Why shouldn’t I just take
out a debt consolidation loan or refinance my mortgage?
What is a debtor?
A debtor
is a person who owes someone else money. On the other hand, a creditor is someone
who is owed money.
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What is chapter 13 bankruptcy and how does it work?
Chapter 13 is that section of the Bankruptcy Code
under which a person may repay all or a portion of his or her debts under the supervision
and protection of the bankruptcy court. In a chapter 13 case, the debtor must submit
to the court a plan for the repayment of all or a portion of his or her debts. The
plan must be approved by the court to become effective. If the court approves the
chapter 13 plan, most creditors will be prohibited from collecting their claims from
the debtor during the course of the case. The debtor must make regular payments to
the chapter 13 bankruptcy trustee, who collects the money paid by the debtor and disburses
it to creditors in the manner called for in the plan. Upon completion of the payments
called for in the plan, the debtor is released from liability for the remainder of
his or her dischargeable debts. Note all creditors need to be paid through the chapter
13 plan. In fact most mortgages and some vehicle loans are usually paid outside the
chapter 13 plan.
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When should I consider filing a chapter 13 bankruptcy?
Chapter 13 is usually preferable for a person who:
• wishes
to repay all or most of his or her unsecured debts and has the income with which to do so
within a reasonable time;
• has
valuable nonexempt property or has valuable exempt property securing debts, either of
which would be lost in a chapter 7 case;
• is
not eligible for a discharge under chapter 7;
• has
one or more substantial debts that are dischargeable under chapter 13 (i.e. certain
taxes) but not under chapter 7; or
• has
sufficient assets with which to repay most debts, but needs temporary relief from creditors
in order to do so.
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Do I need a lawyer to file a chapter 13 bankruptcy petition?
No, but the process is not as straight forward as
you might believe. The wrong answer to a few simple questions can lead to dire results
such as the dismissal of your chapter 13 bankruptcy case. It is highly recommended that
you retain competent legal representation.
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Does my spouse have to file chapter 13 bankruptcy with me?
No. On the other hand, it may be a good idea because of the amount of
joint debts. Moreover, under Texas law, debts incurred during the marriage are deemed to be community debts.
As such, a spouse that does not sign loan documents may be found personally liable for such debts to
the extent there may be recovery had against such spouse’s interest in any non-exempt community
property assets.
Latimer v. City National Bank of Colorado City, 715 S.W.2d 825,
827 (Tex. App.-Eastland 1986, no writ). Note, however, that one of the benefits of
chapter 13 over chapter 7 is the fact that joint debtors benefit from the automatic
stay to the same extent as does the debtor as regards consumer debts.
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Do I have to file chapter 13 bankruptcy against ALL of my creditors?
Yes. Whether the debt is owed to a bank, a relative
or a friend, all creditors must be listed. When you sign your chapter 13 bankruptcy
schedules you are stating under penalty of perjury that all of your creditors have
been listed. An intentional failure to list a creditor may constitute cause for conversion
or dismissal and would prevent that debt from being discharged as it was not provided
for in the chapter 13 plan. On the other hand, mistakes do happen, and in those instances
you will usually be allowed to amend your schedules.
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What is a chapter 13 discharge?
It is a court order releasing a chapter 13 debtor
from all dischargeable debts and ordering creditors not to collect them from the debtor.
A debt that is discharged is one that the debtor is released from and does not have
to pay. There are two types of chapter 13 discharges: a full or successful plan
discharge, which is granted to a debtor who completes all payments called for in the
plan, and a partial or unsuccessful plan discharge, which is granted to a debtor who
is unable to complete the payments called for in the plan due to circumstances for
which the debtor should not be held accountable. A full chapter 13 discharge is broader
and discharges more debts than a chapter 7 discharge, while a partial chapter 13 discharge
is similar to a chapter 7 discharge.
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What is a chapter 13 Plan?
It is essentially a contract approved by the Bankruptcy
Court binding the creditors of the debtor and the debtor to certain terms respecting
the repayment (or partial repayment as the case may be) of certain debts. The chapter
13 plan will state how much money or other property the debtor will pay to the chapter
13 trustee, how long the debtor will make payments to the chapter 13 trustee, how much
will be paid to each of the creditors and when, and which creditors will be paid
outside of the chapter 13 plan.
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What is a chapter 13 trustee?
