Colorado bankruptcy attorney Matt McCune ANSWERS COMMON QUESTIONS


What is bankruptcy? 

Basically, bankruptcy is a legal process where individuals, families and businesses (typically called Debtors) can seek to gain some relief from the various debts that they owe to creditors. The main goal of our bankruptcy system is to provide relief to debtors in the form of a Fresh Start or a second chance.  Another goal of the bankruptcy system is to provide an orderly payout to creditors. Prior to having an organized bankruptcy system, creditors would be paid out on a first come-first serve basis. When a person or business was in financial duress, the creditors would “race to the courthouse” to try and get paid first and it created chaos. So, bankruptcy is legal process (Federal Law in the US) that really is designed to have two purposes: a Fresh Start for Debtors and Equity (or fairness) among Creditors.  In most consumer bankruptcy cases (by far the highest percentage of cases filed), it really is the Fresh Start that’s the focus of the case because there just isn’t much of a payout (if any) to creditors.  Approximately 1 million individuals, families and businesses file for bankruptcy protection every year. 

The history of bankruptcy in the United States.

The history of bankruptcy in the US goes all the way back to the late 1700’s when our founding fathers were drafting the Constitution. Article 1, Section 8 of the Constitution grants Congress the power to establish federal laws on the subject of bankruptcy.  The first federal law on bankruptcy was way back in the year 1800 and these laws have been changed many, many times since.  Our modern law on bankruptcy really started in 1978 and created what we now refer to as the “Bankruptcy Code.”  The Bankruptcy Code has been amended several times with the most recent overhaul taking place in 2005 and that’s the Code that we operate under today.

What are the different types of bankruptcy? 

The Bankruptcy Code is broken down into several different chapters.  What type of bankruptcy one might file, depends on which chapter of the Bankruptcy Code they file under.  Technically, there are six different types of bankruptcy one might file: Chapters 7, 9, 11, 12, 13, and 15.  Practically speaking, most cases are going to fall into one of three categories: 7, 11 or 13.  For most consumers (the focus of my practice), there are typically only two chapters to choose from: 7 or 13.

Who are the players in the bankruptcy system? 

Within the bankruptcy system there are a lot of players:  There is the Bankruptcy Code which is the written set of rules (the law) that is drafted by Congress.  There’s also the Bankruptcy Court. The Bankruptcy Court is a federal court which is a part of the United States District Court for each jurisdiction.  The Bankruptcy Court is made up of federal Bankruptcy Judges which are highly specialized judges that oversee primarily just bankruptcy cases.  There are debtors which are typically the individual, family or business that is seeking some form of relief from their debts.  The creditors are the entities that own the debt the debtors owe (banks, mortgage company, lenders, medical providers, taxing authorities, etc).  There’s this thing called a Bankruptcy Estate. The Estate is really all the property, interests, and assets that can be administered by the Court in a bankruptcy case. This is a bit confusing and I’ll explain the Bankruptcy Estate in a lot more detail later.  The next player is the Bankruptcy Trustee (sometimes called the Panel Trustee). The Trustee’s job is primarily to administer the assets of the Bankruptcy Estate, which really means to see if there are any assets or interests that can be liquidated or converted to cash to provide an equitable payout to creditors.  Not to be confused with the Bankruptcy Trustee, is the United States Trustee. The US Trustee (UST) has a broad responsibility to oversee the administration of the entire bankruptcy system. The UST appoints bankruptcy trustees, conducts meeting of creditors and tries to ensure a fair and smooth process for those involved in the bankruptcy system. 

Chapter 7 Bankruptcy introduction.

