Chap. 13, 11, 20

Chapter 13 introduction

(I would be glad to help you decide which chapter is right for you. Call for a free consultation on any bankruptcy matter at (619) 702-5015. Or you can visit my websites for more bankruptcy information at: www.farquharlaw.com or www.freshstartsandiego.com.)

A chapter 13 bankruptcy is basically a debt payback plan.  It allows you to pay back your debts out of disposable income over a period of 3 to 5 years to the extent that you can and you receive a discharge of the remaining debts at the end of the period.  Chapter 13 has advantages to it like being able to strip off unsecured mortgages and cramming down the loans to the value of the underlying asset.

The reality of the chapter 13 though is that like the chapter 11 most people fall out of them during the payment period and the case is thus usually dismissed or converted to a chapter 7.  You can dismiss a 13 your self whereas you are locked into a chapter 7 once you file.  Most people prefer chapter 7s if they qualify but a chapter 13 does make sense under certain circumstances.

What is a chapter 13 bankruptcy?

Chapter 13 bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization supervised by a federal bankruptcy court. The Bankruptcy Code anticipates the goal of Chapter 13 as enabling income-receiving debtors a debtor rehabilitation provided they fulfill a court-approved plan. Compare the goal of Chapter 13 with the relief contemplated in Chapter 7 that offers immediate, complete relief of many oppressive debt(s).

Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3 to a 5 year period. This written plan details all of the transactions (and their durations) that will occur, and repayment according to the plan must begin within thirty to forty-five days after the case has started. During this period, his or her creditors cannot attempt to collect on the individual’s previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his property, and his creditors end up with less money than they are owed.

During the pendency of a Chapter 13 case the debtor is not permitted to obtain additional credit without the permission of the bankruptcy court. Moreover, creditors may not be willing to risk lending money to such an individual. However, this disadvantage is not unique to Chapter 13; it may also apply to individuals currently in a Chapter 11 case, case or those who are in or have recently been in a Chapter 7 case.

The advantages of Chapter 13 over Chapter 7 include: the ability to stop foreclosures although a foreclosure would be reinstated upon completion of the bankruptcy; to achieve a super discharge of debts of kinds not dischargeable under Chapter 7; to value collateral; to bifurcate the security interest of creditors in certain property that creditors are either charging too much interest for, or are over-secured, or both, and leading to a cram down modification of the debt; to prevent collection activities against non-filing co-signers (co-debtors) during the life of the case.

Call (619) 702-5015 to speak to a knowledgeable attorney if you have any questions regarding this information.

For much more bankruptcy information see my websites at: www.farquharlaw.com or www.freshstartsandiego.com

Chapter 13 or chapter 7?

Chapter 13 bankruptcies and chapter 7s are very different bankruptcies bur both have advantages and disadvantages.  A chapter 7 is good because it is clean and fast.  It discharges debts quickly.  It is all over in 90 days and you can then go on with your life if you qualify for the chapter 7.  Not everyone does qualify though.

Some people are “means tested” out of a chapter 7 because they make too much money to file one.  They have disposable income and thus bankruptcy law says that they must therefore file a chapter 13 bankruptcy if they want to file one at all.  (They would also qualify for a chapter 11 but that is another story).

Others don’t qualify if there is too much equity in their home.  In a chapter 13 they could then keep the home and continue to make payments on it in the 13.  One must always be careful that you do not violate the “best interests of creditors test”.  This is where the creditors have the right to demand that they get as much in a chapter 13 as they would in a chapter 7 liquidation.

The 13 differs from the 7 in that it is a payback plan where the debtor makes payments to the trustee for from 3 to 5 years.  In this period the debtor pays back some or all of his debts.  Most plans pay only a percentage of the debts but some do pay back 100%.  After the payback period is over then the unpaid debts (if there are any) will be discharged.

But why pay back the debts if you can discharge and escape them?  There are many reasons and one is the income limits of a 7 discussed above.  If you exceed these income limits then you cannot file a 7.  Debtors also file chapter 13s to take advantage of the lien strip and the cramdown.

The cramdown allows you to write down loans to the value of the property and is useful if you have property that is underwater.  The lien strip allows you to strip off or eliminate a second mortgage on a home if it is completely unsecured.  So if you have a home that is worth less than the first mortgage then the entire second mortgage can be eliminated after the 5 year payment plan is over.

