Asaph Abrams Attorney at law

San Diego Bankruptcy

San Diego bankruptcy attorney

What is Chapter 13 Bankruptcy?

The thirteenth chapter of the United States Bankruptcy Code sets forth parameters for reorganization of personal and business debt by individuals.  You may file for chapter 13 bankruptcy alone or jointly with your spouse.  Basically, chapter 13 bankruptcy allows you to pay back a portion of your unsecured debt and cancel (discharge) the unpaid balance.   In other words, pay pennies on the dollar and walk away debt-free.  Chapter 13 bankruptcy is designed for persons with sufficient disposable income to allocate funds to 3- or 5-year payment plans to repay some or all debt.   

Can I really get rid of a second mortgage (what is a lien strip)? 

A common misconception is that a chapter 7 bankruptcy will let you get rid of a second mortgage.  It doesn’t.  But you can get rid of it through a chapter 13.  Sometimes.  Here’s the deal.  When you originally took out your second mortgage, the mortgagee or lender was protected by a security interest in your home.  If you defaulted, they could pursue foreclosure to recapture your obligation.  However, homes are upside down these days.  You need a self-contained-underwater breathing apparatus just to make it downstairs.  The current market value of the home may be less than just the balance on the first mortgage.   If that is the case, then the second mortgage can be characterized as unsecured. In conjunction with a chapter 13 bankruptcy, you can do a so-called “motion to avoid the second mortgage,” also known as a lien strip. What that accomplishes is that the second mortgage gets turned into your everyday dischargeable unsecured debt in bankruptcy, just like credit card debt.  Thus, upon completion of your chapter 13 bankruptcy, you cancel out the second mortgage, and often little or no payment would have been made on it.

Chapter 7 bankruptcy lets me cancel debt without paying anything.  Why file a chapter 13 bankruptcy and end up making payments?

There are both involuntary and practical reasons to file for chapter 13 bankruptcy. 

By legal necessity: if you earn above the state median and your debt is not mainly from business,  it is more difficult to qualify for chapter 7 bankruptcy.  

By practical necessity: a chapter 7 bankruptcy may not be desirable if it would liquidate property for settlement of debt.  If you are behind on mortgage or car payments, a chapter 7 bankruptcy may not preclude foreclosure or repossession. 

Chapter 13 bankruptcy plans allow you to catch up on arrears for secured property. 

Through a chapter 13 bankruptcy, you can lower the principal on a car loan if it was purchased over 910 days before filing.  You can even get rid of a second mortgage if: 1) the balance on the first mortgage is greater than the value of the home and 2) you successfully complete your chapter 13 bankruptcy.  

Chapter 13 bankruptcy also provides the framework for paying back certain taxes and other debts that wouldn’t be canceled by a chapter 7 bankruptcy.

Who can petition for chapter 13 bankruptcy?

Only people can. 

No joke.  But the distinction is limited to that between persons and businesses.  Only persons can file a chapter 13 bankruptcy.  Businesses can’t.  However, if you own your business, you can still file a chapter 13 bankruptcy to address business debt you are liable for. 

Here’s an oddity.  If you owe too much, you can’t do a chapter 13 bankruptcy.  Your unsecured debt must be under 360,475.  Your secured debts must be under $1,081,400.  For more discussion on these debt limits please see this entry in my blog.

If you previously received a chapter 7 bankruptcy or chapter 13 bankruptcy discharge, you don’t have to wait to file and begin a chapter 13 bankruptcy.  However, the law sets limits on when you can get the new chapter 13 bankruptcy discharge (meaning, cancel your unpaid balance of debt). If you have a prior chapter 7 bankruptcy discharge, you can’t get a chapter 13 bankruptcy discharge unless you file your chapter 13 bankruptcy four years after the filing date of that prior chapter 7 bankruptcy.

Can I file a chapter 13 bankruptcy if I previously filed a chapter 13 bankruptcy?

It’s an uncommon fact pattern (since in most cases, chapter 13 bankruptcies take at least 3 years), but if you had previously filed a chapter 13 bankruptcy and received a discharge, you can’t file another chapter 13 bankruptcy that results in a chapter 13 discharge until: at least 2 years have passed since you filed the prior chapter 13 bankruptcy.

There is no bar to filing a chapter 13 bankruptcy within 2 years after filing a prior chapter 13 bankruptcy that resulted in a discharge. However, if you don’t wait the prescribed 2-year period, then your subsequent chapter 13 bankruptcy will not end in a discharge, meaning you won’t eliminate any debt that you don’t actually pay for.  In other words, you wouldn’t get to pay pennies on the dollar.  Though, even without a discharge, you might benefit from court protection and the ability to distribute payments of debts over the course of up to 60 months.

