Middletown Lawyers Help Clients through Chapter 13 Bankruptcy in New York
What is Chapter 13 bankruptcy?
The most common reasons for filing a Chapter 13 bankruptcy are:
- To save a home from foreclosure;
- To catch up on past due income tax payments, HOA payments, property tax payments, or car payments;
- To protect assets that would be liquidated if a Chapter 7 case were filed; or
- If the debtor does not pass the Means Test and is not eligible for relief under Chapter 7.
Chapter 13 bankruptcy differs from Chapter 7 because it is not a liquidation. Rather, Chapter 13, or a wage earner’s plan, offers certain benefits such as property protection and debt discharge in exchange for a promise to pay back all or a portion of your debts through a payment plan.
Why should I file for a Chapter 13 bankruptcy?
To begin, Chapter 13 does not necessarily require full repayment of all debts — only past-due secured debts (if the debtor wants to keep the collateral—usually a house) and priority debts (usually, child support or recent income taxes) must be paid in full. The amount you repay is based on your financial situation, including your income and the amount and type of debts you owe. This is discussed below in considerable detail.
Chapter 13 has many benefits that are not available under Chapter 7:
- You can keep your home — If you have defaulted on your mortgage, Chapter 13 can allow you to catch up on your past-due mortgage payments while under the protection of the automatic stay. Your Chapter 13 Plan requires monthly payments to be made to your Chapter 13 Trustee for a period of either 36 or 60 months, but the Trustee only pays your pre-bankruptcy mortgage arrears. In addition, each month you must also pay, directly to your mortgage holder, your regular mortgage payments as they come due during the pendency of your Chapter 13 case. If your property tax payments are not part of a mortgage escrow you must also make these tax payments directly to the taxing authority when they become due. To illustrate, assuming a 60-month Plan is filed by a debtor having a $2,000.00 mortgage payment who is 6 months behind (arrears total $12,000.00). Each month after filing the debtor must pay the $2,000.00 mortgage payment directly to the lender and make a payment to the Chapter 13 Trustee of approx. $225.00 (which would include the Trustee’s 10% statutory commission) for 60 months. At the end of the 60-month Plan period the arrears are caught up and you are current on your mortgage.
- You can keep additional property — If you have property with significant equity or other property that is not exempt from liquidation, Chapter 13 can allow you to keep that property where it would be liquidated in a Chapter 7 proceeding. You simply pay to your unsecured creditors (via the Chapter 13 Trustee payments) the cash value of the non-exempt property, less the Chapter 7 Trustee’s expenses of liquidation (usually his statutory commission), over the length of the Plan.
- Discharge – Chapter 13 can discharge certain debts that are non-dischargeable in Chapter 7. These debts include marital property settlements not in the nature of alimony or support, and willful and malicious damage caused to the property of others.
- Reduce amount owed on secured loans — Chapter 13 makes “strip-down” available. Strip-down allows you to reduce a secured loan to the value of the collateral, and pay that amount through your Chapter 13 Plan. For example, assume you took out a $20,000.00 loan to purchase a car but after 3 years the car is worth only $10,000 even though you still owe $15,000 on the loan. Strip-down allows you to reduce the loan amount to the $10,000 value of the property, which can be paid (along with required interest) through your Plan (which can be either 36 months or 60 months) via the monthly payments made to your Trustee.
- Eligibility — If you filed a Chapter 7 within the past 8 years and received your Discharge, or cannot pass the means test, then you are not eligible for Chapter 7. However, you may qualify for a Chapter 13 plan to reduce your debt burden.
- Avoid 2nd and 3rd mortgages — If your residence is worth less than what is owed on your 1st mortgage, any 2nd or 3rd mortgage can be avoided, meaning that the monthly mortgage payment no longer has to be made, and the unpaid mortgage balance is treated as just another unsecured debt.
- Avoid judicial liens – If title to your residence or other property is encumbered by a judicial lien that impairs your ability to claim an exemption authorized by statute, there are many instances where the judicial lien can be avoided.
- Reduce secured portion of income tax liens–In many instances an income tax lien can be bifurcated into a Secured Claim and an Unsecured Claim, with only the Secured Claim having to be paid in full. The allowed value of the Secured Claim can be limited to the value of the equity in your real and personal property (also referred to as “Cram Down“.
- Loss Mitigation—Debtors in both Chapter 13 and Chapter 7 can seek a mortgage modification through the Court’s Loss Mitigation program.
- Sell property and/or borrow money — Chapter 13 allows debtors to both sell their property and to borrow money while in bankruptcy, although Court approval is required in most (but not all) cases.
- Ability to dismiss case — Chapter 13 debtors have an absolute right to dismiss a case filed under Chapter 13, without a hearing, providing such dismissal is not based upon a bad faith motive.
- Recover seized assets—In certain circumstances a Chapter 13 debtor can recover title to or possession of property previously seized by creditors. This can be most helpful if the County has recently taken a deed to your property for non-payment of a nominal amount of property taxes.
