Chapter 13 bankruptcy cases are administered by a court-appointed individual known as the Chapter 13 Trustee.
Who is this person, what does he or she do, how can he or she make or break your Michigan Chapter 13 bankruptcy case—and under what authority?
This Article will address these questions and more regarding the role of Chapter 13 Bankruptcy Trustees in your path to debt freedom.
First, however, some basics on Chapter 13 bankruptcy itself. An understanding of how Chapter 13 bankruptcy works in the Eastern District of Michigan in particular is beneficial to understanding why the Chapter 13 Trustees are … as they are.
Michigan Chapter 13 Bankruptcy 101: A One-Minute Tour
Chapter 13 bankruptcy in Michigan—and in Detroit in particular—is a complex process. Unlike Chapter 7 bankruptcy, a Chapter 13 bankruptcy requires that you make some payment to your creditors through the bankruptcy process.
The Chapter 13 bankruptcy process lasts from 3-5 years, depending on how much debt you need to repay, what sort of debt needs to be repaid, and on the outcome of your Chapter 13 Means Test.
As to the Means Test, we will not discuss its formula in detail. However, for present purposes, suffice it to say that, if your household earns more money than the median income average of a household of your size in your part of Michigan, you will be required to file a 5-year Chapter 13 payment plan. If your household is below-median average in its overall income per the Means Test, you can file a 3-year Chapter 13 payment plan.
Likewise, if you are an above-median household per the Chapter 13 Means Test, there may be some minimum amount you are required to repay to your unsecured creditors (more on these creditors below), whereas there is no minimum unsecured creditors need be paid if you are a below-median household.
For each month—however many—that you are in the Chapter 13 process, you are required to make a monthly payment equivalent to your “net household income.” This is the amount left over when your necessary, allowable household expenses (food, rent/mortgage, clothing average, medical expenses, transportation, etc.) are deducted from your average household take-home pay.
If you have $200 left over, that is your monthly Chapter 13 plan payment. If you have $2,000 left over in net income, that is your monthly Chapter 13 plan payment.
Every household and every Chapter 13 case is unique in this respect.
What is the Chapter 13 Plan?
The Chapter 13 payment plan is the plan that your Detroit bankruptcy attorney drafts for you that stipulates which of your creditors are to be paid how much and in what order. It’s a form that is mandated by Local Court Rule which will differ from the Western District of Michigan to the Eastern District (Detroit, Saginaw, Ann Arbor, Bay City, Flint, Monroe, etc.).
It flows in accordance with the priority of creditor repayment mandated by the US Bankruptcy Code. Creditors are paid in this priority order:
- “Administrative” expenses are paid first. These are your bankruptcy attorney’s fees, as well as a small, percentage-based fee owed to the Chapter 13 Trustee.
- Secured creditors, such as your mortgage holder or servicer, your car loan, and other debts “secured” by collateral and a related security agreement (mortgage, etc.).
- Lease and executory contract obligations, including leases for rental housing.
- Priority creditors, such as child support recipients or the IRS or Michigan Department of Treasury, for recent tax debts.
- Unsecured creditors, such as credit card debt and medical debt holders.
Your creditors are stayed from collecting from you during this entire 3-5-year process. With exceptions, you do not pay them directly. Instead, you send that monthly payment to—the Chapter 13 Trustee.
The Chapter 13 Trustee’s functional role is to take your monthly payment and disburse it out to your creditors in the above priority order.
Beyond that, the Chapter 13 process allows you, in your payment plan, to “reorganize” certain debts. Second mortgages on primary residences underwater relative to a first mortgage can be totally stripped off and treated as low-priority unsecured debt, for example. A vehicle worth less than you owe on it can be “crammed down” so that you pay a high priority secured debt only the actual fair-market value of the car and treat the balance as unsecured.
And so on.
At the end of the process, whatever of your monthly payments remains after secured and priority and administrative debts are paid is disbursed to your unsecured creditors. Whatever they get is all that they get. Any balance left owed to them is completed discharged.
Thus, in a Chapter 13 bankruptcy, you essentially, therefore, pay what you can afford to pay—and only that amount.
Back to the Chapter 13 Trustee: Beyond the Payment Disbursement Function
So is the Chapter 13 Trustee merely a vehicle for moving money from your pocket to your creditors?
In theory, that should be true.
In practice, the Chapter 13 Trustees—especially in Detroit bankruptcy cases—are the active and often aggressive overlords of the next 3-5 years of your life. Some appear to see it as their statutory duty to try their very best to have your Chapter 13 case dismissed before it is confirmed (approved) by the Bankruptcy Court.
