Chapter 13 Bankruptcy Filings
Chapter 13 Bankruptcy Filings
Welcome to Part 2 in a two part show. We just went through the Chapter 7 bankruptcy filing process. We’re here on the Making Law Easy Show which is about navigating Chapter 13, which is another part of the Bankruptcy Code. And again, talking to one of the 1-2-3 Law Group lawyers who handles a number of our bankruptcy cases. You’re on the show with us Warner. We had an interesting dialogue going with someone from out-of-state, which raises an interesting question before we start. This person had a piece of property through a divorce. The divorce had already happened, and they were still on the Deed. And they were getting contacted by lenders. I guess it’s real important to stay on top of basically what you owe debts on.
Sure. There’s a lot of things that can happen to your credit. Some of which is your own doing, and others are through error by companies. And some of it has to do with identity theft. There’s a lot of mean, nasty people, who try to make money by harming others. And you need to stay on top of what your credit history is. And who’s looking into your credit. And you know there’s a lot of free services out there that will allow you to get a free credit report every year. When I do a bankruptcy, I strongly recommend and suggest to people that they allow me to get a credit report for them. And it’s not from one of those free services. This is a selection of the top free credit reporting agencies. A lot of people who have debt sometimes don’t realize that their debt is now in the hand of the collection agency, even though they have the credit card with Capital One, and they owe Capital One money, the Capital One might have sold their debt or authorized a collection agency to go after that debt. And when you file for bankruptcy, you have to notify interested parties. And I like to notify those debt collection agencies, that a bankruptcy has been filed. Because that will put them on notice that my client is now hands off. They cannot call him anymore. And that credit credit report is a valuable, valuable tool in bankruptcy.
No sense just aiming at one troubling debt. You might as well use the eraser to erase all of it that you can.
Sure, as we talked on a previous show, the statute of limitations is four years. But you know, why not take the opportunity , if you’re filing for bankruptcy, to try to wipe everything out. To wipe out as much as possible of your debt. You surely don’t want to do bankruptcy more than once. And if you screw up, the first time, you might not get another opportunity to wipe out that debt. And certainly you have to wait a long, long time to do it again. So it’s something that has to be carefully approached, and you have to be meticulous about the petition that’s filed by the bankruptcy attorney. And you have to check and then double check, that not only your original debt was listed, but also, any possible other collection agencies, or sometimes the case has been transferred already to an attorney to file suit. And you know those are sometimes listed on your credit report and I like to notify those attorneys. Again basically telling them, bankruptcy has been filed, lay off. Don’t contact my client and don’t bother filing a lawsuit because this debt is going to be discharged.
You said you can only file once every so often. What’s the length of time between bankruptcy filings?
Well if you filed under the old law, it is one set. If you file now, you’re going to have to basically wait eight years after it’s discharged to file again. There are different rules and regulations. You can do a whole show just on what applicable time period there is. There’s different applicable time periods if you go from a 13 and then do a 7. There’s different applicable times if you do a 7 and you want to do a 13. That’s why if you find yourself in financial debt again after you had initially filed a bankruptcy in the first place, you need to contact a bankruptcy attorney so he could ask the case specific questions he needs to ask you of. And to provide you the right answer.
Well let’s look at Chapter 13 now a little bit. What is a Chapter 13 bankruptcy filing, and how does it differ from a Chapter 7 filing.
The Chapter 7 is a complete and total discharge of your debt. 13 in simple terms is the way that you can reorganize your debt and make a partial payment of your debt. For example, in today’s headlines there are an increase in foreclosures in not only Pennsylvania, but the entire United States. People are falling behind on their mortgage. Sometimes they are one, two, three or four months behind. In a Chapter 7 you could try to do so something about you falling behind on your debt by eliminating your unsecured creditors. Thereby freeing up more funds for you in order to pay your mortgage. However, sometimes you’re so far behind that you need something more than just discharging your unsecured debt. You need a court ordered and implemented payment plan. If you’re more than two or three months behind or you’re facing foreclosure proceedings, Chapter 13 is a possible avenue for you to save your house. You need to sit down with the bankruptcy attorney. He has to make a determination of what your balance is on the mortgage. How far behind and he can arrange a repayment plan based on your debt and your income.
And Warner, you want to do this right away. Your don’t want to wait for a Sheriff’s Sale notice to come, and the process has gone further along. Right?