Without question the most common type of bankruptcy is Chapter 7. The vast majority of cases filed nationwide are Chapter 7, although the percentage of Chapter 13 cases is steadily climbing.  The Bankruptcy Code refers to Chapter 7 as the “liquidation” Chapter, but that title is rather misleading.  Most Chapter 7 cases are what we call “no asset” cases which means there is in fact no liquidation of ANY of the debtors property. This is typically because most of the debtor’s assets are either “exempt” (we’ll cover exemptions later) or of inconsequential value and liquidating them wouldn’t bring any meaningful payout to creditors.  Chapter 7 should always be the first option you look at when considering seeking bankruptcy relief from your debt and creditors.  The main reason for that is that Chapter 7 is fast! You are in and out of bankruptcy typically in about 4-5 months.  The other reason is that, compared to other chapters, Chapter 7 is cheap. There’s typically no payment to creditors. Attorneys fees are less. The total cost is less than other chapters.  For most people the goal, the finish line if you will, of a bankruptcy filing is to get to that Discharge and in Chapter 7 you get there fast (and often cheap), which is why it’s such a popular option.

Any individual who resides, is domiciled or has property in the US may file for Chapter 7.  You do not have to be a US citizen to seek relief under Chapter 7.  Legally married same-sex couples can file a joint bankruptcy.  A corporation may file for Chapter 7, however, a corporation is not eligible for a Discharge in Chapter 7 (we’re going to cover the Discharge later).  Any individual who files must have received a credit counseling class within the 180 days prior to filing.  This isn’t a big deal: $20 and an hour on the Internet will get you your counseling certificate.  There’s a unique limitation to filing any bankruptcy case if you were a debtor in a prior bankruptcy case in the last 180 days and failed to abide by a court order or requested a voluntary dismissal of your case.  This is unusual but it does happen and there are rules in place designed to keep people from jumping in and out of bankruptcy cases.

Now,  just because you filed a Chapter 7 doesn’t mean you always get to stay in Chapter 7.  Sometimes, the US Trustee (UST) or a creditor will come along and try and kick you out of Chapter 7 if your income is above certain levels. Or, sometimes, the debtor chooses to leave Chapter 7 if things start to get a little uncomfortable, and that typically involves the bankruptcy Panel Trustee (not the UST) coming after assets of the debtor when the debtor might have thought those assets would be protected.  Another factor to consider is whether the Debtor is eligible for a Discharge.  I cover the Discharge in greater depth below but basically the Discharge is the Court Order that wipes out certain debts.  If you’re not eligible for a Discharge, it typically doesn’t make a lot of sense to file a case under Chapter 7.  You can’t get a Discharge in Chapter 7 if you already received a Discharge in Chapter 7 (or 11) in the past 8 years OR you already received a Discharge in Chapter 13 in the last six years. 

When first considering Chapter 7 the questions you need to ask are:  Am I eligible to file a 7 AND get a Discharge? (prior bankruptcy filings can keep you out of a 7, AND income above certain thresholds can also keep you out of a 7).  The next question to ask is does Chapter 7 make sense for me?  There are a lot of reasons why Chapter 7 might not be the best option.  If you have assets above certain exemptions levels, Chapter 7 may NOT be the right option as your risk losing those assets!  Will Chapter 13 provide you greater relief from your creditors?  Chapter 13 is frankly a much friendlier place to be and for a lot of people the expanded protection under Chapter 13 makes a lot more sense than Chapter 7. 

Chapter 7 Bankruptcy process. What happens after filing? 

A Chapter 7 Bankruptcy is commenced by filing forms with the appropriate Bankruptcy Court. The main form is a called voluntary petition but there are a LOT of other forms that need to be field to make sure your case is properly filed. All of these forms can now be filed electronically.  Where the debtor chooses to file a case depends on where the proper venue for the debtor is. Venue for most consumer cases is going to be where the debtor has lived for the 91 days prior to the filing date.  The current filing fee for a Chapter 7 case as of the date of this writing is $335.  That fee is typically paid when the case is filed. 