The Chapter 13 Trustees are empowered to essentially represent the interests of unsecured creditors in your plan who have otherwise little role to play in the process other than to file proof of claim forms with the court to provide evidence for the amounts claimed to be owed to them.
They are chartered by the US Trustee’s Office to act in this manner.
The US Trustee’s Office is a division of the US Department of Justice tasked with policing the integrity of the bankruptcy system in the United States. While, in theory, this means policing the behavior of creditors as well as debtors, again, in practice, things don’t quite work out that way.
Creditors routinely file incomplete, insufficiently, outright fraudulent proof of claim forms in Chapter 13 cases, for example—and no one generally polices them at all, other than your own bankruptcy attorney. (This is slightly unfair: once in a blue moon, a Chapter 13 Trustee will object to a creditor’s proof of claim—but only about that often.)
All of this being the case, the Chapter 13 Trustee will, initially, at least, actually be one of your primary adversaries.
The Chapter 13 Trustee and his or her attorneys will interrogate you at your 341 Meeting of Creditors hearing about your expenses, your income, your assets, your debts—and anything else they may be interested in knowing more about.
Afterward, they may then file a series of “objections” to the confirmation of your Chapter 13 plan. In Detroit, they will always find something to which to object, with rare exceptions (usually only in the case of “100% plans” in which all creditors of all sorts will be paid all of what they’re owed).
It is your bankruptcy lawyer’s job to resolve all of the Chapter 13 Trustee’s objections—if possible. This means supplying more documentation, providing evidence that your grocery bill is as high as you say it is in your bankruptcy petition schedules, and so on.
This can be quite an involved process absolutely require that you have experienced bankruptcy counsel representing you.
In Flint and Bay City Chapter 13 cases, however, it is usually not so adversarial. If your petition or schedules or Chapter 13 plan contains a flagrant error or some provision that does not comply with the Bankruptcy Code or Local Rule, it will surely be brought to your attention by the Chapter 13 Trustee—but routine objections for the sake of it?
Thus, geography will determine whether you come to view your Michigan Chapter 13 Bankruptcy Trustee as a helpful guide to an arcane process—or something else.
Michigan Chapter 13 Bankruptcy Trustees: After Confirmation
After the confirmation of your Chapter 13 plan, the Chapter 13 Trustee recedes into the background of your case, unless something goes awry.
So long as you make your required plan payments in full and on time, turn over tax returns annually and tax refunds as required by your particular Chapter 13 plan, the Chapter 13 Trustee works quietly in the background in a more friendly and generally less adversarial manner.
If you do fail to comply with your plan’s requirements, the Chapter 13 Trustee will certainly move promptly to dismiss or forcibly modify your plan, but it’s fair to place the onus in avoiding this on you rather than the Trustee.
Even in Detroit, Chapter 13 Trustees are usually quite willing to work with your bankruptcy attorney to save a faltering plan as needed. If they aren’t given anything to work with, however, well, they can hardly be blamed for doing their jobs.
Chapter 13 Bankruptcy Trustees: The Bottom Line
The bottom line is that the Chapter 13 Bankruptcy Trustee is someone you will work with—and against—throughout your Chapter 13 bankruptcy process. Depending upon where your case is filed, you will find the Chapter 13 Trustee to be more or less helpful, or more or less pointed in his or her approach to the job.
Regardless, all of the Chapter 13 Trustees in Michigan have been employed in their roles for a very long time, and the success of your Chapter 13 bankruptcy process will be greatly enabled by the retainer of a bankruptcy lawyer who knows them all well.
When a Chapter 13 Trustee sees the “right” name printed in the “attorney for debtor” fields in your petition and related paperwork, they will know an awful lot in advance about who and what sort of legal case you will be making for yourself—and what sort of opponent they will have when objecting to this and that aspect of your Chapter 13 plan.
If you work with an inexperienced bankruptcy attorney, the Chapter 13 Trustee will know it.
If you work with no bankruptcy lawyer at all, the Chapter 13 Trustee not only knows that they will have no opposition to deal with but also that your case and your filings are likely to present, to them, a tedious mess that will likely fail before confirmation.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Chapter 7 and Chapter 13 bankruptcy clients in Detroit and throughout Michigan for over 30 years.
If you are considering filing for Chapter 13 bankruptcy, it pays to work with the right lawyer.
Call us now to schedule your free, initial consultation.