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Chapter 13 bankruptcy is the best consolidation of debt you’ll ever get. It doesn’t require negotiation with the creditors holding your unsecured debt, can save your home from foreclosure, can help you repay your tax debt without interest or penalties and protects you from creditor collection activity for as long as 5 years.
A Chapter 13 bankruptcy is a complicated machine with many moving parts. Some depend upon you, the person filing the case in need of debt relief. Other of those moving parts depend entirely upon third parties over whom neither you nor your bankruptcy attorney have any control.
When a Chapter 13 is successfully completed, it can do wonders for you and your family. A Chapter 13 bankruptcy can, among other things:
- Save your home from foreclosure;
- Cure mortgage payment arrearages;
- Catch up back property taxes;
- Allow you to repay non-dischargeable tax debt at 0% interest;
- Prevent creditors from harassing you for up to 5 years;
- Allow you to retain and preserve assets regardless of value.
Chapter 13 bankruptcy is a powerful tool, in other words.
However, it is a highly interactive process, in which you will be required to stay on the ball for the entire 3-5-year-long proceeding. Any number of different failures or mistakes can cause your entire debt relief plan to stumble off of the trail.
This Article will discuss the first 5 of 10 key things that can go wrong during your Chapter 13 bankruptcy process in Michigan.
But, first: how does Chapter 13 bankruptcy work? What is it exactly?
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a debt reorganization process. That is, it is a process that forces creditors into a debt repayment plan overseen and enforced by the Federal Bankruptcy Court.
Within the Chapter 13 process, you file a Plan of Reorganization (“Chapter 13 Payment Plan”) that describes which of your creditors will be paid in what order. It also describes how much each will be paid.
The Chapter 13 Plan also states how much you will pay each month in the single “Chapter 13 Plan Payment” that you must make rather than paying any (or most) of your creditors individually.
Instead of paying your creditors directly, largely, in a Chapter 13 bankruptcy, you pay this monthly Chapter 13 Plan Payment to the Chapter 13 Trustee assigned to your case by the Bankruptcy Court. This Trustee then disburses those funds to your creditors in the Plan’s priority order.
Generally, secured creditors such as mortgage creditors are paid at the highest priority. (That is, after the fees paid to your Chapter 13 Trustee and your own bankruptcy attorney.)
Unsecured debts are then sub-divided into “priority” and “non-priority” groups. Priority debts, naturally, are paid first. These priority unsecured creditors will include creditors such as the IRS, the Michigan Department of Treasury, and child support or spousal support recipients.
Credit card balances, utility balances, back rent, personal loan obligations, and other “ordinary” consumer debts (including the $50 you owe to your grandmother) are among the usual “non-priority” unsecured debts.
These non-priority, unsecured creditors only receive whatever is left over after the higher priority creditors are paid. Whatever they receive is all that they get. The balance owed to them “on paper” is discharged entirely just as it would be in a Chapter 7 bankruptcy.
In contrast to the Chapter 7, because creditors are repaid at least in Chapter 13 bankruptcy, the process does not involve the liquidation of any of your personal assets.
Things That Can Go Wrong During Chapter 13 Bankruptcy
The Chapter 13 process sounds very simple when neatly described in this way. However, the fact is that Chapter 13 bankruptcy is a highly adversarial process that is entirely dependent upon your active and timely participation for success. Some things can go wrong in a Chapter 13 that are not your fault. Sometimes, things can go wrong that are within your control.
What can go wrong during Chapter 13 bankruptcy? These, below, are the Top 10 winners.
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Missed Plan Payments
As noted above, in Chapter 13, you must make a Plan Payment each month to your Chapter 13 Trustee. Everything working well in your bankruptcy process will depend upon that payment hitting your Trustee’s account on time and in the right amount every single month.
If you miss Plan payments or make short Plan payments, what can go wrong?
Your mortgage arrearage won’t be paid if you have one that is being paid through your Plan. Because ongoing mortgage payments and mortgage arrearages are paid in the first priority in a Chapter 13 Plan, missing even a single Plan payment may mean that your Chapter 13 will not succeed in saving your home from foreclosure.
It will also mean that you will not receive a discharge of the rest of your debt, either. Completing all Plan payments is a legal requirement for a successful debt discharge.
Missing a Plan payment may, in your case, also mean that your child support payment is not timely made, exposing you to arrest and other State of Michigan sanctions. It may mean that you lose your car if your car payment is included in your Plan.
