San Jose Chapter 13 Bankruptcy Attorneys
Considering Debt Reorganization? Call (408) 465-4472 Today!
Are you earning a consistent income but are still unable to get out of debt? You may want to consider filing for Chapter 13. Chapter 13 bankruptcy allows you to reorganize your debt through a court-supervised payment plan that lasts three to five years. Once all the payments are made, the remaining debt will be discharged.
At The Fuller Law Firm, PC, our bankruptcy lawyers can help you become financially free. We offer our potential clients in San Jose, Oakland, and Salinas a free case evaluation to determine their best solution. Contact us to get started on your case. We can give you advice that is tailored to your unique debt situation.
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Want to know more? Reach out to a San Jose Chapter 13 attorney today! Call (408) 465-4472 for a free consultation or contact us online.
What Is Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy is called a wage earner's plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period "for cause."
(1) If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. (11 U.S. Cide §1322(d)) During this time, the law forbids creditors from starting or continuing collection efforts.
Benefits of Filing for Chapter 13
Chapter 13 offers individuals several advantages over liquidation under Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments on time that are due during the Chapter 13 plan.
Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments.
Chapter 13 also has a special provision that protects third parties liable with the debtor on "consumer debts." This provision may protect co-signers. Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.
As discussed above, some benefits include:
- Minimize or eliminate debt
- Stop creditor harassment
- Save your home
- Stop wage garnishment and bank levies
By filing for Chapter 13 bankruptcy, all debt collection attempts are required to stop.
The Chapter 13 Plan
Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 14 days after the petition is filed. (Fed. R. Bankr. P. 3015) A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee—typically biweekly or monthly. The trustee then distributes the funds to creditors according to the plan, which may offer creditors less than full payment.
There are three types of claims:
- Priority claims are those granted special status by bankruptcy law, such as most taxes and the costs of the bankruptcy proceedings.
- Secured claims are those for which the creditor has the right to take back specific property (i.e., collateral) if the debtor does not pay the underlying debt.
- Unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.
The plan must pay priority claims in full unless a particular priority creditor agrees to a different treatment of the claim or, in the case of a domestic support obligation, unless the debtor contributes all "disposable income" to a five-year plan. (11 U.S. Code § 1322(a))
If the debtor wants to keep the collateral securing a claim, the plan must provide that the holder of the secured claim receives at least the value of the collateral. If the obligation underlying the secured claim was used to buy the collateral (e.g., a car loan), and the debt was incurred within specific time frames before the bankruptcy filing, the plan must provide for full payment of the debt—not just the value of the collateral (which may be less due to depreciation).
Payments to certain secured creditors (i.e., the mortgage lender) may be made over the original loan repayment schedule—which may be longer than the plan—so long as any arrearage is made up during the plan. The debtor should consult an attorney to determine the plan's proper treatment of secured claims.
The plan need not pay unsecured claims in full as long it provides the debtor will pay all projected "disposable income" over an "applicable commitment period." Unsecured creditors should receive at least as much under the plan as they would receive if the debtor's assets were liquidated under Chapter 7. (11 U.S. Code § 1325)
In Chapter 13, "disposable income" is income (other than child support payments received by the debtor) minus the reasonably necessary amounts for the maintenance or support of the debtor or dependents and minus charitable contributions up to 15% of the debtor's gross income. If the debtor operates a business, the definition of disposable income excludes those amounts which are necessary for ordinary operating expenses. (11 U.S. Code § 1325(b)(2)(A) and (B))
The "applicable commitment period" depends on the debtor's current monthly income. The applicable commitment period must be three years if the current monthly income is less than the state median for a family of the same size and five years if the current monthly income is greater than a family of the same size. (11 U.S. Code § 1325(d)) The plan may be less than the applicable commitment period (three or five years) if unsecured debt is paid in full over a shorter period.
When Do I Need to Start Making Plan Payments?
Within 30 days after filing the bankruptcy case, the debtor must start making plan payments to the trustee—even if the court has not yet approved the plan. (11 U.S. Code § 1326(a)(1)) If any secured loan or lease payments come due before the debtor's plan is confirmed (typically home and car payments), the debtor must make adequate protection payments directly to the secured lender or lessor—deducting the amount paid from the amount that would otherwise be paid to the trustee.