A chapter 13 trustee is a person appointed by the
Office of the United States Trustee to collect payments from the chapter 13 debtor
for the purpose of disbursing those payments to the debtor’s creditors in the
manner set forth in the debtor’s chapter 13 plan, and to administer the debtor’s
chapter 13 case until it is closed.
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Must I pay all of my creditors in full under a chapter 13 plan?
No. While all fully secured obligations and
certain priority debts, such as debts for alimony, maintenance and support and
debts for taxes, must be paid in full under a chapter 13 plan, only a percentage
of the amount due and owing your general unsecured creditors need be paid. The
amount of money paid to your general unsecured creditors will vary depending upon
the amount of net disposable income available for distribution.
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How much will I need to pay to the chapter 13 bankruptcy trustee?
Usually all of the net disposable income of the debtor
and the debtor’s spouse for a period of three to five years must be paid to the chapter 13
trustee. Net disposable income is income received by the debtor and his or her spouse
that is that amount of income over and above what is not reasonably necessary for the
support of the debtor and the debtor’s dependents.
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When must I start making payments to the chapter 13 bankruptcy trustee?
The debtor must begin making payments to the chapter
13 trustee within 30 days after the debtor’s plan is filed in the court, and
the plan must be filed with the court within 15 days after the case is filed. The payments
must be made regularly, usually on a monthly basis. If the debtor is employed, some
courts require the payments to be made by the debtor’s employer, otherwise, the
payments can be made by the debtor.
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How does chapter 13 deal with joint, co-signed or guaranteed debts?
If a joint, cosigned or guaranteed CONSUMER debt is
being paid in full under a chapter 13 plan, the creditor may not collect the debt from
the joint debtor, cosigner or guarantor. However, if a consumer debt is not being paid
in full under the plan, the creditor may collect the unpaid portion of the debt from
the joint debtor, cosigner or guarantor.
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Will a chapter 13 bankruptcy stop my creditors from calling?
Yes. Section 362(a) of the Bankruptcy Code (the
automatic stay provision) prevents creditors from taking any action to collect
debts. The automatic stay also prevents secured creditors from foreclosing, seizing,
and repossessing their collateral. Once a creditor learns of the chapter 13 bankruptcy
filing, that creditor must immediately stop all collection efforts.
Creditors receive notice of the chapter 13 bankruptcy from the Bankruptcy Court based
upon the information you provided in your bankruptcy schedules. The notification
process will often take one or two weeks. In the interim, when a creditor calls you
should advise them of the bankruptcy filing and provide them with the chapter 13
bankruptcy case number and the date the case was filed. Some cases, however, may
require a more proactive approach. In that situation you or your attorney should
contact the creditor immediately after filing the bankruptcy petition. Examples
of situations requiring immediate notification include: (1) pending litigation,
(2) possible repossession, or (3) possible foreclosure.
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Will a chapter 13 bankruptcy stop a foreclosure or repossession?
Yes. In fact, chapter 13 is the ideal vehicle
to save your home from an impending foreclosure. Not only will a chapter 13 bankruptcy
stop the foreclosure (assuming timely notice is provided to the secured lender), but
it will allow you up to three years to bring your mortgage payments current. If you
have received a notice of foreclosure, you should give serious consideration to filing
a chapter 13 bankruptcy petition.
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Who is eligible for relief under chapter 13 of the Bankruptcy Code?
Any natural person may file under chapter 13 if the person:
• resides
in, does business in, or owns property in the United States has regular income;
• has
unsecured debts of less than $290,525;
• has
secured debts of less than $871,550;
• is
not a stockbroker or a commodity broker; and
• has
not been a debtor in another bankruptcy case that was dismissed within the last 180 days
on certain technical grounds.
A person meeting the above requirements may file under chapter 13 regardless of
when he or she last filed a bankruptcy case or received a bankruptcy discharge.
Corporations, partnerships and limited liability companies may not file for relief under
chapter 13.
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May a person who is self-employed file for relief under chapter 13 of the Bankruptcy Code?
Yes. A self-employed person meeting the eligibility
requirements for a chapter 13 debtor may file chapter 13 bankruptcy petition. A debtor
engaged in business may continue to operate the business during the chapter 13 case.
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If I have been sued by one of my creditors, will a chapter 13 bankruptcy stop
the lawsuit?
Yes. A chapter 13 bankruptcy case will stop most
civil lawsuits and IRS proceedings. On the other hand, a chapter 13 bankruptcy case will
not usually stop divorce or criminal proceedings.
