to have to pay more to your unsecured creditors. And most of the time, we’re talking about amounts that are high enough to trigger 100% Plans.

Here’s the common situation: Married couple own a home. For whatever reason (everyone’s exact situation is unique), they’ve fallen behind on their mortgage, and now there’s a foreclosure date. To stop the foreclosure, they file a Chapter 13 case to enjoy the court’s protection while they catch up on the arrears over 5 years. But because their house is so valuable now, they have to pay off 100% of their other debts through the plan, too.

So that’s the upshot: In the current market, your house is worth a lot more than it was worth 2 years ago. While that’s great, it also means that if you have to file a Chapter 13 case, you’re going to have to pay back a lot more to your unsecured creditors. However, you can’t let the prospect of being in a 100% plan stop you from filing a Chapter 13 case if you need to. Foreclosures are still happening, and if you’re being threatened with one, a Chapter 13 case remains one of the best legal tools for keeping your home.

Executive Benefits v. Arkinson: Supreme Court walks back from Stern v. Marshall

Executive Benefits v. Arkinson: A little background: In 1978, Congress based the bankruptcy courts’ existence on its Article I powers to establish uniform laws on bankruptcy. But then in the 1982 case of Northern Pipeline Construction, the Supreme Court held that federal judicial power could only be exercised by judges appointed under Article III. However, the Court also allowed for certain exceptions, such as cases involving “public” rights.

What exactly constituted a “public” right was never defined, but in 1984, Congress created a list of “core” matters that bankruptcy courts were authorized to decide. (As to “non-core” matters, bankruptcy courts were directed to submit findings of fact and conclusions of law to district courts, which are Article III courts.)

All was fine and good until the 2011 case of Stern v. Marshall reopened the can of worms.  That case involved Vickie Marshall’s (AKA Anna Nicole Smith) estate’s state law counterclaim against her late husband’s son. The Supreme Court held that the counterclaim was indeed a “core” matter under the 1984 Act, but since it only involved state law rights (and were so not “public”), the bankruptcy court had no Constitutional authority to hear it.

Which brings us to June 9’s decision of Executive Benefits v. Arkinson, which asked the question: “What does a bankruptcy court do with these so-called Stern claims (i.e. “core” claims that don’t involve public rights)? Is a bankruptcy court barred from hearing the matter at all?  Or can it issue reviewable findings of fact and conclusions of law (just as it does with “non-core” claims), even though it has no explicit statutory authority to do so)? Justice Thomas, writing for a unanimous Court, held for the latter position.

A very wonkish, non-sexy decision indeed, but important in that it deals with issues of the fundamental basis of bankruptcy courts’ Constitutional authority. It’s notable for the Court’s declining to throw bankruptcy courts’ current bases of authority into disarray (which it could well have done). Instead, it is a very pragmatic decision that walks from the precipice opened by Stern v. Marshall.

Top 8 Bankruptcy Lawyer Blogs – June 2014

I try my best to provide helpful, accurate, and interesting information here at the blog section of my website.  But I also try to keep abreast of what other bankruptcy lawyers are writing about.  To that end, here are what I view as the top 8 bankruptcy lawyer blogs, as of June 2014.  If you’re looking for information on a subject that I haven’t covered, you would do well to search these sources.

The Top 8 Bankruptcy Lawyer Blogs – June 2014

Bankruptcyblog.org – Bankruptcyblog.org is a website that features regular articles by bankruptcy attorneys from throughout the country and is intended “to educate consumers about the complexities of the United States Bankruptcy Code.” One recent article warns debtors about potential Chapter 13 overpayment when they elect a voluntary wage order and are paid bi-weekly.

Bankruptcy Law Network – Another group of unaffiliated debtor lawyers, perhaps the most widely-recognizable bankruptcy blog around.  If you’re looking for information on any bankruptcy-related topic, odds are good someone’s written about it there at some point.