What is the process for filing a Chapter 13 bankruptcy?
A Chapter 13 proceeding begins by meeting with an experienced bankruptcy attorney. If you decide that a Chapter 13 plan is in your best interest, your attorney files a petition with the bankruptcy court that includes:
- A repayment plan of three or five years, depending on means test results
- A schedule of income and expenditures
- A schedule of contracts and leases
- All recent tax transcripts
- A statement of financial affairs
- Proof of undergoing credit counseling
Following the filing of the petition, an “automatic stay” is triggered. The stay prohibits creditors from continuing most collection efforts, including foreclosure, against you and any cosigners to your debt. Even if you have not received plan approval yet, your first payment under your plan is due 30 days following the filing. A meeting is scheduled with your Chapter 13 Trustee, referred to as a “first meeting of creditors” or a “Chapter 13 Section 341 meeting” and a confirmation hearing follows approximately 45 days later. Most creditors have 90 days after the first meeting of creditors to file their “proofs of claim” (except for the government, i.e., IRS, NYS Tax Dept., etc., who have 180 days), so the first confirmation hearing is frequently adjourned because necessary claims (i.e., mortgage arrears, IRS claim, etc.) have not yet been filed. After all payments are made pursuant to the three- or five-year plan, a discharge is granted, your mortgage arrearages are completely caught up and all remaining unsecured debts are forgiven.
What are the Chapter 13 eligibility requirements?
For a debtor to be eligible for Chapter 13 relief the following criteria must be met:
- The debtor must be either an individual person or a married couple. Business entities such as corporations, LLC’s, partnerships and business trusts are not eligible for Chapter 13 relief.
- The debtor must have “regular income”, which fortunately is a loosely defined term that includes employment income (i.e., working for a pay check), income from operating a business, rental income, government assistance or benefits, etc.
- The debtor’s monthly net income must be more than his or her monthly cost of living expenses, so there is money left over each month to pay to the Chapter 13 Trustee.
- Effective June 21, 2022 the new total debt limit threshold for Chapter 13 eligibility is $2,750,000.00 in “non-contingent, liquidated debts” owed on the date of the bankruptcy filing. This new threshold limit does not distinguish between secured and unsecured debt, and the same limit applies to both the debt of a single individual filing a Chapter 13 or the aggregate debt of a married couple filing a Chapter 13. Absent further governmental action. this increased threshold limit will “sunset”, or expire, on June 21, 2024, at which time the powers that be in Washington will either extend it or modify it in some fashion. Only “noncontingent, liquidated” debts count toward determining eligibility so if you are being sued by someone for the random sum of $10,000,000.00, this amount does not count toward the debt limit threshold.
What are the Chapter 13 Plan confirmation requirements?
A debtor’s Chapter 13 Plan must satisfy the following “tests” in order to be confirmed by the Court:
- The Plan must be proposed in good faith. This is not usually an issue, although it can be if multiple bankruptcies are filed by a debtor (or by related parties jointly obligated on the same mortgage) in an order to fend off a foreclosure.
- The “best interest of creditors / Chapter 7 liquidation” test must be satisfied. Unsecured creditors, which include both general (i.e., non-priority) unsecured and priority unsecured creditors, must receive at least as much on their claim as they would have received if the debtor had filed a Chapter 7. As an example, assume a debtor owned a “widget” that was not exempt and was worth $6,000.00. Had the debtor filed Chapter 7 the widget would have been liquidated and the unsecured creditors would have received their pro rata portion of $4,650.00, which represents the value of the widget less the Chapter 7 Trustee’s statutory commission of $1,350.00. In Chapter 13, the unsecured creditors must receive their pro rata share of said $4,650.00, although it can be received over sixty (60) months. Note: the widget is not liquidated in Chapter 13. The debtor keeps the widget and pays its net cash value to the unsecured creditors over the length of the Plan.
- A debtor must devote all of their disposable income to the Plan, as determined by their budget and Means Test.
- The Plan must be feasible. The debtor must establish that they actually generate the income alleged in their bankruptcy schedules.
- Claims entitled to a statutory “priority” must be paid in full. These “priority” claims include recent income taxes, past due child support and unpaid fees owed to your bankruptcy attorney. In addition, past due mortgage payments must be paid in full if the debtor is trying to “save” the house.
How much will my monthly Trustee payment be?
That is “The $64,000.00 Question”, and the short answer is—it depends! The required monthly payment is very fact-specific. It is determined by application of the above “tests”, and the one that yields the highest monthly payment to creditors is the one that dictates what the minimum required monthly payment will be. To illustrate this, assume the following fact pattern: (1) debtors want to keep their house but are $12,000.00 behind on their mortgage; (2) debtor’s bankruptcy attorney has obtained a Court Order approving payment of $3,000.00 for post-filing legal work; (3) debtors owe $3,000.00 for last year’s income tax; (4) debtors own a non-exempt widget worth $6,000.00, which has a Chapter 7 liquidation value (see above) of $4,650.00; and (5) debtors have $20,000.00 in general unsecured claims (i.e., credit cards) filed in their case.