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May a person whose debts are being administered by a financial counselor (i.e. Consumer
Credit Counselors) file a chapter 13 bankruptcy?
Yes. A financial counselor has no legal right to
prevent a person from filing any type of bankruptcy case, including a chapter 13 case.
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What is required for court approval of the chapter 13 plan?
The Bankruptcy Court may confirm a chapter 13 plan
if: (1) the plan complies with the legal requirements of chapter 13, (2) all required
fees, charges, and deposits have been paid, (3) all priority claims will be paid in full
under the plan, (4) the plan was proposed in good faith, (5) each unsecured creditor
will receive under the plan at least as much as it would have received had the debtor
filed under chapter 7, (6) it appears that the debtor will be able to make the required
payments and comply with the plan, and (7) each secured creditor receives no less than
the value of its collateral (by accepting the plan, by being paid that value, by surrender
of the collateral, or by being paid pursuant to the original terms outside of the plan).
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What if the Bankruptcy Court does not approve a filed chapter 13 plan?
If the Bankruptcy Court will not approve the Chapter
13 plan proposed by a debtor, the debtor may modify the plan and seek Bankruptcy Court
approval of the modified plan. The Bankruptcy Court will usually give specific reasons
for refusing to confirm th e chapter 13 plan. This affords the debtor the ability to
appropriately modify the chapter 13 plan in a manner that is acceptable to the Bankruptcy
Court. A debtor who does not wish to modify a proposed plan may either convert the plan
to chapter 7 or dismiss the case.
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What if the debtor is temporarily unable to make the chapter 13 payments?
Depending on the reason for not making the chapter 13 plan payments,
there are at least three options available. One, convert the case to one under chapter 7.
Two, modify the chapter 13 plan to reflect your new budget. Three, work out an arrangement
with the chapter 13 trustee to bring the plan payments current.
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What if the debtor incurs new debts or needs credit during a chapter 13 case?
There are three situations in which a chapter 13 debtor
will incur post-petition debt. These are: (1) debts for taxes that become payable while
the case is pending, (2) utilities that become payable while the case is pending, and (3)
consumer debts arising after the filing of the case that are approved by the Bankruptcy
Court which debts are necessary for the debtor’s performance under the plan. Other than
the above debts, a chapter 13 debtor should not be incurring any debt during the life of the
chapter 13 plan.
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What should the debtor do if he or she moves while the case is pending?
The debtor should immediately notify the Bankruptcy Court
and the chapter 13 trustee in writing of the new address. Most communications in a
chapter 13 case are by mail, and if the debtor fails to receive an order of the Court
or a notice from the chapter 13 trustee because of an incorrect address, the case may be dismissed.
More importantly, however, is the fact that any move will likely mean substantial changes to
your budget. You will need to review your bankruptcy schedules and your chapter 13 plan to see what
has changed. At this point you will likely need to modify your chapter 13 plan. Try to accomplish before you
move as the relief requested might require a hearing.
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What if the debtor later decides to discontinue the chapter 13 case?
A chapter 13 debtor has the absolute right to either
dismiss or convert their chapter 13 bankruptcy case at any time for any reason.
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Must all of my creditors approve of my chapter 13 plan?
No. A chapter 13 plan, in order to become effective,
need only be approved by the Bankruptcy Court. Unlike chapter 11, the chapter 13
creditors are not afforded the opportunity to vote on the plan. The Bankruptcy Court
cannot, however, approve a plan unless the secured creditors are dealt with appropriately. The
Bankruptcy Court will approve the chapter 13 plan only if: (1) the secured creditors accept
the proposed plan; (2) the secured creditor retains its lien and is paid the full amount
of its secured claim under the plan; (3) the debtor surrenders the collateral to the
secured creditor; or (4) the secured creditor is paid outside of the chapter 13 plan
and its claim remains unmodified by the chapter 13 plan. Also note that unsecured creditors
are permitted to file objections to the chapter 13 plan, and that these objections must be
ruled on by the Bankruptcy Court before it can approve the chapter 13 plan.
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Can I pay my bankruptcy lawyer with a credit card or from a cash advance?
