Keeping the Homestead Safe in Bankruptcy: Chapter 13

Bankruptcy continues to evoke this notion of getting something for nothing. For some,that results in feeling a bit of judgment or disdain towards the whole idea of filing bankruptcy or the people who end up there. To that I say, “There, only by the grace of God go I”. Others see it with a bit of a glimmer in their eye as a great way to get free stuff. Both views are askew. Bankruptcy is a tough process to go through that is humbling and often anxiety provoking which is why people prefer to hire a lawyer than attempt it pro se. Few people actually abuse the system; most who file have tried everything they could think of to avoid it, but life’s curve balls and the accumulation of mistakes here and there just prove too daunting without assistance. For those hard working folks who end up in a bad spot, I do what I can to make the process smooth and effective so they can get on rebuilding their lives financially.

One of the things I do to ease the way is to stress the imperative in Chapter 13 bankruptcies that if you want to keep it, you must pay for it. This applies to bigger ticket items with a loan secured against it like a house or a car. Many people opt for a Chapter 13 because they fell behind in their house payments or their car payments but they do not want to lose that property. Well, a Chapter 13 can certainly make that happen, but they must still pay for the house or the car. There are NO free houses out there – and the only free cars are ones your would not want to drive.

Chapter 13 only halts the secured lenders collection process (and helps reduce interest costs in certain ways). That means that foreclosure proceedings for a house are stopped and repossession of a car is nixed. Then, the arrears that had accumulated must still be paid through the Chapter 13 plan payments as well as each ongoing payment as it comes due. Unfortunately, many home owners had the pre-bankruptcy experience of months going by without making house payments before the bank took legal action. That will NOT be the experience in the bankruptcy. The secured lenders are much quicker to file a Motion for Relief from the Stay (the automatic collection halting part of a bankruptcy). This motion allows them to then resume the foreclosure in state court if it is granted.

Often, this motion is filed by the lender quickly after a payment or two is missed as a wake-up call to the debtor. They really just want the debtor to get caught up on their payments and so they typically will enter into an agreed order with the debtor to do just that over the next few months rather than force their motion through. However, this is an exceedingly expensive process. The lenders insist on getting reimbursed for the hundreds of dollars they spent on an attorney and filing fees for that motion. So, you may have used that $1,000.00 house payment or two to buy Christmas gifts or cover an unexpected medical bill, but you will end up eating around $600 or $700 on top of catching up those missed payments.

To make it through your Chapter 13 smoothly and retain your house and car, those payment simply have to be a non-negotiable. There is no wiggle room on secured debt payments in a Chapter 13. If you want to keep it, you must pay for it.

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Chapter 13 Plan: What’s in, what’s out?

In a Chapter 13 bankruptcy, everything is driven by the Debtor’s proposed plan. The plan determines payment amount, treatment of secured debts and the assets to which they attach, and a number of other items. You may hear your bankruptcy attorney use the phrases, “pay inside the plan” and “pay outside the plan”. To pay inside the plan means that part of your payment to the Trustee is distributed to that creditor or class of creditors by the trustee. To pay outside the plan simply means that you, the Debtor, must continue to make payments directly to the creditor for that specific debt in addition to your plan payment.

The reason why it may be valuable to you to pay some debts outside the plan is that the Chapter 13 Trustee earns their money by receiving a commission from your payments. This percentage is different from State to State or District to District. In the Eastern District of Kentucky, the Chapter 13 receives around 5.4 or 5.5 percent of each payment. So, the lower your payment, the less you pay in Trustee’s commissions. Likewise, the Trustee has some motivation to get the highest plan payment possible within the structure of the bankruptcy. It is also beneficial, though, to the Chapter 13 to have a successful Chapter 13 – one which the Debtor is able to see through.

Generally speaking, it is in the discretion of the Chapter 13 Trustee what can be paid outside the plan because they are the gatekeeper that recommends approval or rejection of the plan (confirmation or not). In the Eastern District of Kentucky, it is routine for secured debts that will mature (need to be paid in full) later than the end of the plan to be paid outside of the plan. So, ongoing house payments are best paid outside the plan.