The filing of the case creates what the Bankruptcy Code calls an “order for relief” and puts in place what is called an Automatic Stay. The Automatic Stay is a big deal because it’s the automatic stay that prevents creditors from taking any further action against the debtor. Garnishment, foreclosure, repossession, lawsuits, collection activities, harassment related to debts…. It all must stop immediately upon the filing of the case!  It’s the Automatic Stay that allows debtors to save their homes, possessions and start the process of moving towards a Fresh Start. 

The commencement of the case also creates what is called a "Bankruptcy Estate". The Bankruptcy Estate is basically all the debtor’s property as of the date of filing the petition. There are a few things that can be pulled back into the estate of the debtor if the debtor becomes entitled to them within 180 days of the filing date, such as an inheritance or life insurance proceeds. So, upon filing the case all of a debtor’s property technically becomes property of the bankruptcy estate. This is a strictly legal entity… nobody shows up to pack all your stuff up because the vast majority of a debtors’ assets can be exempted from the estate (more on exemptions below).

After the case is filed, the Court will assign the panel Trustee. The Trustee will conduct what is a called a “Meeting of Creditors” about a month or so after the case is filed.  The Debtor is required to attend this hearing and for most cases that is the only appearance that is required of the debtor. Creditors are allowed to attend the hearing and question the debtor if they would like, but it rarely happens. Most creditor meetings last about five minutes and just involve the Trustee asking the Debtor a handful of questions. The debtor will usually be represented by his or her attorney at the creditor meeting and your lawyer will prepare you for the meeting beforehand. My clients are usually pretty nervous but I always try and relax them. The creditor meeting isn’t a big deal. The Bankruptcy Judge is not there. The judge is not allowed to attend the hearing. It’s fairly casual.  For most cases, it really is a check the box thing. But… for some more complicated cases, creditors will show up and question the debtor about assets, transfers of property, payments, etc.  The average creditor meeting lasts five minutes… so that should tell you something.  Primarily, the Trustee is looking to see if there are any non-exempt assets that belong to the Bankruptcy Estate so the Trustee can liquidate them and provide a payout to the creditors. 

There are various deadlines that come due after the creditor meeting. The most important is the deadline for creditors or the UST to object to the debtor's discharge. They have to have a valid reason to object and I’ll cover those possibilities in another section.  Creditors and the UST have 60 days after the creditor meeting to raise the objections.  Another deadline is the deadline to object to exemptions that the debtor claimed. I’m going to cover exemptions below but creditors or the Trustee have 30 days after the creditor meeting to object to the claim of exemptions.

Now, in some cases there are enough non-exempt assets that belong to the bankruptcy estate and in those cases the Trustee will open up what is called an “Asset Case.” To open up an asset case there needs to be enough assets to provide a meaningful distribution to the creditors.  There’s no magic number to what is “meaningful" and it can vary by Trustee but usually the total value of non-exempt assets needs to be around at least $1500.  The debtor is almost always first given the opportunity to buy back the non-exempt assets from the Trustee.  (EXAMPLE: Debtor owns a boat - It’s easier for Trustee to just sell it back to the debtor. No need to pick it up, no need to pay for an auctioneer, they’d prefer to sell it back to the debtor than deal with all that stuff.)  Debtors can make an offer to buy back a non-exempt asset.   ***LAWYER'S TIP***  If you potentially have a lot of non-exempt assets that you don’t want to lose, don’t file Chapter 7. File Chapter 13 and pay the value of those non-exempt assets over 3-5 years and keep them!

If a Chapter 7 case is going to be an asset case, the Trustee will send out a notice to all creditors so that the creditors can file a claim. In this case, the debtor is going to want to keep an eye on the claims that get filed because there may be non-dischargeable debts in the case (taxes, student loans) and if they don’t file claims the debtor will want to file a claim on their behalf so they share in the payout.  Claims get paid out in a certain order of priority.