If there’s one thing regarding a Chapter 13 that any debtor has to know, it is far longer a process in a Chapter 13 bankruptcy, than a Chapter 7. And it’s far more complex than a Chapter 7. You can finish a Chapter 7 in six months. You could finish, you’re not going to be done with a Chapter 13 bankruptcy for either 3 or 5 years, depending on what type of Chapter 13 bankruptcy you qualify for. And you’re not going to be able to make a determination as to what type of Chapter 13 qualify until you talk to an attorney. And when I say qualify for a specific type of 13 depending on what your income is you can qualify for a court repayment plan of either three years or 5 years. And if you make too much money, you’re going to be bumped up to the 5 year plan. And the only way to make that determination is that you need to talk to an attorney. And you know, your attorney is going to be able to look at what you mortgage is. Look what your payments are. And look how far you are behind. And he’s going to submit a plan subject to the approval fo the Chapter 13 Bankruptcy Trustee and subject to the approval of the court. And possibly make, this is a possible avenue for you to keep current with your mortgage, number 1. Number 2, get current in regards to payments you missed, and also keep paying on your unsecured debt. The rule of thumb is, you’re going to have to probably pay ten cents on the dollar on the unsecured debt. So the Chapter 13 is going to affect your unsecured creditors, and you could knock that debt down as well.
So you’re wiping some debt off a lot of the time. Just like a 7, but you’re making payments over time.
You are wiping a lot of your unsecured debt off. Like I said, as much as 90 cents on the dollar you’re eliminating. You’re making yourself current on your secured debt whether it be a car or a house. And another interesting aspect of Chapter 13 is a lot again has been said on the news about second mortgages. People, debtors in the past have fallen behind on their credit card bills, have gone to some disreputable mortgage brokers. And basically used the equity in their house to secure a loan in order to pay off credit card debt, which is something I never recommend because what you are basically doing is securing credit card bills with your house. And then if you fall behind on your payments, you can lose your house. But, what has been happening, or what was happening was that the sub prime market and that sort of wild west lending was that a second mortgage was being gotten and appraisers were being used at over appraised houses and what chapter 13 can allow you to do is, if your house is only worth 90,000 but you have a first mortgage, excuse me, if your house is worth 100,000 and you have a mortgage, your first mortgage is also worth 100,000, you know, you have no equity in that house whatsoever. Now if you have a second mortgage on top of your first mortgage for perhaps 30,000 you can actually make that second mortgage an unsecured debt. So you could basically eliminate that second mortgage payment under a Chapter 13 plan. And this is very valuable for someone who’s made the mistake of getting that second mortgage.
Is this the cram down?
Yes, it’s absolutely that. That is the term. It is a cram down. And you’re kind of cramming it down your second mortgage company’s throat because they are forced to take that money.
Who are the most frequent candidates for filing a Chapter 13?
People who make more than is the median income here in Pennsylvania. As we talked about in your Chapter 7 show, there are guidelines that are put together by the United States Department of Justice regarding median income figures. Now as I said before new guidelines are effective today, February 1, 2008.
It’s also my birthday, so you know, two reasons why I’m not going to make a statement on our pod cast, but I didn’t know I shared the date with the Bankruptcy guidelines.
Sure.
It’s not making me very pleased.
In this particular case, if you have a two person home, and you’re making more than 50,628 dollars a year. If you’re making 75,000 80,000 dollars you may not have an option for a Chapter 7 bankruptcy. You’re only alternative may be a Chapter 13. And that is one way to get rid of your debt without declaring a Chapter 7. If you think you don’t qualify for a Chapter 7 because you make too much money, you may still qualify for a 13 and that court repayment plan.
Is the stigma or impact on your credit report that same with a 13 as a 7.
It is not because you are repaying parts of your debt. And a lot of people are very, very much concerned as to the affect of bankruptcy on your credit score. Now believe it or not bankruptcy can actually help your credit score in the long run. And this was an article in Smart Money that basically said that when calculating scores. First of all credit scores are developed by a company call Fair Isaac, and the company calculates the most widely used credit score known as the FICO score. And based on the formulas that are developed they are set up to grade someones credit standing as compared with that of other consumers that are actually in similar situations. And not to get into this very complex calculation, you know you can get an increase, you can get a better bankruptcy score or increase your bankruptcy score by actually filing for bankruptcy. now you won’t be able to bring your score up to the perfect 850 as long as your bankruptcy stays on yoru report but with good credit management after filing a score of 700, again this is not me talking this is smart money, in their article. You can get your score up to the 700s. So it’s almost this urban legend that’s been created about oh my God your bankruptcy score is going to be crippled forever because of bankruptcy and the realty of it is sometimes bankruptcy will help. On the other hand too, if you’re so far in debt you have a crappy credit score anyway. So it’s not going to go really much downer.
That’s true. Well since a Chapter 13 is a payment plan instead of wiping out debts free. What are the advantages of filing versus working out your own payment plans with different creditors.
Well there’s no credit out there that’s going to accept 90 cents on the dollar and who is a credit card company. What happens though in a Chapter 13 is that the court tells teh credit card company you will accept this period. No ands, ifs or buts. So in other words waht a creditor might not accept, in the bankruptcy process, a credit must accept if he is in fact ordered to accept it by the bankruptcy court. So that is the big difference between trying to negotiate the settlement and making the settlement through a Chapter 13 bankruptcy.