Some attorneys prefer to have car payments made outside of the plan even though they will be paid in full before the close of the Chapter 13. This results, though, in having to do a “step-up” of payment amounts when the car is paid off. My recommendation is to pay all car payments inside of the plan. Usually this draws out the payments, allows for a lower interest rate, and possibly a reduction in the principal (this depends on when the debt was incurred). I often find the plan payment actually ends up being really close to what the ongoing car payment was and sometimes even less.

If the interest rate on the car loan is below 4.25%, and the car was purchased within 910 days of the filing date, then paying it outside the plan would be best, even if a step-up payment has to be built into the plan. The step-up payment basically takes whatever that car payment is and adds it to the plan payment the month after the car loan is paid in full.

It is very important that Debtors the importance of remaining current on payments to be made outside of the plan. Failing to make a few payments to a creditor outside the plan can probably be remedied, but the Debtor needs to quickly advise their attorney of the circumstance. Eventually, though, if missed payments are chronic, it will go beyond the point of remedy within the Chapter 13 and the lender will take steps to foreclose. That usually results in changing the Chapter 13 to a Chapter 7 or it means modifying the plan to surrender the house.

I filed a prior bankruptcy but I never got a discharge, when can I file again?

c there is no time limit on filing with regard to receiving a discharge. The problem this does create, though, is with the automatic stay.

If the first bankruptcy was pending and dismissed during the year preceding the filing of the next bankruptcy, then the automatic stay of the bankruptcy terminates automatically on the thirtieth (30th) day after the subsequent case was filed. See 11 USC Sect. 362(c)(3). This is not the end of things, but it does require careful pre-filing planning after a case has been dismissed.

Yet another reason to consider Chapter 13 over Chapter 7

In either chapter 13 or chapter 7 bankruptcy there is an automatic stay with broad protection that stops creditors from attempting to collect debts. This stay is found in 11 USC Sect. 362 of the bankruptcy code. There is an additional “stay” afforded debtors who file chapter 13 and it is found in 11 USC Sect. 1301.

Upon first glance at Section 1301 it appears to be a protection given to non-filing co-debtors such as mom or dad who co-signed on the car loan. However, the intent is actually to expand the protection given to debtors. In other words, if the provisions are violated, it is the debtor who would file the action against the creditor. The co-debtor can join in that action, but it does not give standing to the co-debtor to pursue the action unilaterally (or at least that is what some courts have decided). See In Re: Marlon Durone Stacker (Bankr. S.D. Ill., 2011). This explains why there is no provision for the awarding of attorney fees for a violation of Section 1301 whereas there is such an award under Section 362.

The idea is that during the protracted chapter 13, a creditor would take action against the co-debtor and in so doing, would coerce the debtor into paying more to that creditor than the plan allowed. Congress wanted to prevent such an end run around the automatic stay by crafting this more limited provision.

Section 1301 is also limited in that if the co-debtor received consideration (something of value) from co-signing on the loan, then then stay does not protect them to that extent. So, if a non-debtor business partner co-signed a loan and the consideration (value) came into the business to both his and the debtor’s benefit, then action against that co-debtor is not prevented. Or, perhaps a friend co-signed a loan for $1,000.00 and received $200.00 of it, then the creditor can pursue him or her for that $200.00, but no more than that. Another limitation is that if the chapter 13 plan only provides for a certain amount of the loan to be repaid, then the amount in excess of the plan is not protected. So, if the plan provides for $9,000.00 of a $10,000.00 debt to be repaid, then the creditor can still pursue the co-signor for the extra $1,000.00.

There are some other, non-enumerated limitations to Section 1301. For example, the creditor may still be able to report a delinquency on the co-debtor’s credit report. One could say that this constitutes a false report because the terms of the agreement have been altered by the chapter 13 plan. But, the plan only altered the relationship between the creditor and the debtor, not the creditor and co-debtor. However, such an action could constitute a violation of both Section 362 and Section 1301 if one can show that there was intentional action by the creditor likely to coerce the debtor into paying beyond the plan. See In re Singley, 233 B.R. 170 (Bankr. S.D. Ga., 1999). If you look at the Singley case, be aware that the court there said the intent of the creditor had to be shown to be one of coercing the collection of the debt, but other courts say the intent only has to be that the act of violation was intended to occur regardless of the result.

Despite the limitations of Section 1301, non-filing co-debtors being protected from lawsuits, garnishments and the like may make the extra work of a chapter 13 worthwhile.