DISCHARGE!  It’s important to remember and I’ll repeat it several times… the Discharge is the main goal of a consumer bankruptcy filing.  There are other benefits that we’ve discussed, but the Discharge is what you really want. It’s a piece of paper, signed by a federal judge that you’ve never met, that wipes out a lot of debt.  Not necessarily all of your debt, but a good portion of it.  Your discharge typically comes about four to five months after you file the case and for most cases… That’s the end!  The Discharge is typically the finish line of the bankruptcy.  The Discharge is your Fresh Start!

Bankruptcy exemptions: What property is protected? 

Bankruptcy exemptions are probably the most important part of the bankruptcy systems for consumers.  The exemptions protect the assets that you need to move forward with your life and get that Fresh Start.  Getting a Discharge from the Bankruptcy Court that wipes out a lot of debt is great! There’s no question about that. But...that Discharge would not be as nearly as valuable as it is, if the cost of the Discharge was that the Trustee can take everything.  Wiping out debt is great, but if the cost of wiping out that debt was walking out of the bankruptcy court naked without a pot to piss in, well, if that was the case it’s probably just not worth it.  Thankfully, Section 522 of the Bankruptcy Code, a beautiful piece of legislation,  allows the debtor to exempt certain property from the estate.  What that really means is that exempt property is protected. You get to keep it and still get your discharge. GOD BLESS AMERICA!

I don’t want to get on my soapbox here for too long, but I really do want to stress what a big deal the exemptions are! This area of law truly is one of the last remaining social safety nets in our country.  The billionaires, the corporations, banks..… money… money is in charge. More than ever!  He who has the gold has the power.  Big business makes the rules in America... and each year they grab a little more power.  Our bankruptcy system is one of the last places normal people can find relief when they get in trouble with big business. The exemptions are what allow our bankruptcy system to actually provide relief to these normal people seeking relief from big business.  

Simply put…. exemptions are assets that people get to keep when they file for bankruptcy.  Now, which set of exemptions apply to a bankruptcy case is much more confusing.  It depends on where you file your case. Bankruptcy is Federal Law and according to the US Constitution, this law is supposed to be “uniform” throughout the country. Uniform really means applied the same throughout the country.  The Bankruptcy Code has it’s own set of exemptions.  It’s really just a list of which assets are protected and up to how much in value. So the Code sets the exemptions.  But… what happened in 1978 when Congress was tying to pass the modern Bankruptcy Code law, was there was a last minute compromise that got put into the law that allowed states to “opt out” of the federal exemptions.  So, states can choose to prohibit the use of the federal exemptions spelled out in the Bankruptcy Code and use their own exemptions.  32 state have elected to do so.  In those “opt out” states you can’t use the federal exemptions and must use the applicable state exemptions. Usually, the state exemptions are better than the federal exemptions (especially the homestead exemption which can often times be the most important exemption).  Colorado is one of the states that has opted out so in Colorado we only use state exemptions.  Now, if that’s not confusing enough, if you’ve lived in multiple states during the two years prior to filing your case which states exemptions laws you can use is very confusing. 

Which debts can I wipe out in a Chapter 7 Bankruptcy?

Let's talk specifically about creditors. Whether a debt is Discharged… whether a debt goes away or not will depend on the nature of the debt and which Chapter of bankruptcy that you filed under.  To start with, assume a debt goes away! Assume that the discharge is going to wipe out a debt.  BUT….then you have to get into whether or not a debt is “excepted” from the Discharge.  The code gives a list of debts that are “excepted” from discharge, but again, some debts will be discharged in Chapter 13 but then not discharged in a Chapter 7. It can get confusing which is all the more reason to hire a competent bankruptcy attorney. 