Confusing, right?  Well, write your Congress-person. The rules are not my concoction.  and I’m glad to explain what it means to you.

Why would I want to file a chapter 13 bankruptcy?

If your income and expenses make it such that you cannot qualify for a chapter 7 bankruptcy, but you still need to file for bankruptcy, this may be your only option.  Additionally, if you have considerable assets to protect (e.g. too many savings or a luxury vehicle) you may still want to file a chapter 13 bankruptcy even if you qualify for a chapter 7 bankruptcy.  A chapter 13 bankruptcy will allow you to keep these assets while still ridding you of a balance on debts, which aren’t actually paid off in full during the plan.  Chapter 13 also permits  payment of arrearages, reduction of the principal on personal property loans as well as removal of second mortgages.  Many conditions apply, but we know the rules, fulfill them and achieve these goals for you. We ensure that you know your available forms of bankruptcy relief, so you may make an informed decision.

Why not just pay back debt without bankruptcy?

A repayment plan outside bankruptcy may be possible, but we see people who have gone that route with no success.  Chapter 13 bankruptcy can let you discharge credit card debt with little or no payment at all on it (all payments can go toward secured or priority debts).  Repayment plans outside bankruptcy don’t do that.

And chapter 13 bankruptcy does so much more.  You can catch up on secured loans over time when you’re hopelessly behind and facing repossession or foreclosure. 

Chapter 13 bankruptcy provides for reduction of principal on certain loans.  For example, you can adjust your car loan so that the principal matches the current market value (only if the car was purchased more than 910 days ago).  It can reduce interest rates and penalties.  When a first mortgage exceeds a home’s value, a chapter 13 bankruptcy can even wipe out junior mortgages.  

Primarily, a chapter 13 bankruptcy can achieve the ultimate benefit of chapter 7 bankruptcy.  It does so by wiping out unsecured debt, albeit through some payment (though often little or no payment is made on unsecured debt).  

Finally, a chapter 13 bankruptcy provides you with the court’s protection from any adverse actions by creditors.  It even protects your cosigners and codebtors from collection attempts on debt that you’re repaying.

The Details: How does a Chapter 13 bankruptcy work?

  1. We’ll meet: The bankruptcy consultation if free.  And this attorney is a nice guy, so it’ll be painless.

  2. You’ll complete an online questionnaire: This includes almost all of the information we’ll need in order to complete your bankruptcy petition.

  3. We’ll collect some paperwork: paystubs, tax returns, credit reports, property valuations, payoff statements, registrations, etcetera. We’re here to help direct you to find the right stuff.

  4. You’ll complete your Credit Counseling: about an hour-long class online or by phone.  From your home.  Not so bad. 

  5. Interview with the Attorney: to make sure all the t’s are crossed and i’s dotted.

  6. We will prepare your Bankruptcy Petition accompanied by a Payment Plan.  The plan will usually last for either 36 or 60 months and provide for a monthly payment toward what’s usually a small percentage of your debt.

  7. We file your Petition and Plan with the Bankruptcy Court: it’s our job to do it right and ensure the process is smooth.

  8. The Automatic Stay goes into effect: immediately, we’ll have  the Bankruptcy Court order a stay or stop on all your collections, repossessions and foreclosures.  Breathe a sigh of relief.

  9. You need to start making more monthly payments.  These are paid to a case trustee, who then distributes payments among your creditors.

  10. If we are getting rid of a second mortgage: we will need submit a special motion to the Court

  11. We will attend what’s called a meeting of creditors.  Generally, no creditors appear and it boils down to a brief interview with your case trustee.  The trustee will have examined your petition carefully and checked for consistency between statements and accompanying evidence.  Consistent with your income and expenses, it’s his job to have you pay as much as possible into the plan.  It’s your attorney’s job to ensure that you are not compelled to pay more than you need to.  Sometimes the trustee and debtor’s attorney agree and your plan is set for “confirmation,” which results in a Court Order that cements your plan. Other times, there may be disagreement between your attorney and the trustee.  Your matter would then be set for a hearing before a Bankruptcy Judge, before it could be confirmed (finalized).

  12. You complete your debtor education: Another approximately one-hour online or telephonic course.  It’s called a Financial Management Course and it’ll give you some ideas how to manage your limited budget.