Bankruptcy Soapbox – Cathy Moran, my colleague here in the San Francisco Bay Area, is amazing.  Her Bankruptcy Mastery blog remains my go-to place for technical legal questions, but her Bankruptcy Soapbox, which is intended for clients instead of lawyers, is equally fantastic.

Carol A. Lawson – Clearwater, Florida attorney Carol Lawson handles family law matters as well as bankruptcy.  The blog section of her website features articles on interesting topics, such as a recent analysis of the Consumer Financial Protection Bureau’s May, 2014 report on older consumers and mortgage debt.

Daniel Stone – Columbia, South Carolina bankruptcy lawyer Daniel Stone publishes great articles that should be useful to people unfamiliar with consumer bankruptcy.  Recent topics include the benefits of filing Chapter 13 over Chapter 7, and “What happens to my credit after bankruptcy?”

Matt Berkus – Denver, Colorado bankruptcy attorney Matt Berkus has very good blog posts that should round out your understanding of potential issues in a bankruptcy case.  Recent posts include one about why not to sign a mortgage reaffirmation agreement and another about how your bankruptcy case may be more complicated than you think.

Maxwell Law Firm PLLC – This is a medium-sized firm in New York City that provides a number of services, including tax, traffic, and small business issues.  Their frequently-updated blog has many interesting bankruptcy posts, including the dangers of debt consolidation and the differences between a Chapter 7 trustee and a Chapter 13 trustee.

Russ DeMott – Charleston, South Carolina bankruptcy lawyer Russ DeMott has an excellent blog section of his website.  It looks like he hasn’t been able to update it as often in the past couple months, but the archives are absolutely worth perusing.

Southern California Law Advocates, P.C. – SCLA is a multi-lawyer, multi-office firm in Southern California.  Their frequently-updated blog has very helpful articles on such topics as co-debtors’ credit ratings and reaffirmation agreements on car loans.

Congratulations to these lawyers, for their commitment to providing people with high-quality information as well as for their continued representation of people in need of help.

How Much Does Bankruptcy Cost?

How much does bankruptcy cost? The answer is “it depends.”

The most important factors are what type of case you’re filing (Chapter 7 or Chapter 13) and how complicated your case is. Basically, there are three kinds of costs associated with filing a bankruptcy case: lawyer fees, court fees, and “other.”

Court Fees: These are the most straightforward, so let’s start here. At the time of writing (June 3, 2014), the fees for filing a bankruptcy case are: $335 for a Chapter 7 case and $310 for a Chapter 13 case.

“Other”:  Next, let’s take “other.” There are a number of miscellaneous fees associated with filing a bankruptcy case.  The main ones are the costs of taking the pre-filing class and the post-filing class. If you search online, you’ll be able to find different providers that charge varying amounts, but they’re usually approximately $30 each.  Additionally, your lawyer needs to do his/her due diligence. That includes such items as credit reports, tax transcripts, real estate title searches, and appraisals. Again, costs vary for these items.

Lawyer Fees: Lawyer fees are usually the largest cost associated with filing a bankruptcy case. Unfortunately, it’s impossible to say exactly what your lawyer fees will be: Every case is unique, and the fees will be higher the more complicated your case is.  (For example, business ownership, home ownership, tax issues, pending lawsuits, special motions to be filed, etc., are all reasons why a lawyer might charge you additional fees.)  Also, different lawyers take different approaches to fees, especially with regard to retainer amount and to hourly rate vs. flat fees.

As a general rule of thumb, lawyer fees for a Chapter 7 case will usually be lower than if the same case is filed as a Chapter 13.  But the two kind of cases accomplish different things, and one shouldn’t choose one over the other based on lawyer fees.  Lawyer fees in a Chapter 7 case will almost always have to be fully paid pre-filing, while in a Chapter 13 case, a portion of the lawyer is often paid through the Chapter 13 plan.

