People say that one can never be too old to learn. I believe this is true. However, as we get older, our learning process can be hindered by our inability to accept new ideas and break free from old habits. Two Fridays ago, I attended a continuing legal education seminar hosted by the Arizona Chapter 13 Bankruptcy Trustees. The essence of the presentation was to explain the proper procedures for filing Chapter 13 Plans and getting a Plan successfully confirmed. Now, I haven’t been practicing bankruptcy for 20 years, but I have been doing this for awhile and have filed many Chapter 13’s. I have also gotten many Chapter 13’s confirmed. So, I was a little hesitant of what tips I can learn from this presentation. What I realized is that I know how to properly prepare, file, and confirm Chapter 13’s, but I could use a little polishing of my skills to do this better.
To give a background, a Chapter 13 bankruptcy involves a type of consolidation of debt and then a repayment over a period of 3 to 5 years. The repayment period that applies is based on whether the debtor is above or below the median income for his/her household size. The repayment amount is based on multiple factors. One of which is called Chapter 7 reconciliation. A debtor must satisfy this requirement by paying back his/her unsecured creditors an amount equal to, or greater, than the value of the assets that could be liquidated by a Chapter 7 trustee. For example, in Arizona, if a debtor owns a free and clear boat, this would be an asset that could be liquidated in a Chapter 7. If the boat is worth $10,000.00, then that debtor must pay at least $10,000.00 worth of their unsecured debt in a Chapter 13. The second factor in determining the monthly payment is disposable income. All of a debtor’s disposable income must be applied to his/her Chapter 13 Plan. When a Chapter 13 bankruptcy is filed, a Plan is proposed to the trustee, to the creditors, and to the bankruptcy judge. The Plan explains how the creditors will get paid. The proposed Plan is never a definite one. Recommendations and/or objections will be issued regarding the Plan. These must be addressed to get the Plan confirmed. A Plan is confirmed once the trustee and judge have signed it. A confirmed Plan is the goal of a Chapter 13 bankruptcy.
What did I learn?
Here are some tips about Chapter 13’s. For those who do not practice bankruptcy law, but may be considering filing Chapter 13 or practice in other areas, these are still good tips to keep in mind. Also, it is important to note that the tips offered come from Arizona trustees. Trustees are individuals and each has his/her own approach to doing things.
1. Replacement value = retail value
In some instances, a debtor can propose something called a “cram-down” of his/her vehicle in a Chapter 13. The amount of the loan is reduced to current value of the vehicle, and then the lowered loan amount is paid. A loan must be 910 days old to be able to do this. There is debate over what the current value of the vehicle is measured at. Debtor’s attorneys would say fair market value. But, what I learned from this presentation is that creditor’s attorneys would not say the same thing. Most are always going to argue that current value is replacement value, which is suggested retail value. Therefore, if we want a more easily confirmed Plan, we should propose a cram-down value that is closer to retail value.
2. Assets, Assets, Assets
While a Chapter 13 can be viewed as a type of asset protection bankruptcy, assets are still important. This is because of the Chapter 7 reconciliation requirement. To ensure that you are being fair to your creditors, assets will still be considered. One of the Chapter 13 trustees made it very clear that he does asset checks to determine that all of a debtor’s assets have been properly listed. Therefore, full disclosure is important.
3. Notice is important
Because it is a very paper driven pand administrative process, we can often forget that bankruptcy is a legal proceeding and that the Rules of Procedure are still important. Procedure rules require that if something is done that could harm a party, proper notice must be given to that party to object. If something is changed in the Chapter 13 Plan that could harm a creditor, i.e. they get paid less, notice must be given. Usually notice requires formally amending or modifying the Plan and sending the new version to each creditor for review. If a Plan has dragged on and is finally close to confirmation, there can sometimes be hesitation to file an amended Plan if something changes. This starts the process all over again. However, it must be done. There are instances in which this may not be required. For example, if the payments are increased, or if there is no material effect to the creditors.
4. Debtors’ attorneys are going to be getting less slack
In 2005, bankruptcy law changed to make it more difficult to qualify for a Chapter 7 bankruptcy. Thus, pushing more debtors into Chapter 13 bankruptcies. Couple this with a tough economy, and Chapter 13 filings rose dramatically. It became hard for all of the parties to keep up, and a backlog formed. Trustees became more lenient on their recommendations of Chapter 13 Plans, making it slightly easier to get cases confirmed. Now, Chapter 13 filings are slowing down. The trustees made it clear that leniency may not last and recommendations may go back to the way they used to look. Therefore, we debtors’ attorneys will need to step it up, break out of old habits, and polish our Chapter 13 practice.