Specifically the Bankruptcy Code mandates that the following debts survive a Chapter 7 Bankruptcy Discharge:  Taxes owed for the last three years; Taxes that were assessed in the 240 days prior to the case being filed; Taxes owed for years where there was no return filed; Any debts incurred via FRAUD (fraud is a broad category and there are a lot of different fact patters that can fall under the fraud umbrella); Unlisted debts (although in a no asset case even unlisted debts can be discharged in some instances); Domestic Support Obligations (child support, alimony); Willful or malicious injury by the debtor to another or another’s property; Court fines and fees; STUDENT LOANS; Injury to another while operating a vehicle while intoxicated; Restitution; Court ordered property settlement agreements via divorce decree; Post-petition HOA fees. There are a few others but those are the main ones and the obvious major debts that we see surviving a Chapter 7 are child support (as it should), taxes and student loans.  FRAUD is a big issue and I’m going to cover that in another section.  It’s important to note that most of these debts are automatically excepted from discharge which means they survive the bankruptcy without the creditor needing to take any action.  However, with some debts, specifically the false pretenses, fraud or false financial statement, the creditor needs to raise the issue and contest the dischargeability of the debt and ultimately prevail on the issue for the debt to survive. The creditor has sixty days from the creditor meeting to raise the issue.  The main debts that people walk away from are the credit cards, medical bills, pay day loans, lines of credit, repo deficiency, foreclosure deficiency, misc collections for retail cards, etc. 

Chapter 7 Bankruptcy Discharge!

Again, the final step to a Chapter 7 case is typically the Discharge. The Discharge is the finish line that you are trying to get to when you file for bankruptcy. The Discharge is the Order that wipes out the debt. The Discharge is your FRESH START!  Now, before you can get that Discharge, a debtor has to complete a financial management course within 60 days after the creditor meeting. With some limited exceptions, you are not eligible for a Discharge unless you complete the class. It’s done on the internet or over the phone. It takes about an hour… not a big deal to complete but a big deal if you don’t. 

If a creditor timely objects to their debt being discharged that lawsuit can go forward and will continue even after a Discharge is entered. The litigation related to the dischargeability of that debt will continue past the Discharge Order entering. 

Once the Discharge Order enters… for many cases that is it. If it’s a no asset case, the case will then close shortly after Discharge and there’s nothing else to do. If it’s an asset case, the Trustee will still need to administer the assets of the estate. It’s very important that if the debtor enters into an agreement with the Trustee to turn over assets (often times it can be part of your tax refund) that the debtor follows through. Often times the debtor is supposed to turn these assets over after the Discharge enters. If the debtor doesn’t follow through, the Discharge can actually be revoked. If you have a Discharge can NEVER get out of the debt in a subsequent bankruptcy. 

Another thing to remember is that there are certain types of assets that a debtor can come into, after the bankruptcy is filed, that can be pulled back into the bankruptcy estate.  If you come into an inheritance, property settlement from a divorce or life insurance proceeds within 180 days of the filing of the case…those assets can be pulled back into the case and become property of the estate, even if they are received after the filing and even if they are received after the discharge.  

As previously mentioned, individual creditors can object to their debts being discharged… the most common objection being false pretenses, fraud or false financial statement. I’m going to cover those issues in more detail in the litigation section.  Also, the UST, panel Trustee or a creditor can object to the debtor getting a discharge at all. It’s rare, but it can happen. The most common reason this might happen is if the debtor has intentionally transferred, concealed or destroyed assets to prevent them from being turned over to the creditors.  If a debtor knowingly makes false statements in connection with the bankruptcy case the debtor can be denied a Discharge. You can’t come into the bankruptcy system seeking relief and at the same absolutely disrespect the system and it’s rules and processes. Bankruptcy isn’t a cafeteria plan where you pick and choose what you want and disregard the rest. 

For secured debts the discharge can be a bit confusing. The Discharge eliminates the personal liability that a debtor has against secured property but the lien that the creditor has survives the discharge (unless the lien was avoided, modified or redeemed).  For example, lets say a debtor is buying a house and has a mortgage. That debtor can discharge his or her personal liability in a Chapter 7. Technically, the debtor doesn’t owe the mortgage company. The personal liability (typically called a promissory note) is Discharged in the bankruptcy. BUT, the lien the mortgage company has against the house is still valid. If the debtor doesn’t continue to pay the mortgage company, the mortgage company can still enforce the lien and eventually take the house back. There is no free house or free car in bankruptcy!

