TUCSON BANKRUPTCY ATTORNEY

Divorce & Bankruptcy

For some Tucson families, a chapter 13 bankruptcy provides an excellent debt relief option. A chapter 13 bankruptcy is routinely mischaracterized as an unattractive "repayment plan." In actuality, a chapter 13 bankruptcy plan provides incredible debtor assistance (See "Benefits" below) for particular debtors.

Benefits of a Chapter 13 Bankruptcy

Home: A chapter 13 bankruptcy can protect a home from foreclosure & remove ("strip") a second mortgage. The home is protected from foreclosure by including reimbursement terms within the bankruptcy, thereby allowing the loan to become current. In addition, the second mortgage can be removed from the home through a "lien avoidance" procedure in bankruptcy. To strip junior liens (such as a 2nd mortgage), the home has to be worth less in value than the amount of the outstanding first mortgage. In this event, the junior lien(s) can be legally determined as "unsecure" and can be eliminated. The value of the home is determined by conducting a residential appraisal.

Vehicle: A chapter 13 bankruptcy also provides Tucson debtors with the ability to favorably renegotiate the terms of the vehicle financing by lowering the payoff, the interest rate, and payment. If a vehicle has been owned for a period that exceeds 910 days, the vehicle (as well as other personal property) can be "crammed down." This means the property is paid off at its value, versus the outstanding loan balance. Next, a chapter 13 reduces interest rates on personal property debt to prime plus a one point margin (this number recently has equaled 3.5%). Finally, because a chapter 13 plan is 3 - 5 years in duration, the vehicle payments can be averaged over this new period (called "re-amortization"), which can drastically reduce a debtor's payment within the plan.

General Unsecured Debt: Finally, and most importantly, a chapter 13 provides organized and effective debt consolidation accomplished through the court. All creditors much cooperate. The payoff on outstanding debt is primarily gauged on a debtor's ability, therefore enabling most debt to be paid off a fraction of what is actually owed. In addition, most creditors cannot charge interest or finance fees (student loans are a common exception).

Chapter 13 Overview

A key to a successful chapter 13 bankruptcy is for Tucson debtors to work with an experienced chapter To file a chapter 13, a consumer must have regular and consistent income, whether it be through wages or self-employment. An Arizona corporation or partnership is not eligible for a chapter 13 discharge. The debtor must also have less than $360,475 in unsecured debt and less than $1,081,400 in secured debt (11 U.S.C. ? 109(e)). If a consumer's debts exceed these amounts, the debtor can explore alternative options of debt settlement or a chapter 11 bankruptcy. Other requirements include no prior bankruptcies within the preceding four years (that received a discharge), each debtor must complete approved credit counseling with 180 days prior to filing (11 U.S.C. ? 109).

The chapter 13 plan will be 3 - 5 years in duration. The actual payment amount on a chapter 13 bankruptcy will vary depending upon multiple factors, including a "means test" analysis, a cash flow calculation, the amount of priority debt, the amount of non-exempt assets a client wishes to retain, diversions of income, etc. In many cases, the plan payment changes through the life of the bankruptcy to accommodate the debtor(s). It is understood that a debtor's situation may change of the course of 3 - 5 years, in which case the plan can be readily amended or modified. This repayment amount is calculated by the debtor's lawyer, which must comply with the Federal Bankruptcy code, state law, and local court rules. In addition, each chapter 13 has their own preferences, legal perspective, and case instructions. If the debtor(s) are above the median income, the plan must be 5 years in length or provide 100% repayment to general unsecured creditors. If the debtor is beneath the median income, there is more freedom in determining the plan length, ranging from 3 - 5 years.

Chapter 13 Bankruptcy Process

The initial bankruptcy process is similar to that discussed in our chapter 7 review (see Filing A Chapter 7 Bankruptcy). The case is commenced upon filing a petition, consisting of various financial schedules that disclose income, expenses, debts, statement of financial affairs, etc. However, a chapter 13 petition also requires that a repayment "plan" be filed as well. After filing, the trustee will send the debtors a questionnaire and request for supplemental documentation.

