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Today a prospective client asked me whether or not her filing bankruptcy would negatively affect her spouse. This is a common question. A spouse's bankruptcy will not affect the non-filing spouse in terms of credit. It will not have an adverse effect on the non-filing spouse's credit. However, there is a possibility that assets that were once only his or hers, could now be considered as joint assets, so possibly there could be an effect as to assets. Also, there are income limitations in bankruptcy, so the non-filing spouse's income does have be counted and accounted for in the spouse's bankruptcy. Adam Brown is a bankruptcy attorney for Dexter & Dexter, a debt relief agency helping people file for bankruptcy.
The Chapter 13 Discharge
The bankruptcy law regarding the scope of the chapter 13 discharge is complex and has recently undergone major changes. Therefore, debtors should consult competent legal counsel prior to filing regarding the scope of the chapter 13 discharge.
A chapter 13 debtor is entitled to a discharge upon completion of all payments under the chapter 13 plan so long as the debtor: (1) certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid; (2) has not received a discharge in a prior case filed within a certain time frame (two years for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases); and (3) has completed an approved course in financial management (if the U.S. trustee or bankruptcy administrator for the debtor's district has determined that such courses are available to the debtor).
The discharge releases the debtor from all debts provided for by the plan or disallowed (under section 502), with limited exceptions. Creditors provided for in full or in part under the chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in 11 U.S.C. § 1328. Debts not discharged in chapter 13 include certain long term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime. To the extent that they are not fully paid under the chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable. .
The discharge in a chapter 13 case is somewhat broader than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
Making the Chapter 13 Plan Work
The provisions of a confirmed plan bind the debtor and each creditor. Once the court confirms the plan, the debtor must make the plan succeed. The debtor must make regular payments to the trustee either directly or through payroll deduction, which will require adjustment 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. .
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. 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.
Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
The Chapter 13 Plan and Confirmation Hearing
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. A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.
Types of Claims. There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding. (3) Secured claims are those for which the creditor has the right take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. In contrast to secured claims, 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 different treatment of the claim or, in the case of a domestic support obligation, unless the debtor contributes all "disposable income" - discussed below - to a five-year plan.
If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive 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 certain 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 home 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 plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected "disposable income" over an "applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor's assets were liquidated under chapter 7. In chapter 13, "disposable income" is income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents and less 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. The "applicable commitment period" depends on the debtor's current monthly income. The applicable commitment period must be three years if 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. The plan may be less than the applicable commitment period (three or five years) only if unsecured debt is paid in full over a shorter period.
Payments. Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, the debtor must start making plan payments to the trustee. . If any secured loan payments or lease payments come due before the debtor's plan is confirmed (typically home and automobile 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.
Confirimation 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 set forth in the Bankruptcy Code. Creditors will receive 28 days' notice of the hearing and may object to confirmation. While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if the debtor's assets were liquidated or that 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." If the court declines to confirm the plan, the debtor may file a modified plan. The debtor may also convert the case to a liquidation case under chapter 7. If the court declines to confirm the plan or the modified plan and instead dismisses the case, the court may authorize the trustee to keep some funds for costs, but the trustee must return all remaining funds to the debtor (other than funds already disbursed or due to creditors).
Plan Modification. 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 either before or after confirmation. 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.Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
How Chapter 13 Works
Filing of Case. A chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. The debtor must also file a certificate of credit counseling, evidence of payment from employers, if any, received 60 days before filing; and a statement of monthly net income and any anticipated increase in income or expenses after filing.
The debtor must provide the chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). A husband and wife may file a joint petition or individual petitions.
The courts must charge a $281.00 filing fee. Normally the fees must be paid to the clerk of the court upon filing. If a joint petition is filed, only one filing fee and one administrative fee are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case.
In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must compile the following information:
- A list of all creditors and the amounts and nature of their claims;
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household's financial position.
Appointment of Chapter 13 Trustee. When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. The chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.
Automatic Stay. Filing the petition under chapter 13 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. Filing the petition does not, however, stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a "consumer debt" from any individual who is liable along with the debtor. Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose.
Saving Home from Foreclosure. Individuals may use a chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the chapter 13 filing.
Meeting of Creditors. Between 21 and 50 days after the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors. During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan. If a husband and wife file a joint petition, they both must attend the creditors' meeting and answer questions. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors' meeting. The parties typically resolve problems with the plan either during or shortly after the creditors' meeting. Generally, the debtor can avoid problems by making sure that the petition and plan are complete and accurate, and by consulting with the trustee prior to the meeting.
After the meeting of creditors, the debtor, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on the debtor's chapter 13 repayment plan.
Creditors' Claims. In a chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed file a proof of claim.
Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $360,475 and secured debts are less than $1,081,400. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor.
An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency.
Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
Chapter 13 Bankruptcy
A chapter 13 bankruptcy is also called a wage earner's plan. It enables individuals with a regular income to develop a plan to repay all or part of their debts.