To get their Plan confirmed and keep the house, the minimum monthly payment (over 60 months) that a debtor could make would be $334.00 per month, which would generate $20,040.00 over the 60 month Plan. This would pay in full the mortgage arrears ($12,000.00), income taxes ($3,000.00), attorney’s fees ($3,000.00) and Chapter 13 Trustee’s commissions (approx. 10% 0f what he pays out, or $2,004.00), and would satisfy the “best interests of creditors” test (Paragraph #2 above) because the $6,000.00 combined payment on the “priority unsecured claims” (i.e., income tax and attorney’s fees claims) exceeds the $4,650.00 liquidation value of the non-exempt widget. Accordingly, the “priority unsecured creditors” would be paid in full, as required, and there would be about $360.00 remaining for “general unsecured creditors”, who would receive approx. a 1.8% distribution on their claims.
- If the debtor’s budget does not establish that they can pay at least $334.00 per month for 60 months, the Plan will not pass the “feasibility test” (Paragraph #4 above) and cannot be confirmed.
- If the debtor actually had disposable income of $700.00 per month, which would yield $42,000.00 over the 60 month Plan, the debtor would have to pay the full $700.00 each month in order to satisfy the requirement to pay all of their disposable income (Paragraph #3 above). In this instance, after payment of the mortgage arrears, income taxes, attorney’s fees and Chapter 13 Trustee’s statutory commissions (i.e., $4,200.00 in this instance) there would be about $19,800.00 left for the “general unsecured creditors”, or about a 99% distribution on their claims.
Using a different fact pattern, assume that the debtors (1) are $12,000.00 behind on their mortgage and want to keep their house, (2) have no unpaid income taxes, (3) owe no legal fees to their bankruptcy lawyer, (4) have no non-exempt equity in any assets, and (5) have $20,000.00 in unsecured filed claims. In this scenario, the minimum payment that could lead to confirmation would be about $225.00 per month, which would yield $13,500.00 over the 60 months. The mortgage arrears and Trustee’s statutory commissions (in this instance, about $1,350.00) would be paid in full, leaving $150.00 for “general unsecured creditors”, or about a 0.75% distribution on their claims.
Changing the above facts just a little bit by adding one additional wrinkle, assume that the debtor also owned a $6,000.00 non-exempt widget having a Chapter 7 liquidation value of $4,650.00. In this instance, the minimum payment that could lead to confirmation would be $309.00 per month, which would yield $18,540.00 over the 60 month Plan. The mortgage arrears and Trustee’s statutory commissions (i.e., in this instance, about $1,854.00) would be paid in full, leaving $4,686.00 for “general unsecured creditors”, which makes the Plan confirmable because it exceeds the “best interest of creditors” threshold (i.e., liquidation value of the widget) figure of $4,650.00. The “general unsecured creditors” in this fact pattern would receive about a 23.43% distribution on their claims.
As you can see, differing fact patterns can result in very different monthly Plan payments being required for Plan confirmation.
What happens to income tax refunds while in chapter 13?
A Chapter 13 debtor must provide their Trustee with copies of their federal and state tax returns each year that their case is pending. Failure to do so can result in the Trustee filing a motion to dismiss the case.
Unless unsecured creditors are being paid in full (i.e., 100%) in the case, each year while the case is pending a Chapter 13 debtor must pay over to the Trustee all net tax refunds in excess of $1,500—NOTE: the debtor can only keep the first $1,500 of any tax refund received for a calendar year. In a joint Chapter 13 case filed by a married couple the joint debtors can keep a total of $3,000 in tax refunds annually. Failure to pay over excess tax refunds can result in the Trustee filing a motion to dismiss the case.
Chapter 13 in perspective
Chapter 13 is not for everyone. Because you must follow a payment plan, Chapter 13 requires you to follow a fixed budget for a significant period of time. Chapter 13 plans can also go awry if you face significant unexpected expenses, such as car repairs, or income disruptions due to illness or loss of overtime, etc. It takes a lot of determination and a little good luck to successfully obtain a Chapter 13 discharge, but frequently it is worth the effort because the pay-off (usually saving the family residence from foreclosure) can be so great.
Contact us today to see if Chapter 13 bankruptcy can help you
Chapter 13 can provide you with a means to financial health while protecting your property and your home. At Hayward, Parker & O’Leary Esqs., our attorneys have shown countless New York residents from Middletown, Newburgh, White Plains and Orange County how Chapter 13 may be the best means to save their home from foreclosure and reduce their debt burden. Put our experience to work for you by calling us at 845-343-6227 or contacting us online for your free consultation.