No. It would be unethical for any consumer bankruptcy
lawyer to accept payment by credit card knowing that such debt might be discharged
through subterfuge. By agreeing to accept legal fees on a credit card, or indirectly
from a cash advance obtained for paying a bankruptcy attorney, the bankruptcy attorney is participating in a fraud upon the
Bankruptcy Court as well as upon the issuer of the credit card. Such debts are likely
not dischargeable (cash advances and charges for luxury goods exceeding $1,150.00 are
presumed to be nondischargeagble) and any effort to cloke the charge or cash advance
constitutes fraud. This is perhaps best illustrated by the following hypothetical
question: Would a credit card issuer, knowing that the credit card charge proceeds would
be used to pay your bankruptcy attorney, authorize the charge? Of course not! Don’t do it.
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Will filing chapter 13 bankruptcy affect my credit?
Yes. All events affecting your credit are recorded.
That includes prompt payments, slow pays, charge-offs, and judgments as well as a
bankruptcy filing. If you are currently contemplating bankruptcy, then it is likely
that your current credit rating has already been negatively impacted. A chapter 13
bankruptcy discharge will usually remain on a credit bureau for seven years, whereas a
chapter 7 discharge will likely remain on a credit bureau for ten years. However, much,
if not all, of the negative impact can be ameliorated. A chapter 13 debtor that
continues to make payments timely to creditors paid outside of the chapter 13 plan
will have very little difficulty obtaining additional credit at reasonable rates upon
discharge. The reality is that most people find they are able to completely rebuild
their credit within 3 to 5 years.
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How long will a chapter 13 bankruptcy appear on my credit report?
A chapter
13 bankruptcy discharge will usually remain on your credit report for a period of seven years.
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Will filing chapter 13 bankruptcy affect my job?
No. First, you should note that although bankruptcy
records are of public record, most employers will never learn of the bankruptcy unless
you tell them. Second, if you owe money to your employer you will be required to list
your employer as a creditor on your bankruptcy schedules. In so doing, they will
learn of the bankruptcy filing from the Bankruptcy Court. Lastly, the Bankruptcy Code
specifically prohibits any employer from discriminating against you because you filed
a chapter 13 bankruptcy petition.
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Can I keep any credit cards after filing a chapter 13 bankruptcy petition?
Absent Bankruptcy Court approval -- No. While you are
in chapter 13 you are not allowed to borrow any money absent prior approval from the
Bankruptcy Court. That includes using any credit cards.
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Why doesn’t Boyd•Veigel, P.C., advertise to file a chapter
13 bankruptcy for “zero down”?
The advertisements you see respecting “zero
down” bankruptcy are misleading and, in our opinion, unethical. Such adds lead
you to believe you are receiving a benefit not offered by other lawyers. That is
simply not the case. Attorneys advertising “zero down” bankruptcy will
not perform any work until they are paid at least something -- just like all other
bankruptcy attorneys. Moreover, most chapter 13 bankruptcy lawyers will allow a large portion of their
fees to be paid through the chapter 13 plan. The “zero down” bankruptcy advertisement
is little more than a ploy to get you in the door and to sign their retainer agreement.
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Why shouldn’t I just take out a debt consolidation loan or refinance my mortgage?
This is an excellent question, and one I wish more
people would ask. It is unfortunate, many people who take out debt consolidation loans
to pay off credit card debt often lose their homes to foreclosure. You can never borrow
your way out of debt. Robbing Peter to pay Paul solves nothing.
On the surface, a debt consolidation loan appears
to be a good thing. The debt consolidation loan lowers the amount of payments due
each month. The debt consolidation loan to eliminates large monthly credit card
debt payments at a high rate of interest and replaces them with a substantially
lower monthly payment at a reduced rate of interest. While this looks great, looks
can be deceiving.
First, though the interest rate on a debt consolidation
loan is lower than that on your credit cards, you will pay more in interest and finance
charges over the life of the loan than you might realize because of the extended term.
Second, you have converted an unsecured debt that could be wiped out in bankruptcy
into a secured debt that cannot be wiped out in bankruptcy absent surrendering your
home. Third, if the only way you are able to make the new lower payment on your
debt consolidation loan is to continue using your credit cards (albeit to a lesser
degree than before) you now risk foreclosure.
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Boyd•Veigel, P.C., is proud to represent clients in Plano, Allen, Frisco, McKinney, The Colony, Lewisville, Greenville,
Dallas, Richardson, Arlington, Addison, Mesquite, Rockwall, Carrollton, Sachse, Collin County, Dallas County, Denton County, Hunt County,
and all surrounding areas.