There’s also a section in the Bankruptcy Code that states the Discharge also operates as an injunction against any act to collect on a debt that was discharged.  If a creditor violates the discharge injunction that is considered contempt and a debtor can be awarded damages and fees against the creditor for such actions. 

Chapter 13 Bankruptcy introduction.

While Chapter 7 is the quicker way for a debtor to get to Discharge, it can be more painful given some assets can be liquidated in the process. Now, Chapter 13 does take much longer to get to Discharge but it can be a friendlier place for a debtor to be.  Chapter 13 is often referred to as a “wage earner reorganization.” You have to be a person with regular income to be eligible to file for Chapter 13. There are lots of different types of income that qualify as regular income (obviously wages but also pensions, social security, disability, contributions from others, etc).  A huge benefit to Chapter 13 is that the debtor is allowed to keep and use all property and they get to resolve their debt and protect non-exempt assets out of future income.  Basically, Chapter 13 is a repayment plan of 3-5 years. A huge misunderstanding is that you have to pay all your debts through Chapter 13. That’s just not true!  Now, there are Chapter 13 cases where the debtor pays 100% of all timely filed, allowed claims… but those are the exceptions.    Most Chapter 13 cases have a very small repayment to unsecured creditors.  Chapter 13 can offer a lot of options that can provide relief to the debtor. Many of these options are not available in Chapter 7 so Chapter 13 is often a much better choice for a debtor, but it does take a long time to complete and that is the major drawback. 

Why file a Chapter 13 instead of a Chapter 7? A debtor might not be eligible for Chapter 7 based on a prior Chapter 7 in the last 8 years and income above certain levels. Or, it might be better for your situation: Chapter 13 allows you to: Stop foreclosure and cure home arrears; Pay of priority taxes through the plan; Cram down on vehicle (lower car payment and interest rate); Protect non-exempt assets; Strip off a 2nd mortgage; Extended protection from student loans and other reasons. There are a lot of good reasons to file Chapter 13!

There are limitations on who can file for Chapter 13: Debt limits are approx 400k in unsecured debts and 1.2M in secured debts. You also can’t get a discharge in a 13 if you received a discharge under Chapter 7 in a case filed within the last four years. However, sometimes a debtor might file a 13 even if they aren’t eligible for a Discharge in the case (such as to cure mortgage arrears). 

A debtor may choose to file a Chapter 13 from the beginning of the case or a debtor can covert to Chapter 13 from Chapter 7 (if they are eligible to be a debtor in Chapter 13).  Sometimes a debtor will file a 7 and things will get a uncomfortable in that 7 (such as the Trustee going after assets that the debtor thought might have been protected).  Chapter 13 can be viewed as a little bit of an escape hatch from the liquidation of certain assets that a debtor might be facing in Chapter 7.  Other times, a debtor in Chapter 13 might choose to convert to Chapter 7 (assuming the debtor is eligible for Chapter 7 and that the case had not been previously converted to a 7). 

As a lawyer who practices consumer bankruptcy I absolutely love Chapter 13. It can provide incredible relief to good people who are struggling with debt while at the same time protecting their assets (whether exempt or not). In my opinion, Chapter 13 is the best part of the Bankruptcy Code when looking for relief for normal people.

Chapter 13 Bankruptcy process. What happens after filing? 

A Chapter 13 Bankruptcy is commenced, just like a Chapter 7, by filing forms with the appropriate Bankruptcy Court. The main form is a called voluntary petition but there are a LOT of other forms that need to be field to make sure your case is properly filed. All of these forms can now be filed electronically.  Where the debtor chooses to file a case depends on where the proper venue for the debtor is. Venue for most consumer cases is going to be where the debtor has lived for the 91 days prior to the filing date.   The current filing fee for a Chapter 13 case as of the date of this writing is $310.  That fee is typically paid when the case is filed. 