Length of Chapter 13 Plan. Under chapter13, 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." 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.C. §1322(d). During this time the law forbids creditors from starting or continuing collection efforts
Advantages of Chapter 13 over Chapter 7. Chapter 13 offers individuals a number of advantages over a chapter 7 case. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. 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 that come due during the chapter 13 plan on time.
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 who are 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 protectionJordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
Tommy needs to file bankruptcy.
We’ve been holding off filing his papers for several months. Why? Before he talked to me as his lawyer, Tommy had pulled $40,000 out of his 401k. That was a problem–as long as it was in his 401k it was safe. But once it hit his bank account, the court, or his creditors, could grab it. (Virginia law allows Tommy, or most people, to protect $5000 in the bank.)
We spent almost three hours in two meetings planning for Tommy to use that money. Use it for things he needed, perfectly legal things that won’t be questioned. Things we can spell out on his court papers.
At the second meeting Tommy showed me an “asset notice” that had been sent to him by the bankruptcy trustee in his ex-wife’s Sue’s bankruptcy What’s this about? We looked it up in the court’s computer.
Sue will have to write a check to the trustee for $16,000.00. Sue and her bankruptcy lawyer didn't take time to plan
Tommy’s ex-wife Sue filed bankruptcy while she had more than $19,000 in the bank. Since Virginia law allows her, like Tommy, to protect only $5000, her trustee will take the other $14,000! Ouch!
(Actually, it’s a little worse. Sue has used $2000 of her $5000 cash protection when she filed before back in 1999. So she only had $3000 left.)
This $16,000 loss would hurt anyone–but especially Sue, who’s been out of work for more than six months.
Sue saved $1600 by using the bankruptcy lawyer she picked–he charged her $800 and I charged Tommy three times that much. But she lost $16,000 because she and her bankruptcy lawyer didn’t take the time for planning.
(Maybe Sue didn’t tell the lawyer about all the money she had in the bank. The detail forms weren’t filed until 31 days after her short form was sent to the court. You need special permission to be that late.)
People see a bankruptcy lawyer because they need protection from their creditors. Careful bankruptcy planning aims for the maximum protection and the smallest loss.
Planning. That’s why I ask my clients to fill in my own 37 (!) page form before we meet. And why I often charge more than double what some lawyers do.
(Just so you know–of course I’ve changed the names and the details on this story. But the numbers–the numbers are real.)
In In re Pamela Persaud, case No. 12-43602-CEC, US Bankruptcy Court, EDNY, February 4, 2013 involved the Means Test, the presumption of abuse and what expenses can be deducted in calculating the Means Test. On Line 17 of the Means Test, the Debtor deducted $5,742.19 form the total monthly income as a "marital adjustment", which she claimed is income of her husband that was not regularly contributed for household expenses. The United States Trustee contended that tuition payments for the couples children were household expenses and should have been counted as a Debtor's income in the means test calculation. The Bankruptcy Judge provided that income of a non-filing spouse can be excluded only to the extent it is not regularly contributed to household expenses. An expense paid by the non-debtor spouse will be considered a household expense and thus included in income on the means test, unless the expense is purely personal to the non-debtor spouse. The Debtor's position was that since the tuition was paid for solely by the non-filing husband who was contractually liable, from his separate monies, those expenses should not be considered household expenses. The Bankruptcy Judge disagreed citing section 101(10A)(b) of the Bankruptcy Code which provides that income includes any amount paid by any entity other than the debtor... on a regular basis for the household expenses of the debtor or the debtor' dependents. The Means Test is an extremely complex calculation and debtor's must use extreme care and caution when making those calculations. Jim
In re Mary Veronica Santiago-Monteverde No. 11-15494 (JMP) SDNY April 10, 2012, is another case where a bankruptcy judge in the Southern District of New York held that a bankruptcy trustee was allowed to sell a debtor's rent stabilized lease to her landlord. Ms. Mary Veronica Santiago-Monteverde lived in the East Village, in New York and after she filed for chapter 7 bankruptcy, her landlord, East 7th Street Development Corp. made an offer to the Bankruptcy Trustee to purchase her interest in the lease. The bankruptcy trustee agreed to sell the lease and the Debtor objected to the sale holding that she was entitled to exempt the value of her rent stabilized lease as a "public assistance benefit" within the meaning of section 282(2) of the New York Debtor and Creditor law. In New York, exempt property in a bankruptcy case is governed by New York State Debtor Creditor law. The bankruptcy judge rejected Ms. Santiago-Monteverde's argument and the rent stabilized lease was sold to the landlord. The bankruptcy judge in his opinion stated that it is undisputed that a rent-stabilized lease is property of the estate and that the Bankruptcy Trustee may assume or reject any executory contract or unexpired lease of the debtor pursuant to section 365 of the Bankruptcy Code.
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