Both of these cannot be done in a chapter 7 and if you want a cramdown or a lien strip then the chapter 13 is your chapter.  If your income is too high then a chapter 13 also makes sense.  There is one more advantage though to a chapter 13.  It can be dismissed by the debtor at any time.  Once you file one you are not locked in like you are with a chapter 7.

The disadvantage though is that you are locked into paying a trustee for a period of five years if you want to complete the plan and get a discharge.  Most chapter 13 fail because people can’t make these regular payments for five years to a trustee.  According to one article I read as many as 92% of them fail and are dismissed or converted to a chapter 7.  This is a very high fail rate and this is the reason why most people file chapter 7s.

You can pay a chapter 13 bankrupty off early though if you have the money.  So if you payments are $300 per month and you are three years in you could pay off the remaining two years early and get out of the 13.  Most people though don’t have the money to do this.

You should consult a bankruptcy attorney to see which chapter is right for you.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation about a chapter 11 bankruptcy or for any other advice about bankruptcy or debt at (619) 702-5015.   For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

What is a Chapter 11 bankruptcy?

A chapter 11 bankruptcy is a business bankruptcy that allows businesses to re-organize, shed some debt, and continue in business if at all possible.  It was created to save businesses and jobs by giving them time to pay off some of their debts.  After a chapter 11 is filed a creditors committee is set up to approve a reorganization plan unless it is a small business and then a creditors committee is often not necessary.

The business owner then becomes the debtor-in-possession and he/she then runs the business.  Individuals can file for chapter 11 if they have too much debt for a chapter 13.  A chapter 11 is very useful in real estate cases where people are behind on mortgage payments and they need time to catch up.  In a chapter 11 liens can be avoided, debts can be reduced, leases and contracts can be rejected and thus it can be very advantageous.

Filing one is a very difficult and lengthy and expensive process though as many motions need to be filed along with an eventual reorganization  plan.  You are constantly in court and it s possible to lose managerial control of the business if a creditor demands it.  Often people believe want to file a chapter 11 but it is sometimes not the best course of action.

When do you file a chapter 11 bankruptcy?

When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11.

In most Chapter 11 cases, the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court.

Chapter 11 bankruptcy retains many of the features present in all, or most bankruptcy proceedings in the United States. It also provides additional tools for debtors as well. Most importantly, 11 U.S.C. § 1108 empowers the trustee to operate the debtor’s business. In Chapter 11, unless appointed for cause, the debtor acts as trustee of the business.

Bankruptcy affords the debtor in possession a number of mechanisms to restructure its business. A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business’ earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.

If the business’s debts exceed its assets, the bankruptcy restructuring results in the company’s owners being left with nothing; instead, the owners’ rights and interests are ended and the company’s creditors are left with ownership of the newly reorganized company.

Call (619) 702-5015 to speak to a knowledgeable attorney if you have any questions regarding this information.

For much more bankruptcy information see my websites at: www.farquharlaw.com or www.freshstartsandiego.com

What is a Chapter 20 bankruptcy?

It is really just one bankruptcy followed by another.  It is a chapter 7 followed by a chapter 13 which added together equals 20 so it is called a “chapter 20”.  Most people have heard of bankruptcy chapters 7, 11, and 13 but a chapter 20 is really just a combination of a 7 and a 13 and there is no official chapter 20 that you can file.

In a chapter 20 bankruptcy someone will first file a chapter 7 and get a discharge.  They then decide some time later to file a chapter 13 bankruptcy.  A chapter 20 is sometimes referred to as a “no discharge chapter 20” because the debtor is not entitled to a discharge in the chapter 13 if he filed it within 4 years of his chapter 7 according to section 1328(f) of the bankruptcy code.

One reason why people file a chapter 20 is because of the debt limits of a chapter 13.  Some want to file a chapter 7 to discharge the unsecured debt they owe to bring that debt within the limits of chapter 13.  Chapter 13s have specific debt limits and if you exceed them you could be forced into a chapter 11 which is far more complicated.  One strategy to avoid a chapter 11 is to file a chapter 7 to lessen the debt through the chapter 7 discharge and then do a chapter 13.  This would be an example of a “good faith” reason to file a chapter 20.