The forms for Chapter 13 are very similar to the forms for a Chapter 7.  The main difference is that in Chapter 13 the debtor must also file a “Plan.”  The goal of the Chapter 13 is to get this plan “Confirmed” by the Court which really just means approved by the Bankruptcy Judge.  There may be objections from creditors and/or the Chapter 13 Trustee that need to be resolved before the plan can be confirmed.  The Bankruptcy Code has very specific requirements that the plan must meet. These requirements mandate that the plan treat certain creditors in a certain way.  The confirmation process is typically 3-5 months after the case is filed. It will usually take several plans before a plan gets final confirmation.  There can be a lot to fight about during the plan confirmation and that’s why you need to have a high quality, experienced bankruptcy attorney on your side. Contested matters can include: Valuation of certain assets; Disposable income; Treatment of certain claims in the plan; Other issues - it’s not possible to go over all issues and each case is unique which is why it’s so important to get a good lawyer. 

Just like in Chapter 7, a Chapter 13 filing puts into effect the Automatic Stay which protects the debtor from most creditor actions.  The Chapter 13 Plan will require that the debtor make monthly payments to the Chapter 13 Trustee. The first payment is due 30 days after the case is filed.  The Trustee is placed in charge of distributing those funds to all relevant creditors, depending on how the plan treats them. The Trustee doesn’t begin to pay creditors pursuant to the plan until the plan is confirmed. 

There’s a creditor meeting in Chapter 13 just like in Chapter 7. It also occurs about a month after the case is filed.  Shortly after the case is filed the Bankruptcy Clerk will send out the 341 creditor meeting notice. This notice will also have the deadline for creditors to file claims, the deadline to object to exemptions and the discharge and it will also have the date for the first confirmation hearing and the deadline to object to plan confirmation.

There’s a lot going on behind in the scenes in a Chapter 13 case. The debtor needs to provide the Trustees with a lot of documentation prior to the hearing.  The debtor also needs to be keeping a close eye on the claims filed in the case. The debtor may want to object to certain claims or in other cases the debtor may actually want to file a claim on behalf of a creditor.  For non-governmental units, the deadline to file a claim is 70 days after the case is filed. 

Getting the plan confirmed to the best terms possible for the debtor is the job of the debtor’s attorney. That’s what I do. However, there are competing interests… The Trustee and various creditors will typically want the debtor to pay as much as possible into the plan before the plan is confirmed.  This is the back and forth of the confirmation process that can take several months and several plans to complete. Once the plan is confirmed… the debtor and the creditors are now bound by the terms of the plan.  I like to call it a light at the end of the tunnel… If you honor the terms of the plan… you get to the light… which is the discharge.  That’s how you get a discharge in a Chapter 13… you complete the plan.  The plan payment period can last from 3-5 years.  Getting the plan confirmed is a huge deal because now it’s crystal clear what needs to be done by the debtor to get the discharge and properly finish out the bankruptcy.  However, 3-5 years is a long time and a lot can happen during that time. Below, I’m going to talk about what options are available for a debtor who is in the middle of a Chapter 13, but gets thrown a curve ball… as life tends to do. 

Chapter 13 Bankruptcy options when things don’t go as planned.

Chapter 13 can take a long time.  A lot can happen in 3-5 years, so often there are steps that need to be taken after the plan is confirmed, but before the plan is completed. 

