For those individuals and small business who have missed mortgage, vehicle payments, or a lawsuit has been filed against them, a Chapter 13 bankruptcy allows them to cure, or make up, missing payments. The payment is made through a "wage earner plan" and can run 3 to 5 years. Chapter 13 is also for those who are presumed to be abusing the bankruptcy process under Chapter 7 due to the means test analysis showing a positive income of over $166 per month. During this time, the creditor is NOT allowed to harass the individual or attempt to seize the asset unless the creditor seeks relief from the bankruptcy court. The secured creditor has the right to lift the stay if you are not carrying insurance on the collateral or you have not made your bankruptcy payments.
1. Credit counseling before file Chapter 13 bankruptcy
Before you file bankruptcy you must attend a briefing with an approved non-profit entity which will conduct a budget analysis with you.
2. File Petition, Schedules A-J, Statement of Financial Affairs, Means Test Analysis, and Plan with the Court
You will need to provide bank statements, pay advices, and tax returns. Some of this information is required to be filed with the court and some must go to your trustee. You have two trustees within the Houston Division of the Southern District, David Peake and William Heikamp. Both are similar but with small management and/or legal differences of opinion.
Many people do not like the disclosure requirements of the bankruptcy law but this is an unfortunate result of the amendments to the bankruptcy code in 2005. If you fail to produce this information it is likely your case will be dismissed. At the same time if proper disclosure is made you will get the benefit of the discharge which far outweighs the trouble of gathering all of the required documents. Once the case has been electronically filed, an injunction goes into effect staying your creditors from taking any further action to collect or recover on any debt you owe without first getting permission from the bankruptcy court. Notice must be given to your creditors, which my firm will do for you. This injunction is called the "automatic stay". Violations of the automatic stay can be severe. Most of your larger debt collections agencies and mortgage companies will not attempt collection without getting permission from the bankruptcy court. Although some smaller companies who do not have much experience with the power of the bankruptcy judge will attempt collection. Our firm prosecutes violations of the automatic stay through a separate lawsuit called an "Adversary".
You have 5 Judges in the Southern District of Texas. The judges, like the trustees, have different management styles and some differences of opinion as to the interruption of the law. The differences are slight but could be costly depending on your facts.
Your monthly proposed plan payments are first due 30 days after your case is filed and then continue for the duration of your plan.
3. Your "PLAN" - Chapter 13 Bankruptcy
In Chapter 13, along with all your other papers, you file a "Plan" of repayment to some of your creditors. The plan payment is determined by the assets you own, the types of debts you have, and your income. Some of the terms used to determine your payments are outlined below:
A. You are paying ALL of your current monthly income into the plan for a minimum of 36 months, and a maximum of 60 months depending on the facts of your case and your household income. Disposable income is defined as your net income (gross income minus tax withholding) minus your reasonable and necessary living expenses. B. Certain creditors must be paid 100% through your Plan, so you must have sufficient disposable income to be able to do this in the required time frame. Examples of creditors needing to be paid 100% are: Mortgage and vehicle arrearages, taxes less than 3 years old, past due child support or alimony and others. C. Your unsecured creditors will receive a percentage on the dollar. The percentage will be determined by how must money is left over after you pay certain bills
4. Section 341 Meeting of Creditors
This occurs within the first 45 days of the case. It is often referred to as the section "341(a) Meeting." The Trustee will review your bankruptcy papers and the information contained therein. The trustee wants to make sure you understand the process and are aware of your duties and responsibilities. In Houston, Texas the trustee will usually recommend confirmation of your plan at this meeting if your paperwork is in proper order. If so, then you may not have to come back to court for the confirmation hearing. Attendance of creditors at this meeting is infrequent and the meeting is quick if you paperwork is in good order. The Trustee's role in a Chapter 13 bankruptcy case is at first to make sure that you are filing your case in "good faith" and that your monthly plan payment is as high as possible, so as to maximize the benefit to your creditors. Once your Plan is confirmed by the court, however, the Trustee generally wants to see you succeed because that's how the Trustee and creditors get paid.
5. Objections and Claims Litigation
Your creditors are able to object to your plan on the grounds set forth above, as well as others (if they can show it wasn't proposed in good faith, the amounts are insufficient, etc.). Creditors are required to file "proofs of claim" with the court in order to be paid from your Plan. As you might imagine, these claims may be for higher amounts than you put in your bankruptcy papers. This can often cause your proposed plan to become infeasible and necessitates that your attorney object to these claims (assuming grounds exist for doing so). Also, creditor may file a claim that is time barred in state court. This debt is often referred to as "Zombie Debt,". The creditor is required to attach something to the claim indicating indebtedness and when was the last charge or payment on the account. Should this not be done then this is grounds to object to the claim and have the claim disallowed. Texas has a four year statute of limitations on breach of contract. If the last charge or payment was more than 4 years prior to the filing of the bankruptcy, this claim may be denied. At the same time the creditors are required to file their claims within 90 days of the creditor's meeting and late claims can be denied as well. It is not wise to attempt to have a mortgage or a vehicle claim denied on being late as the lien still survives the Bankrupty. But with unsecured debts, having late claims denied can result in you paying a higher percentage to your other creditors while still discharging the late claims. This can also result in getting out of bankruptcy quicker as your total gross plan payments have been reduced by the disallowance of late or time barred claims.
6. Plan Confirmation Hearing and Plan Payments
Several weeks after your creditors meeting, the court will hold a hearing on confirmation of your Plan. This is a graduating event which you want to occur as soon as possible. The trustee starts to make disbursements to your creditors after the order of confirmation is signed. Attendance is not necessary if the trustee is recommending that your plan be approved. .
7. Modification or Conversion
Modification to confirmed plans is common place. If you fail pay tax debt that is incurred after the filing or lose your job while you are in bankruptcy them it is possible to revisit your confirmed plan and attempt a second bite at the apple. You generally must have a good reason for failing behind and a solid plan to catch up. If you are unable to catch up, you may consider converting the case to chapter 7. It would be as if you filed a chapter 7 case in the first place. You will need to provide an updated budget and will have to attend a new 341 meeting of creditors with your chapter 7 trustee. If you cannot get current then this is sometimes your best option but you will likely lose the property you were attempting to cure in the chapter 13 bankruptcy.
The entry of the discharge order requires a 2nd class and a motion. Mr. Peake teaches this class and there is no charge to attend his course if he is your trustee. You will need to review and sign the motion for entry of discharge. Once the discharge is entered you should be current on your mortgage and have paid your vehicle in full. The legal effect of the discharge is that a creditor cannot file suit in a court to attempt to force you to pay. While the IRS and other creditors would not be able to execute on the debt or judgment if the debt or judgment was perfected prior to the commencement of the bankruptcy. The term “discharge," does not extinguish the debt or obligation. It discharges the creditor’s ability to legally collect the debt or obligation. The next step is to update your credit report by following our post discharge section.
9. Updating Your Credit Report
Your credit report should show your discharged debt with a ZERO balance. If it does not say this, then go to the all of the bureau’s websites to "DISPUTE," the balanced showed. Just click on the creditor you are disputing and it will being up a box of reasons why you are disputing that debt. All you need to do is click the reason "Was included in my bankruptcy filing." It's that easy.
In about 45 days, the agency will update your report showing the debts being reported correctly. Do not delay in updating your credit file.
IMPORTANT: Make sure that your Credit Report is UPDATED and CORRECTED PRIOR to getting any type of financing.
Some creditors MAY report the cancellation of your debt to the IRS. If this happens, it's mistake and one you can easily correct. To correct it, you should file a Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness), with your Federal income tax return.