You get the idea. A short or less-than-full Plan payment is not much more helpful than no payment at all.
Either you cover the cost of your Plan in full, or it is a failed Chapter 13 Plan. Period.
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No Tax Return/Refund Turnover
No matter where in Michigan (Detroit vs. Flint vs. Bay City vs. Grand Rapids, etcetera) you file your Chapter 13, you will be required, annually, to turn your Federal tax return over to your Chapter 13 Trustee.
This is a requirement of the US Bankruptcy Code. Your Chapter 13 Trustee will oppose your eventual discharge if you have not turned over your tax return at any time throughout the Chapter 13 process.
Depending on where you file your Plan and depending on your particular Plan, you may also be required, annually, to turn over Federal tax refunds as well.
This is especially true in Detroit.
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Lost Your Job or Other Income Reduction
Because the Chapter 13 Plan Payment is premised upon your “net monthly average household” income, any reduction in your income will affect your ability to make that required payment.
When you lose your job entirely in Chapter 13 bankruptcy, you may not be able to continue with the Chapter 13 process, in other words.
If you lose your job while in Chapter 13, your bankruptcy attorney will need to work fast to buy you some time with motions to modify your Plan and other steps while you quickly hunt for a new job.
If your job search is not successful, you will have 2 choices: to dismiss the Chapter 13 entirely or convert to Chapter 7 bankruptcy.
If the point of the Chapter 13, for you, was to save your home from foreclosure or take other actions
Any other income reduction short of full job-loss will, at least, require a modification of your Chapter 13 plan.
But any of these steps require that you inform your bankruptcy attorney in a timely manner that your income has been reduced.
Losing a job is not a “failure.” It may be something due entirely to market forces wholly outside of your control. However, if you’re in a Chapter 13, the next call you make after receiving that news after your spouse should be to your bankruptcy lawyer.
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Didn’t Report New Income
Likewise, on the flipside of the coin, a failure to report an increase in your income will result in problems as well.
You will be required to report any new or additional or increased income while in a Chapter 13 bankruptcy process. Your monthly Plan payment will need to increase proportionally. The Chapter 13 Trustee will want to see the new paystubs or other documentation to prove that your new income is only X and not X + Y.
A failure to report new income will come to light when you turn your tax return over the next spring. If you don’t modify your Plan to increase your Plan payment first (or discuss vis a vis increased expenses you may have with your bankruptcy lawyer why it shouldn’t), the Chapter 13 Trustee will file his or her own modification of your Plan.
And you won’t like it.
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Failing to Disclose Divorce or Marriage
Your Chapter 13 Plan payment is calculated not just on your own income but upon your household income. Thus, if your Plan payment is premised upon the income of a 2-person household, your ability to make that monthly payment will be greatly affected by a divorce.
If you’re in a joint Chapter 13 proceeding, your case may likely need to be “bifurcated” (split in two) when a divorce occurs in fact. This is due to the inherent conflicts involved in a divorce proceeding.
Your bankruptcy lawyer may also no longer be able to represent either of you.
To retain outside divorce counsel, you need, further, to file a motion to have that retainer approved by the Bankruptcy Court.
In short, you need to let your bankruptcy attorney know immediately if a divorce is imminent or underway.
Alternatively, a new marriage during Chapter 13 brings, probably, a new wage-earner and new income into your household. The Chapter 13 Trustee is going to insist that your Plan payment increase, particularly if your new spouse is high-income.
There are steps that your bankruptcy attorney can take to mitigate or fend off these possibilities. But nothing is possible if you don’t let your attorney know about the marriage.
By the way, moving in with a partner and sharing a household even without marriage will affect your income and expenses and your resulting “net household income.” You need to let your lawyer know about this as well.
Top 10 Things That Can Go Wrong in Chapter 13: The Bottom Line
As noted, these are just the Top 5 of 10 of things that can go wrong in Chapter 13 bankruptcy.
The bottom line, this far into our discussion, is that disclosure of life changes is key. Retaining an experienced bankruptcy attorney to assist you with your Chapter 13 is vital.
Attorney Walter Metzen is a Board Certificated Bankruptcy Expert who has assisted thousands of Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.
If you are considering filing Chapter 13 bankruptcy, contact us now to schedule your free initial consultation and to ensure that you have the right attorney working for you—no matter what happens during your Chapter 13.
