Posted by Kevin on April 4, 2014 under Bankruptcy Blog | 
To qualify for Chapter 13, you must be an “individual with regular income, meaning that your income is sufficiently stable and regular to enable you to make payments under a Chapter 13 plan. That requirement of a “stable and regular” income means not only at the time of filing, but for the entire duration of the plan (36 to 60 months). In a way, every Chapter 13 is a leap in faith that the debtor’s financial situation will be stable (or better) through the duration of the plan. Of course, life throws you curve balls. You lose a job, or your hours are cut. You or a member of your family gets sick and insurance does not cover the whole bill. The car breaks down-more than once. Your wife has to quit her job to take care of her sick mother. Whatever. The Code takes this into account. How? One way is by allowing you to convert your Chapter 13 to a Chapter 7.
Here’s an example to illustrate this. You own a home and have two mortgages. You are $5,000 behind in payments on your first mortgage (balance $250,000) and cannot remember when you last paid the second (balance of $75,000). You owe $25,000 in credit card bills, and another $10,000 in medical expenses that the insurance did not cover. The home is worth a less than the first mortgage. You had been laid off, but got a new job, and are starting to get significant overtime. But now, almost miraculously the debt collectors are calling again. You are making enough to take care of that first mortgage, your current expenses, and if everyone tightens belts, a little more, say $250 per month.
Chapter 13 may be the answer. How, you say. Even if everything goes right, what am I going to do about that second mortgage? Chapter 13 gives you the power to “strip” the second mortgage; that is, convert the second mortgage secured debt into unsecured debt. Then, the second mortgage gets paid pro rata with the credit cards and medical bills. How much? What ever is left over after paying your current monthly bills, your first mortgage arrearages, and the fee to your lawyer and the trustee. Could be very little. Plus the “second mortgage strip” also lowers the debt against the home by the amount of that second mortgage, bringing the debt down closer to the home’s market value. Seems to satisfy both your short term and long term goals. Chapter 13 looks good, so you file under that chapter. You know it is going to be a bit of a stretch, but if the stars line up right, you get to keep your home and discharge your debts.
15 months into the plan, your boss cuts back on most of your overtime. You can’t even pay the first mortgage much less the trustee. If the case is dismissed, there is no more automatic stay so your creditors will come after you because you now have wages that can be garnished. What to do?
The Bankruptcy Code explicitly states in that a Chapter 13 debtor may convert a case under this chapter to a case under chapter 7 at any time. Any waiver of the right to convert under this subsection is unenforceable.
Not a perfect solution, by any means. However, better than being thrown to the wolves. Let’s look at the scenario under the converted Chapter 7. First, you do not have to make any more payments to the trustee. That comes out to $3000 per year. Second, your Chapter 7 case is over in about 3 months and you most probably get a discharge. That means that you have knocked out all your debts (mortgage, credit card and medical).
BUT, the Code differentiates between the debt and the security for the debt. The debt is discharged but the security (mortgage) remains on the property. Unless you can make a deal with the mortgagees, you will probably lose your home. But you will not owe any deficiency on the first mortgage or anything on the second. Moreover, you will knock out the credit card and medical debt.
Now, if you work with experienced bankruptcy counsel, he or she will lay out this scenario in a way that you know or should know that you are taking a “shot” to save your home. If it works, God bless. If not, you switch into a 7, get your discharge and move on with your life.
So conversion to Chapter 7 can be a decent result when the goals of Chapter 13 cannot be met, either because of unexpected circumstances or because the debtors took some calculated risks which did not go their way.
Posted by Kevin on February 20, 2014 under Bankruptcy Blog |
You have some wiggle room if you either want to get out of your bankruptcy case or change to the other Chapter.
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After starting your bankruptcy case, your circumstances could suddenly change or for some other reason you may no longer want to be in the bankruptcy case that you’re in. Getting out of the bankruptcy court altogether—dismissing your case—is not very easy in a Chapter 7 case, easier in a Chapter 13 one. Changing from one Chapter to the other—converting the case–is usually allowed. We start today with some reasons why you might want to dismiss or convert, and then in the next two blogs talk about dismissal and conversion first under Chapter 7 and then under Chapter 13.
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Why Dismiss or Convert?
To put this into context, what types of situations would lead to a person to want to get out of a bankruptcy case after presumably giving the decision a lot of thought beforehand?
Although some situations could apply to both Chapter 7 and 13, these two procedures are very different in two very practical ways so that the situations that would motivate you to get out of the case tend to be different. The two big differences are their length and likelihood of successful completion:
• most Chapter 7 cases usually lasts only about three months, compared to three to five years for a successful Chapter 13 case; and
• most Chapter 7 cases are completed successfully (at least those where the debtors are represented by an attorney), while a significant percentage of Chapter 13 cases are not.
Why Would You Want to Dismiss or Convert Under Chapter 7?
Under Chapter 7 “straight bankruptcy,” there’s a lot less that can go wrong and a lot less time for your circumstances to change. The focus is on your assets and debts at a fixed moment in time, at the point your case is filed. So if a careful analysis of your financial situation at that time indicates that your case meets the requirements of Chapter 7, not much should change that.
Here are some problems that can nevertheless arise making you wish you could get out of your Chapter 7 case:
• Although assets are fixed as of the date of filing, under Section 541(a)(5) of the Bankruptcy Code, if a relative dies within 180 days of the filing of your case leaving you as the beneficiary of an inheritance or a life insurance policy, that inheritance or insurance proceed becomes available to pay your creditors.
• If shortly after filing your case you have an accident and incur significant new medical debts because of having insufficient medical insurance, the new debt cannot be included and discharged in your case because that debt did not exist when your case was filed.
• You may be unaware at the time your case is filed that you have a legal right to a valuable asset, for example you did not know that your parents’ vacation home had been secretly deeded to you and your siblings.
Why Would You Want to Dismiss or Convert Under Chapter 13?
Under Chapter 13 “adjustment of debts bankruptcy,” there’s a lot more going on and so a lot more that can go wrong than in a Chapter 7 case. A Chapter 13 plan lays out how much and when the various creditors will be paid (if at all), and creditors can object to the plan and sometimes force it to be changed before it’s approved by the bankruptcy judge. Then you have to comply with the terms of the plan, over the course of three to five years, which give a lot of time for your circumstances to change. The focus is on your financial life not at a fixed moment in time but rather throughout the years of your case. Your Chapter 13 plan usually assumes that your income and expenses will stay the same, or else sometimes tries to predict how they will change into the future. Either way, those assumptions come with risk.
So all kinds of things can happen which could make you wish you could get out of your Chapter 13 case, but here are some representative examples:
• Your plan is designed around your desire to save your home, but a year or so later you find a job which requires you to move, taking away the primary purpose of your case.
• You filed a joint Chapter 13 case with your spouse, but two years later you go through a divorce, totally changing your financial life.
• Your income is significantly reduced permanently; so much so that even amending your Chapter 13 plan is not feasible, making you no longer eligible for Chapter 13.
• Your income is significantly increased a year into your case; so much so that you become obligated to amend your plan to pay most or all of your debt.
Again, the next two blogs will be about getting out of Chapter 7 and then Chapter 13, in situations like the examples given above.