One court where I practice, the Oakland Division of the Northern District of California, publishes a document entitled “The Rights and Responsibilities of Chapter 13 Debtors and Their Attorneys,” which establishes guidelines for flat fees in a Chapter 13 case.  Those guidelines provide for lawyer fees of $6,000 if the client operates a business, $4,800 if he or she does not.  The San Francisco Division publishes a similar document, but there the court uses a “cafeteria plan” to determine lawyer fees, with the fees being determined by the specific issues involved.

Sadly, there’s no way to answer the question “How much does bankruptcy cost”  with any specificity in a blog post.  Ultimately, the best way to get an exact answer to that question is to call two or three lawyers who offer free initial consultations, meet with them, and see what they say.

The Bankruptcy Means Test (Bankruptcy Basics)

The bankruptcy means test is an aspect of U.S. consumer bankruptcy law that was introduced as part of the 2005 bankruptcy reform law. All people who file a Chapter 13 bankruptcy case or a Chapter 7 bankruptcy case (and who primarily have consumer debts) must file a completed means test as part of their petition.

The Chapter 7 and Chapter 13 bankruptcy means tests are similar, but perform different functions.

The Chapter 7 Bankruptcy Means Test

The Chapter 7 means test basically asks the question: “Did you make so much money in the past six months that you don’t qualify to file a Chapter 7 case?”

To answer that question, you add up all your income from the last six complete months before filing, and then divide by six. If that number is below the median income in your state for a household of your size, the inquiry ends. You qualify to file Chapter 7. If that number is above median, you have to go through a complicated calculation: First you subtract what the government thinks people nationwide spend on necessities.  Then you subtract what people in your county spend on other necessities. Finally, you subtract amounts you personally spend on necessities that are specific to you (such as taxes, health insurance, car payments, etc).

If the ultimate result is that you have more than a certain amount per month in disposable income, then you don’t qualify to file Chapter 7. (That amount, as of May 1, 2014, is $208, but it changes frequently.)

The Chapter 13 Bankruptcy Means Test

The Chapter 13 means test asks two questions: “Do you qualify for a 36-month plan?” and “What’s the minimum amount your unsecured creditors must be repaid?”

To answer those questions, you add up your last six months’ income and divide by six (just like with the Chapter 7 means test). If that number is below median, you qualify for a 36-month/3-year plan. (Nevertheless, people who qualify for 36-month plans still often choose 60-month plans because it benefits them.)

If you are above-median, you go through calculations similar to those described above. If the ultimate result is a number higher than zero, then that’s the minimum amount per month that your unsecured creditors need to get paid.

Bankruptcy Means Test Provisions in the Code

For those interested, the Chapter 7 bankruptcy means test is codified in Section 707(b) of the Bankruptcy Code. Section 707(b) lays out the guideline for conducting the means test and says that if you don’t pass it, a “presumption of abuse” arises, and gives the Court the authority to dismiss the case.

The Chapter 13 bankruptcy means test is codified in Section 1325(b) of the Bankruptcy Code. Section 1325(b) states that the Court cannot confirm an objected-to plan unless the debtor commits all of his or her disposable income during the lifetime of the plan to repaying the unsecured creditors. To determine what constitutes “disposable income,” it then directs you back to the calculation laid out in Section 707(b).

Conclusion

Properly conducting the bankruptcy means test is one of the most complicated parts of filing a bankruptcy case. It takes expertise to know what expenses you are legally entitled to include in order to improve your result. Moreover, the result often determines the success or failure of your case.  If you’re unsure of how the means test will impact your case, be sure to contact an attorney who is experienced in bankruptcy.

Bankruptcy Filing Fees Increase

The Judicial Conference has announced that bankruptcy filing fees will increase for news cases filed on or after June 1, 2014. Most relevant to my clients will be Chapter 7 and Chapter 13 fees each going up by $29, but Chapter 11 fees will go up by a whopping $504.