Chapter 13 Confirmation Hearing
No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets the standards for confirmation outlined in the Bankruptcy Code. (11 U.S. Code §§ 1324, 1325) Creditors will receive 28 days' notice of the hearing and may object to confirmation. (Fed. R. Bankr. P. 2002(b))
While a variety of objections may be made, the most frequent ones are:
- Payments offered under the plan are less than creditors would receive if the debtor's assets were liquidated
- The debtor's plan does not commit all of the debtor's projected disposable income for the three- or five-year applicable commitment period
If the court confirms the plan, the Chapter 13 trustee will distribute funds received under the plan "as soon as is practicable." (11 U.S. Code § 1326(a)(2)) If the court declines to confirm the plan, the debtor may file a modified plan. (11 U.S. Code § 1323) The debtor may also convert the case to a liquidation case under Chapter 7. ((4) 11 U.S. Code § 1307(a)) If the court declines to confirm the plan or the modified plan and dismisses the case, the court may authorize the trustee to keep some funds for costs. Still, the trustee must return all remaining funds to the debtor, other than funds already disbursed or due to creditors. (11 U.S. Code § 1326(a)(2))
Occasionally, a change in circumstances may compromise the debtor's ability to make plan payments. For example, a creditor may object or threaten to object to a plan, or the debtor may inadvertently have failed to list all creditors. In such instances, the plan may be modified before or after confirmation. (11 U.S. Code §§ 1323, 1329) Modification after confirmation is not limited to an initiative by the debtor but may be at the request of the trustee or an unsecured creditor. (11 U.S. Code § 1329(a))
Do All Debts Have to Be Paid Back in a Chapter 13 Plan?
Probably not! There is a common misconception that debtors in Chapter 13 must propose a plan to pay back all of their debts. In the overwhelming majority of cases, this is not true. In most Chapter 13 bankruptcy cases, a skilled lawyer can successfully propose a plan that pays close to nothing to unsecured debts—typically, credit card debts, medical bills, deficiency balances on cars, or foreclosed homes.
Once the bankruptcy plan is completed, these debts will be discharged.
Often, your bankruptcy attorney can propose a plan that provides for no payments whatsoever to non-priority unsecured creditors. This type of bankruptcy plan is often called a "zero-percent plan." Your attorney can use the Chapter 13 plan to pay certain debts that are otherwise not discharged in bankruptcy. For example, certain taxes that are not dischargeable can be paid back without interest or penalties in a Chapter 13 plan.
What Are My Monthly Payments in a Chapter 13 Plan?
The exact amount of the monthly payments in a Chapter 13 bankruptcy is determined by multiple, sometimes complex legal issues. An experienced bankruptcy attorney will perform a careful analysis to carefully determine the lowest amount the debtor would have to pay.
Some of the factors that determine the monthly amount include:
- Household Income: The bankruptcy code requires that the debtor's "disposable income" be paid into the Chapter 13 plan. Generally, higher disposable income increases the probability that higher payments must be made in a Chapter 13 plan. However, determining "disposable income" can be complex. The bankruptcy code requires that debtors analyze their income for six months before filing the petition and, in certain circumstances, take into account standardized expenses, costs associated with paying car debts, home mortgages, child support, back taxes, and other items. Furthermore, at least one recent Supreme Court decision has introduced further complications in this analysis.
- Assets: Debtors that have more assets may have to propose higher monthly payment plans.
- Recent Transfers & Payments: Debtors who have recently transferred assets or made significant payments to certain creditors may have to propose higher monthly payment plans.
- Priority & Secured Debts: Debtors who have higher debts to certain priority creditors or higher secured debts may have to pay higher monthly payments.
- Bankruptcy Location: Different courts and trustees have different requirements. A skilled attorney will have a better chance of successfully confirming a Chapter 13 plan that pays zero to non-priority unsecured creditors.
Making the Chapter 13 Plan Work
The provisions of a confirmed plan bind the debtor and each creditor. (11 U.S. Code § 1327) Once the court confirms the plan, the debtor must make the plan succeed. The debtor must make regular payments to the trustee directly or through payroll deduction, which will require adjusting to living on a fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles the debtor to retain property as long as payments are made, the debtor may not incur new debt without consulting the trustee because additional debt may compromise the debtor's ability to complete the plan. (11 U.S. Code §§ 1305(c), 1322(a)(1), 1327.)
A debtor may make plan payments through payroll deductions. This practice increases the likelihood that payments will be made on time and that the debtor will complete the plan. In any event, if the debtor fails to make the payments due under the confirmed plan, the court may dismiss the case or convert it to a liquidation case under Chapter 7 of the Bankruptcy Code. (11 U.S. Code § 1307(c)) The court may also dismiss or convert the debtor's case if the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony) or fails to make required tax filings during the case. (11 U.S. Code §§ 1307(c) and (e), 1308, 521)
Is Chapter 13 Right for Me?
Our firm can help you determine whether Chapter 7, Chapter 13, or another debt solution is right for your situation. Many individuals find Chapter 13 to help them get back on a positive financial track. This type of bankruptcy is generally best suited for individuals or households that have income assets—such as homes, businesses, or cars—that they want to keep. It is also beneficial for those who have incomes too high for Chapter 7. If you have failed the means test, you may wish to consider filing for Chapter 13!
Start your free case evaluation with a Chapter 13 attorney in San Jose. We're ready to help you become debt-free! Call (408) 465-4472.
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