  13. Debts be gone (Order of Discharge): at the end of your generally 36- or 60-month plan, you’ll receive your order of discharge.  This means that the unpaid balances on your unsecured debts will be canceled.   Any unpaid portions of student loans will still be due.  Priority debts like recent taxes can be paid through a chapter 13 plan, but you don’t  get  to pay pennies on the dollar.  You have to pay Uncle Sam the full dollar.  Older taxes are dischargeable under certain conditions.

When will my debts be discharged in a chapter 13 bankruptcy?

At the end of your approved chapter 13 bankruptcy payment plan (either 36 or 60 months), your remaining unsecured debts will be discharged.

Is there still an automatic stay when you file for chapter 13 bankruptcy?

Yes. As soon as we file your bankruptcy the stay goes into effect.  This protects you from creditor abuse, harassment and seizure of property.

How long is the automatic stay in chapter 13 bankruptcy good for?

The automatic stay is good for as long as you are making your chapter 13 bankruptcy plan payments or the chapter 13 bankruptcy plan is active.  Once you receive your discharge, debts are canceled. 

Can I file a chapter 13 bankruptcy even if I'm under the median income?

If you have enough income left over after our necessary expenses to complete an approvable chapter 13 bankruptcy payment plan, then yes.  This is a relatively complicated calculation though, which would require going through all of your income sources, expenses, and outstanding debts before we can make that determination.

How much money do I have to pay into the chapter 13 bankruptcy payment plan?

If you earn below the median income level, then we commit all your disposable income into the chapter 13 bankruptcy plan.  That means what’s left over at month’s end after you’ve made all reasonable and necessary living expenses. If you earn above the median income, then we must perform a “means test” analysis. Which means, a partially objective measure of your... means to pay back your debt.   This a  test of how much money you “should” have available to pay back debt.  The starting point of the analysis is your gross income.  We then subtract from that your involuntary deductions as well as your secured debt obligations.  We further subtract standard allowances determined by the Internal Revenue Service.  Some actual expenses are also factored in.  What’s left over needs to go into your chapter 13 bankruptcy payment plan.  The monthly payment may be increased if your actual expenses happen to be lower than IRS standards or if you have property that is not covered by the limited exemptions.  Payments are made to a chapter 13 trustee, an attorney appointed by the Dept. of Justice.  The trustee generally collects a 10% administrative fee, then distributes the remainder of the payments among your creditors.  He will also pay your hardworking attorney out of your payment plan.

Why file a chapter 13 bankruptcy if I have to pay back my debts?

There are several reasons to file for chapter 13 bankruptcy.  First, you generally won’t be paying all your debts back: you may be paying but a small fraction. Second, the Federal Court orders your protection from creditors, while you pay off the reasonable amounts due under the payment plan. Third, chapter 13 can be used to “cram down” the principal you owe on your car and other secured assets (if the collateral was purchased long enough before filing).  Fourth, if you owe more on a first mortgage then your home is worth, chapter 13 bankruptcy can wipe out the second mortgage.  Fifth, interest and penalties can be reduced. When you have finished making your chapter 13 bankruptcy plan payments, remaining unsecured debts are simply discharged and you can move on with your life.

Will a chapter 13 bankruptcy allow me to keep my house?

Yes.  What makes a chapter 13 bankruptcy so appealing is that it allows you to keep all of your assets.  Of course, you have to stay current on your first mortgage.  But, you may not have to pay on your second mortgage. When you originally took out your second mortgage, it was secured by value in your home.  But due to dropping values, many second mortgages are not actually secured anymore.  In other words, you owe more on the first mortgage than the home is worth.  In that situation, a motion to the bankruptcy court would be made to “strip” off the second mortgage.  That means your second mortgage would be re-characterized as a non-secured debt.  It would be treated like a credit card debt that can be canceled upon completion of your chapter 13 (discharged) even if you paid nothing on it (or pennies on the dollar).  If you have a $100,000 second mortgage, then that’s quite a deal.  It will enable you to build equity in your home.

Will a chapter 13 bankruptcy prevent a foreclosure?

If you’re in default on your mortgage, we will write a chapter 13 bankruptcy plan that enables you to get caught up on your arrears.  The mortgage arrears can be be paid over the course of 5 years.  Outside bankruptcy, the banks want you to pay the full past-due balance in order to reinstate your mortgage.  Of course, you’ll need to be able to afford the monthly payments going forward. Chapter 13 does not modify your mortgage terms.

Chapter 13 Bankruptcy

San Diego bankruptcy attorney

To discuss your particular situation, please call (858) 344-0500 to schedule your free consultation.