The new bankruptcy filing fees will be:

  • Chapter 7 filing fees will increase from $306 to $335
  • Chapter 13 filing fees will increase from $281 to $310
  • Chapter 11 filing fees will increase from to $1,213 to $1,717
  • Adversary proceeding filing fees will increase from $293 to $350 (but will still be waived if the debtor is the plaintiff).

Chapter 12 fees will be $275 (up from $246), and Chapter 9 and 15 fees will be $1,717 (up from $1,213), just like Chapter 11.

If you’re preparing to file a bankruptcy case and are waiting until June for a specific reason, then a $29 increase probably won’t make that big a difference.  But if not, this increase may give you another reason not to delay.

Five Questions to Ask a Bankruptcy Lawyer before Signing an Agreement

Every bankruptcy attorney has a different approach to learning more about you. I personally don’t ask potential clients to fill out a questionnaire; I prefer to get that information through face to face conversation. And I don’t ask you to bring in a credit report; pulling that information is part of my due diligence.

Regardless of style, every bankruptcy lawyer is thinking about certain questions during an initial consultation: How helpful will filing a bankruptcy case be to this person? Which would be more helpful: a Chapter 7 case or a Chapter 13 case? Are there any red flags or complications?

As the potential client, you should be asking questions, too.

Maybe you’re “interviewing” lawyers to find the best one. But you also need to know what’s in store for you if you decide to hire this person. With that in mind, here are five questions to ask a bankruptcy lawyer before signing an agreement:

  1. Does this person make me feel comfortable? This is one you ask yourself, not the lawyer, but it’s the most important question. You’re putting a great deal of trust in this person, and you’re counting on him or her to accomplish something very important. Does he or she seem competent? Does he or she take the time to answer your questions? If it feels as if you might receive insufficient personal attention, or if the lawyer seems mostly interested in his or her own pocketbook, maybe you should look elsewhere.
  2. Is [thing that I’m worried about] going to complicate my case? Everyone’s situation is unique, and everyone has some detail that they’re concerned about. Most of the time, there’s nothing to worry about. Other times, the thing a client thinks is no big deal actually has a major impact. There’s no way to know unless you ask. Believe me, your lawyer wants to know about potential problems, and you’ll be happier with the outcome if he or she does.
  3. What’s the most likely outcome, and what’s the worst case scenario? Your lawyer wants your case to go smoothly. Unfortunately, not every case can go smoothly. Sometimes there are potential complications that might (or might not) arise. Other times there are complications that are virtually certain to arise. Find out what he or she thinks will probably occur, but also find out what he or thinks is a worst case scenario, and how likely that scenario is.
  4. What would happen if I filed a different chapter instead? This question gets to the heart of what the lawyer wants to accomplish for you in your case. Why is he or she recommending Chapter 13 instead of Chapter 7, or vice-versa? This question will also help you understand how bankruptcy law works and how it will affect you.
  5. What are the factors on which you based your quoted fee? It’s perfectly reasonable for you to inquire into quoted fees. I don’t recommend choosing a lawyer based solely on price: You get what you pay for after all, and I think comfort with your lawyer is more important (see question #1), but fees do matter. If a lawyer is quoting you more than he or she might quote a different client, it should be due to additional work he or she thinks your case will require, and that’s something you want to know about.

There you have it: Five questions to ask a bankruptcy lawyer before signing an agreement. You might notice that I didn’t include any questions about who will appear at your Meeting of Creditors or about the impact of a case on your credit score. Those questions are important, and you should certainly ask them. However, these five questions listed above get to the heart of the lawyer’s representation of you.

The Automatic Stay (Bankruptcy Basics)

The Automatic Stay is one of the basic concepts of bankruptcy law and is the fundamental protection that filing a case brings you. It is codified in Section 362 of the Bankruptcy Code.

The moment you file your case, your creditors are “stayed” from taking any action against you. That means no debt collection attempts, no foreclosures, no repossessions, no lawsuits, no garnishments, no levies, no letters or phone calls.