Debtors will meet the trustee at the 341 Meeting of Creditors, which is typically scheduled 40 days from the date of filing. After the hearing, the trustee will submit her "trustee objection." This filing is will include standard language, as well as, specific objections that she may have to the particular plan. After the trustee objection, the attorney works with the debtor to cure any issues and then a "stipulation of confirmation" is filed with the court.

The confirmation is the amended plan that is approved by the trustee, debtor, debtor's attorney, and any objection creditors. All parties must sign the stipulation. This document is then submitted to the court for approval. Once the plan is confirmed, the debtor merely continues to make payments for the remaining duration of the plan.

The Plan

The chapter 13 plan provides a proposed reorganization that includes the classification of debt. Debts are categorized as priority, secured, and unsecured. A "priority debt" receives its special status by the bankruptcy code, and commonly includes most taxes, domestic support obligations, and administrative costs tied to the bankruptcy proceeding. Secured debts are those claims that have liens against underlying collateral, which commonly includes homes, vehicles, furniture, and jewelry. Unsecured debts are those which there is no underlying collateral.

The bankruptcy code requires that priority claims be paid in full unless such creditor agrees otherwise. However, with a domestic support obligation, the debtor is only required to contribute all of their "disposable income" (11 U.S.C. ? 1322(a)). With secured debt, such as a vehicle, the plan must propose the amount to be repaid (which will vary depending on whether the property was owned for more or less than 910 days), and include interest that is set at Prime rate plus a very low margin.

Home loans are repaid respective to the original or modified terms that predate the filing of the bankruptcy. If a debtor is current on their mortgage, they will continue to pay the lender directly. If delinquent, the debtor will make the mortgage payment through the trustee, called a "conduit" payment. If the second mortgage is wholly unsecured, meaning the value of the home is worth less than the outstanding first mortgage, the second mortgage will be treated as an unsecured debt and eventually eliminated.

General unsecured debt is repaid based on a debtor's ability. This is determined by a debtor's projected budget, which includes gross income from all sources, minus monthly expenses. The debtor, at minimum, must pay unsecured creditors as much under the plan, as the unsecured creditors would have received had the debtor filed a chapter 7 bankruptcy (called "chapter 7 reconciliation amount")(11 U.S.C. ? 1325).

The length of the plan, known as the "applicable commitment period" depends on whether the debtor is above or below the median income. If the debtor is beneath the median income, the applicable commitment period is three years. If the debtor is above the median income, the applicable commitment period is five years (See Hamilton v. Lanning, 130 S.Ct. 2464 (2010) & 11 U.S.C. ? 1325(d)). An above median income debtor can reduce the applicable plan length by paying the unsecured debtors in full.

Living within a Chapter 13 Bankruptcy

A chapter 13 bankruptcy provides a comprehensive debt consolidation option with various enhanced benefits for the debtors. With the benefits of debt relief come the reality of living on a confined budget. The budget is designed to accommodate a debtor's fundamental needs and monthly expenses with balancing the goal of optimized repayment.

For some debtors, the chapter 13 plan actually relieves financial pressure. This is accomplished by consolidating minimum payments on credit cards, car payments, mortgage arrearages, taxes, and other outstanding debts, which effectively improves a debtor's monthly cash flow. Inversely, if a debtor has not been repaying debt, the chapter 13 plan can be confining at first. In both scenarios, the budget provides fundamental practices that can be followed long after the bankruptcy process has concluded.

Because the plan is three to five years in length, it is understood that life events will happen that may compromise a debtor's ability to make payments. Therefore, the chapter 13 plan can be amended or modified as necessary, or the proceeding can be converted to a chapter 7 bankruptcy, dismissed, or concluded with a hardship discharge. In addition, a debtor can replace vehicles and otherwise petition the court for assistance as necessary to facilitate the life of the plan.

In summary, the purpose of a chapter 13 is to provide debt relief. A chapter 13 is not designed to fail. To ensure success, the Tucson debtors should work with an experienced chapter 13 attorney that will provide clients with valuable insight on how to properly prepare for bankruptcy, as well as, walk them through the process.