An unfortunate thing that can happen to a debtor mid plan is that they lose their job. If the debtor loses their job and can’t find replacement income it’s unlikely that they will be able to a continue to make the required plan payment. In these cases, the debtor should always explore whether conversion to Chapter 7 is an option. To successfully convert to Chapter 7, the debtor has to be eligible, which means the debtor cannot have a Chapter 7 case filed within the 8 years prior to the FILING of the Chapter 13. This needs to be looked at closely because by the time the debtor is looking to convert the case… it may be more than 8 years… but it’s the filing date of that Chapter 13 case that matters. If the debtor had a Chapter 7 case filed within 8 years of filing the Chapter 13, conversion to Chapter 7 is not an option if the debtor is seeking a discharge, and consumer debtors are almost always seeking a discharge. The bankruptcy code provides that the debtor has an absolute right to convert from Chapter 13 to Chapter 7 but conversion is tricky! You need to make sure you have an experienced bankruptcy attorney that fully understands all consequences of conversion. 

The Bankruptcy Code also provides that the debtor has the right to voluntarily dismiss their own Chapter 13 case. However, if the case was previously converted from another Chapter to Chapter 13 the debtor does not have the absolute right to dismiss that case.  There are instances where voluntary dismissal makes a lot of sense, but this is also tricky and full of potential traps for the unwary. If you voluntarily dismiss your case and there was a motion for relief from stay filed in your case, you can’t file any bankruptcy for 180 days after dismissal. You get 180 day vacation from bankruptcy in that scenario. 

Probably the most common post-confirmation occurrence in Chapter 13 is a plan modification. There can be a lot of reasons to modify a confirmed plan… A change in income or circumstances might require a modified plan that can either lower or increase plan payments. There might be secured asset (typically a car) that is being provided for in the plan that gets wrecked. This happens all the time and the in those cases the prudent thing to do is to modify the plan to provide for the surrender of the asset, and subsequent discharge of the unsecured debt.

Things change… life happens… and while there are limitations, many times your bankruptcy case can change as well to provide the debtor with the best benefit possible. 

Chapter 13 Bankruptcy creditors.

As you now understand, Chapter 13 is a reorganization plan where the debtor makes payments into a plan for three to five years.   What is really great about Chapter 13 is because you have this plan or “reorganization,” you can modify the rights of certain creditors by how you treat them in that plan.  This is awesome! Let me give you some more detail…

Within the entire bankruptcy code, Chapter 13 is without question the best place where a debtor can impact the rights of secured creditors, to the debtor’s benefit.  In many cases you can change the terms of your contract with secured creditor. Chapter 13 allows the debtor to change the terms of the deal, to the debtor's benefit. 

Options available to a debtor in Chapter 13 include:  Lowering the amount you have to pay a creditor on an asset. Usually this is a car. There are some exceptions but one of the best things I can do for a debtor in Chapter 13 is put the car into the plan and only pay the value of the car, NOT what the debtor owes; Lowering the interest rate on car; Paying a creditor over a longer period of time… curing mortgage arrears; SAVING YOUR HOUSE FROM FORECLOSURE; WIPING A LIEN OUT ENTIRELY - STRIP OFF OF 2ND MORTGAGE; Surrender of the collateral and much more!

Bankruptcy litigation.

What is litigation? Litigation is basically the term that the legal systems uses for the process of settling disputes between parties.  While most consumer bankruptcy cases do not really involve any actual litigation, there can be a lot to fight over in a bankruptcy case. The possibility of litigation is what can often guide the parties and the process in resolving disputes, without having to have any formal litigation.

Litigation within the Bankruptcy Court can be broken down into two broad categories: Adversary Proceedings and Contested Matters. An Adversary Proceeding is basically a lawsuit within the core bankruptcy case that follows rules of procedure substantially similar to the Federal Rules of Civil Procedure.  Contested Matters are other litigation that occur within the bankruptcy case but are treated less formally than adversary proceedings.  

Common issues that debtors and creditors fight over in bankruptcy: Automatic stay violations; Discharge injunction violations; Objections to claims; Objections to discharge; Fraud; Fraudulent transfers and Preferences.