The Automatic Stay last for the duration of your case. For people filing Chapter 7 cases, the Automatic Stay is what stops lawsuits or wage garnishments that may be pending against you until you receive a discharge order at the end of your case.

In Chapter 13 cases, the Automatic Stay remains in effect for the entire five years of a typical plan. The Automatic Stay is what prevents a mortgage holder from proceeding with foreclosure actions while you are using your Chapter 13 plan to catch up on mortgage arrears. It is what prevents the holder of a student loan from trying to collect any more than what they are receiving from the trustee.

If a creditor violates the Automatic Stay, it can be subject to sanctions by the Bankruptcy Court, and an injured debtor can recover actual damages, attorney fees, and punitive damages.

Secured creditors may seek relief from the Automatic Stay, but only if they are not receiving payments that “adequately protect” their interest in the property.

Additionally, if you have had another bankruptcy case dismissed in the prior year, the Automatic Stay in the subsequent case only last for a month unless you obtain an order from the court extending it.

A few critical things to know about the Automatic Stay:

  • It only comes into effect when you file your case with the court, so give your lawyer enough advance time to prepare your case.
  • Notice to your creditors isn’t necessary for it to take effect (it is automatic), but in order to sue a creditor for violating it, the violation must have been willful (i.e. they had notice but committed the violation anyway).
  • It only protects you from collection attempts on debts incurred before you case is filed.  For debts incurred later, you’re fair game to debt collectors.
  • Once your case is closed, the Automatic Stay ends, so if you have non-dischargeable debts (e.g. taxes, mortgage/car loan arrears, or student loans), consider Chapter 13.

As always, there are qualifications and nuances to all of the above, and your situation is unique.  Be sure to talk to a lawyer if you’re considering a bankruptcy case.

Law v. Siegel: Debtor’s Homestead Exemption not Surchargeable for Misconduct, Holds Unanimous Supreme Court

Stephen Law filed a Chapter 7 bankruptcy case in the Central District of California, valuing his Hacienda Heights home at approximately $363,000. He listed two liens on the property; one held by Washington Mutual for approximately $147,000, and another for some $157,000 held by “Lin’s Mortgage.” The remaining equity (approximately $59,000), he protected from liquidation under California’s $75,000 homestead exemption. The Chapter 7 Trustee (Siegel) challenged the second lien, with the Bankruptcy Court ultimately determining that it was a fiction created by Law to preserve the equity in his home.

As a result, there was in fact $216,000 equity in the house. Ordinarily, after Law subtracted $75,000 for his homestead exemption, there would only have been $141,000 available to the Trustee upon liquidation. However, because the Trustee had incurred over $500,000 in lawyer fees, the Trustee sought to have Law’s homestead exemption “surcharged” to defray those fees. The Bankruptcy Court granted the motion, and first the Ninth Circuit BAP, then the Ninth Circuit, affirmed.

On March 4, 2014, in a unanimous opinion written by Justice Scalia, the Supreme Court overturned the decision. (Law v Siegel, Docket No. 12-5196) While acknowledging that a Bankruptcy Court has “inherent power to sanction abusive litigation practices”, the Court also pointed out that such general permission must yield to a more specific prohibition found elsewhere. Here, Section 522 of the Bankruptcy Code expressly entitled Law to his $75,000 exemption, and protected that amount from use for any administrative expense.

Clearly Law engaged in reprehensible misconduct.  And, as the Court noted, the decision forces the Trustee to shoulder a heavy financial burden. However, bankruptcy courts are not without other options: they can deny a dishonest debtor a discharge, and can sanction a dishonest debtor (with such sanctions surviving the bankruptcy case), but they can’t do what was done here. Thus, the decision represents a victory for debtors insofar as it restrains a bankruptcy court’s punitive powers within limits set by the Code.