Let’s talk a little bit about the process. You mentioned in the last show it’s a longer process than a Chapter 7. So what happens and what are the time frames.
You file the plan, you file the petition after you and your attorney talk and after you get a certificate of credit counseling that is required prior to filing. After that, about a 30 day period you get a hearing notice in the bankruptcy saying that you have a meeting before the bankruptcy trustee. At that point in time the bankruptcy trustee will examine your petition and ask you any questions because you are required to attend this meeting. They will ask you questions about teh petition and will make sure that everything in that petition is true and accurate. After that, any claimes that any creditor has against you need to be filed. They files those claims in order to get paid. If they don’t file those claims they are not going to get paid. That’s why it’s important that a competent bankruptcy attorney checks to see waht claims are filed and in what amounts those claims are filed to make sure that a company is not in error as to how much they are claiming you owe. And long story short, once that’s done you are going to be making payments to the plan to the bankruptcy trustee. Also, onto that point making payments to the bankruptcy trustee, it’s not a matter of you’re going to be writing a check, you know, made payable to Rhonda Winnekour, whose the Banrkutpcy Trustee for the Western District of Pennsylvania. It’s not like you’re going to be making a check out to her every month. What happens is that when your bankruptcy attorney files a petition, he also must file here in the Western district a wage garnishment motion and order. Although the bankruptcy code does not require wage garnishment or wage attachment in Chapter 13 bankrutpcy cases, the local rules of the Western District of Pennsylvania require the attachment of wages, and the local rule, which I think is 3015-2. It basically says that any Debtor under Chapter 13 who has an attachable income must file a motion for wage attachment and must serve the wage attachment order on the employer. What the employer is required to do is take the amount of the plan out of the person’s wages monthly and send them to the Trustee. That’s teh way the plan is funded.
Who decides if the plan is acceptable. Is it the Trustee or do the creditors have a say.
The trustee decides, the judge decides, the creditors do have a say. Sometimes your initial bankruptcy plan that you submit and the amoutn of yourpayments will be modified later in the process because more money needs to come out of your pocket in order to you know, for example, catch up on your mortgage payments. It is again a very complicated process.
Yes. What if you lose you job in the process or something. You might go to a seven right?
Then you would have to go to a 7. Hopefully that won’t happen. But you may have to convert the Chapter 13 into a Chapter 7.
Well how often are these plans successful in resolving a debtor’s debts? Do they work a lot of the time.
It depends on the fact specific situation. If teh debtor is able to maintain income wage and able to fund that plan, they work 100% of the time. The only time that things go south is if you know, I’ve had one case where the participants in the Chapter 13, husband and wife, got divorced. And then that had to be converted into a Chapter 7. And another case of where a plan worked despite losing a job was that the client lost the job, was uanable to fund the plan, so we went in there and after teh person regained employment and the plan was extended. And she’s doing well and the plan is getting funded, and soon she’s going to be done with the plan and her debt discharged.
Do you ever see people object to a Chapter 13 plan once it’s in effect. Like say, all of a sudden you get more money, or you’re involved in divorce, or something like that.
I’ve not seen it. It’s not that common. The petition that you file and the plan that you file is a snapshot of your financial situation at the time you file the bankruptcy. And that being teh case, you know one of the questions in bankruptcy petition is do you foresee any changes in your income level? And if you’re answer is no, the bankruptcy trustee is not going to come every year and say well if you made more money this year, have you made less money this year. If you’ve made more money this year, we’re going to take more of your money. They’re not going to do that. Once that plan’s established, it’s pretty well what you are going to pay until you’re done with teh plan.
Well I think we covered most of everything involved that we were planning to talk about on Chapter 13s. But one thing that comes clear is that when you have a lot of debts and you have problems, you know a bankruptcy filing can buy you some breathing room and make your life a little bit easier is what it sounds like.
Absolutely.
You already have a bad credit score, you know and in some cases according to that article it can improve your credit score.
People need, and I always tell clients this, their concerned about the stigma of bankruptcy. I told them Thomas Jefferson filed for bankruptcy three times in his life. And I also tell the clients he’s a lot smarter, or was a lot smarter than I am, and he did well for himself. Sometimes people just get in financial trouble and need a fresh start period.
It happens to entrepreneurs all the time. They are risk takers, and so. Well anyway Warner I appreciate your taking the time with us, and I want to let people know that if they have any questions you can call us at 877-7-123-LAW, if you’re in Pennsylvania. We’d be happy to talk to you about these types of issues and you can also get us on the internet at makinglaweasy.com, where we’ve got a comprehensive list of all of the shows we’ve done.
Thanks again for joining us Warner. Looking forward to having you on in the future.
Alright sir.