Another common reason why they would want to file a chapter 20 is because of the chapter 13 lien strip capability not offered in a chapter 7.  In a chapter 13 homeowners can strip (eliminate) second mortgages if they are completely unsecured.  Second mortgages are completely unsecured if you owe more on your first mortgage than the entire home is worth.  This leaves nothing (no equity in the home) to secure the second mortgage so it is in effect an unsecured debt.

But of course it is a lien that exists and will continue to exist on your house if you do nothing or even if you file a chapter 7 bankruptcy.  The lien will remain on you home virtually forever and the only way to get rid of an unsecured second mortgage it is to strip it off in a chapter 13 bankruptcy.

So some people try to get rid of their credit cards in a chapter 7 bankruptcy and then file a chapter 13 to strip the second mortgage.  If they just filed a chapter 13 without the prior chapter 7 they would have to pay some of the credit cards back in the chapter 13.  So it seems that filing a chapter 7 followed by filing an immediate 13 makes sense right?  After all you save all of those credit card payments you would have to make for 5 years in a chapter 13 right?

Wrong!  You cannot be seen to be manipulating the system just to get rid of your credit cards and then strip a mortgage. This would be an example of a “bad faith” bankruptcy filing and this would be challenged by the bankruptcy trustees in an adversary proceeding.  If you file one chapter and then another to create a benefit for yourself that would not exist in either chapter then that could be considered bad faith.  So you must not attempt to merely get a credit card discharge and then apply for a lien strip.

This tactic would be considered bad faith because if you filed a chapter 7 you would not be allowed the lien strip.  If you filed just a chapter 13 you would have to make payments to the credit cards for the length of the chapter 13 plan.  The courts will want you to pick one or the other but no both chapter in succession merely to seek maximum benefits.

One way to avoid a possible bad faith challenge to your chapter 20 is to show that there has been a subsequent change in your situation since the filing of the chapter 7.  If for instance you intended to surrender your house at the time of filing the chapter 7 but your situation substantially changes after your chapter 7 discharge then you may have a valid new reason to keep your home.  You could get a divorce or suffer a lessening of income for instance.  Then you could possibly do a chapter 13 to strip the second mortgage and this could prevent a bad faith challenge.  Courts examine chapter 20s carefully though so you should be aware of this increased scrutiny over your case when you attempt one.

It is also possible that housing values change and your second mortgage might become unsecured sometime after your chapter 7 discharges.  If you are in a period where housing values are declining then the value of your house may drop below the value of your first mortgage sometime after your chapter 7 is complete.  Now you can strip the lien in a chapter 13 whereas before you filed the chapter 7 you could not.  This would be a valid circumstance that could defeat a bad faith claim.   There are many other possible good faith circumstances in addition to these mentioned above.

Chapter 20s used to be more common.  Doing a chapter 20 became a problem after the 2005 bankruptcy law was passed.  This law can be interpreted to not allow a chapter 13 discharge unless 4 years have passed since the filing of a chapter 7.  (A second chapter 7 cannot be filed until 8 years have passed since a first chapter 7).  This prohibition is contained in section 1328(f) of the bankruptcy code which relates to discharge.

With this code section in mind the question then becomes how can you receive a discharge from your second mortgage after the chapter 13 plan is completed if section 1328 disallows such a discharge?  This can create problems for you as you proceed with the chapter 20 bankruptcy.

Most courts have maneuvered around this by turning to other sections of the code and they have allowed you to do a chapter 20 anyway.  Remember though that the possibility is still there that you will get a challenge if you attempt to do a chapter 20.  It appears that at this time the law is not completely settled and the courts are not in complete agreement on this issue of allowing a chapter 13 within four years of filing a chapter 7.

It also appears to help if new debt exists.  If some sort of new debt has been acquired post chapter 7 judges apparently like that.  It seems as if there needs to be something to make payments on in the chapter 13 and not just a lien to strip.

Bt I still believe that the safest thing to do though is to not run afoul of section 1328(f) at all.  Just wait the required 4 years after your chapter 7 to file a chapter 13 and strip your lien.  You then won’t be in violation of 1328 and there should be no argument to stop you from filing.  Nobody wants to buy a court challenge or court case when filing bankruptcy.

The additional advantage of waiting the full four years to comply with section 1328 is that it is a longer period in which to argue changed circumstances.  It is harder for anyone to argue bad faith if you waited a full four years after your chapter 7 to file a chapter 13.  This is because people don’t generally plan that long in advance and circumstances do naturally do change considerably in four years.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.   For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

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