The Difference Between Chapter 7 and Chapter 13 Bankruptcy

What is the difference between Chapter 7 and Chapter 13 Bankruptcy? I think of it this way: There are two main reasons why a person would file a case with the Bankruptcy Court. One, to get a discharge of debts. Two, to get protection from your creditors. Chapter 7 focuses on the discharge, while Chapter 13 focuses on the protection.

Chapter 7 Bankruptcy: Focus on Discharge

Chapter 7 bankruptcy is usually a fast process. You file your case, a month later you go to a hearing, and (usually) two months after that, you receive a “Discharge Order” from the Court. That Order “discharges” some kinds of debts. Unsecured debts (credit cards, personal loans, medical bills, deficiencies on repossessed cars and post-foreclosure second mortgages) are all discharged. Your legal obligation to repay is gone, and the creditor’s right to try to collect is gone.

With secured debts (mortgages, car loans), you basically have the choice of either keeping the thing & keeping the debt or getting rid of the thing & getting rid of the debt. Other kinds of debts (recent income taxes, government fines and penalties, support arrears) are entitled to “priority.” They are not discharged; at the end of a Chapter 7 case, you still owe them. A fourth category is student loans. They should be general unsecured debt, but Congress has given them special treatment. At the end of a Chapter 7 case, you still owe them too.

Chapter 7 is “means tested.” The simplified explanation of that is, if you made too much money in the past six months, you have to go to Chapter 13 instead. Also, Chapter 7 is “liquidation bankruptcy.” If you have assets over the exemption limits, a Chapter 7 Trustee is empowered to liquidate those assets and distribute the proceeds to your creditors.

In a nutshell, Chapter 7 is best for people with modest incomes, assets below the exemption limits, and whose debts are mostly dischargeable.

Chapter 13 Bankruptcy: Focus on Protection

Chapter 13 bankruptcy lasts for 5 years, and that’s a good thing. The moment you file your case, something comes into effect called the “automatic stay.” Your creditors are stayed from trying to collect on any debt. You then present the Court with a Plan. That Plan says you’re going to pay a certain amount of money to a Trustee per month for sixty months. He or she then turns around and distributes that money to your creditors.

The Trustee takes a cut for administering the estate. He or she will pay your lawyer. Then there are certain debts that need to be paid in full, including car loans, taxes, and mortgage arrears. Everyone else (credit cards, medical bills, etc.) get what’s left over. Whether that amounts to 1% or 100% of what they’re owed largely depends on your income and your assets.

So why would anyone file Chapter 13 instead of Chapter 7, when it lasts for years and only gets you a partial discharge? One reason might be that you don’t pass the Chapter 7 Means Test. Another might be that you have assets over the exemption limits, and don’t want a Chapter 7 trustee liquidating them.

One of the traditional applications for Chapter 13 bankruptcy is to stop foreclosure. If you’re six months behind on your mortgage and are about to get foreclosed on, Chapter 7 doesn’t help you very much. You’d go through the process, and three months later, you’d still be behind on your mortgage. In Chapter 13, you use your five-year plan to get caught up on your mortgage arrears. And since you’re not making payments on your credit cards, you can afford to resume making the ongoing mortgage payments. Meanwhile, since you’re under the Court’s protection, the lender can’t move forward with the foreclosure.

There are many other things that can be accomplished in Chapter 13 cases. One that is increasingly common in my practice is that people are using Chapter 13 to get a five-year break from paying their student loans. Other things that can be accomplished include “stripping” second mortgages, “cramming down” car loans, and paying off tax debt before a lien can be imposed.

Your Situation Is Unique, So Talk to a Lawyer

So that, in broad strokes, is the difference between Chapter 7 and Chapter 13 Bankruptcy. Of course, there are caveats and exceptions and qualifications to all of the above. It is only intended to give you a general idea of the two types of cases. Your situation is unique, and you should sit down and talk with a bankruptcy lawyer to determine what type of case is best for you.