- A Brief Overview of Chapter 13 Bankruptcy in Michigan
- The Importance of Understanding Potential Problems
- Things That Can Go Wrong in Chapter 13: The Bottom Line
Much can go wrong in Chapter 13 bankruptcy in Michigan. Some of these the things that tend to go wrong in a Chapter 13 bankruptcy proceeding are your fault. Some, however, are not.
This Article will explore the Top 5 things that can go wrong during a Chapter 13 bankruptcy that are not your fault. We will discuss the importance of understanding these potential problems, the consequences of not addressing them, and how retaining an experienced Michigan bankruptcy attorney can decrease the possibility of these things happening. And help you fix them when they do.
First, a brief overview of the Chapter 13 bankruptcy process is warranted.
A Brief Overview of Chapter 13 Bankruptcy in Michigan
Chapter 13 bankruptcy is a type of bankruptcy that allows you to restructure your debts and repay them, at least partially, over a period of three to five years.
Unlike Chapter 7 bankruptcy, which involves the liquidation of your assets to pay off creditors, Chapter 13 bankruptcy allows you to keep your assets while repaying your debts through a court-approved payment plan.
To file for Chapter 13 bankruptcy, you must have a regular income and owe less than a certain amount of secured and unsecured debts. You are required, in Chapter 13 bankruptcy, to draft and file with the US Bankruptcy Court a Chapter 13 payment plan, or plan or reorganization, proposing to repay your creditors with a specific monthly payment made to the court. The Chapter 13 plan will also propose to repay your creditors in a certain priority order. Once approved, the debtor makes payments to a court-appointed “Chapter 13 Trustee,” who distributes the funds to the creditors according to the terms of the plan.
The order of repayment proposed in your Chapter 13 plan must comply with the requirements of the US Bankruptcy Code (the Federal statute governing the US bankruptcy process). Secured creditors, such as mortgage and car loan lenders, are typically paid first, followed by priority unsecured creditors, such as tax obligations and child support payments. Finally, any remaining funds are distributed to general unsecured creditors, such as credit card companies and medical bills.
The monthly payment you make to the court-appointed trustee is determined by a variety of factors, including your income, expenses, and the amount and type of debts you owe. Specifically, it is generally the difference between your household take-home pay and your necessary monthly household expenses—even if your spouse is not filing jointly with you. (This straightforward-sounding rule can be complicated by the other factors above.)
Once your plan is approved by the court, you make payments to the Chapter 13 Trustee. The Trustee then distributes the funds to your creditors. They are prohibited from collecting from you directly under force of Federal injunction for the entire 3-5-year Chapter 13 process.
The Importance of Understanding Potential Problems
As you consider filing for Chapter 13 bankruptcy, it is important to understand that the process is filled with potential pitfalls. While the goal of Chapter 13 bankruptcy is to help you restructure your debts and regain financial stability, there are several problems that can arise during the process. Some of these problems may be beyond your control, while others may indeed be the result of your own failings.
At the end of the day, the Chapter 13 bankruptcy process is premised upon your attention to legal requirements and deadlines, yes. But it is also presumes that your income and expenses and other aspects of your daily life will remain entirely stable for as long as 5 years. For anybody, this is not a realistic presumption. Life happens to you, sometimes, regardless of how On Top Of Things you may or may not be.
Thus, It is important to understand what can go wrong in Chapter 13 in order to understand how vital it is that you retain an experienced bankruptcy attorney to represent you. Most Chapter 13 problems are fixable—but you need the help of someone who knows how to fix those problems.
That all said, what are the most common things that can go wrong in Chapter 13 that aren’t your fault?
Failure of the Chapter 13 Trustee to Distribute Payments
It is frankly rare for a Chapter 13 Trustee to “fail” to distribute payments. If nothing else, the Chapter 13 Trustees in the Detroit, Flint, and Bay City Bankruptcy Courts are highly skilled handling money. Your money.
This is, in fact, the statutory role of the Chapter 13 Trustee: to receive your monthly Chapter 13 plan payment, hold onto it in a secure manner, and then distribute it to your Michigan bankruptcy attorney in payment of his or her fees, to him- or herself in payment of the percentage-based Trustee’s fee, and—to your creditors.
If this issue does occur, it is usually because the Chapter 13 Trustee did not think that a distribution to one of your creditors was warranted or required by your Chapter 13 Plan or by law. Even in this case, the Trustee will (or should) object to the creditor’s proof of claim and obtain a court order striking that claim rather than simply not paying it.
On the “it could be your fault, after all” side of the coin, this could also happen because you failed to list or schedule the debt in your bankruptcy petition. And, thus, the creditor was not notified, no proof of claim filed, and no Trustee payment has been disbursed.
If this does occur, for whatever reason, it is essential to have an experienced bankruptcy attorney working for you. A debt that is not scheduled is not discharged in Chapter 13 bankruptcy.
If it is a secured debt for, say, your home mortgage, a debt not paid means big problems (foreclosure) at some point down the road.
You’ll need a good lawyer to work out the reason for the problem and to motion for an order requiring the Trustee to disburse the funds, if warranted.
Inaccurate Claims Filed by Creditors
This is probably the most common thing that can go wrong in Chapter 13 Bankruptcy that isn’t your fault. The filing of inaccurate or outright fraudulent proofs of claim by your creditors is a daily occurrence in bankruptcy courts across Michigan and beyond.
When inaccurate claims are filed by your creditors, it can seriously affect the functionality of your Chapter 13 plan.
For example, if a credit card debt that you know to be an unsecured debt entitled only to be paid last in your Chapter 13 payment plan files a proof of claim form claiming that its debt is secured, artificially raising its priority. Suddenly, that “paid whatever it gets” claim becomes a “must be paid 100% of what’s owed” claim.
If your monthly Plan payment is already the most you can afford to pay monthly, this sort of issue will suddenly render that payment amount insufficient.
Thus, it is vital that you have an experienced Michigan bankruptcy attorney working for you so that every claim form filed is scrutinized and, where appropriate, objected to.
Changes In Your Financial Circumstances
Life happens. To you. That is the essential premise of this Article, in fact. In or out of Chapter 13 bankruptcy, changes to your financial and other life circumstances are often beyond your control.
When you are in the midst of a Chapter 13 bankruptcy proceeding, those changes to your financial circumstances will directly affect your ability to complete your Chapter 13 successfully.
Job loss, overtime loss, demotion, lay-off, and other changes in your income stream will result in an immediate inability to pay your required Chapter 13 monthly payment if not addressed. Likewise, a permanent increase in a necessary monthly household expense can have the same effect.
When this occurs, you will need to discuss the viability of a modification of your Chapter 13 plan to accommodate the change in financial circumstance.
Likewise, positive changes in your financial circumstances create different sorts of problems that will at least carry disclosure requirements and amendment of your income and expense Schedules as originally filed. They may also require a Plan modification in which you increase your Plan payment.
You have an affirmative duty to report changes in your financial circumstances to the Chapter 13 Trustee and to the Bankruptcy Court. You are also required, no matter what, to provide the Chapter 13 Trustee with a copy of your Federal tax return each year. Thus, income changes will be discovered. It’s better than you take the initiative.
If you don’t want them to disrupt your Plan and your odds of a successful discharge, it’s even better if you have an experienced bankruptcy attorney who will help you to disclose these changes in the most strategically advantageous way.
Unexpected Life Events
Not all of life’s changes are financial. At least not directly. Some are more personal.
A divorce or marital separation, for example, are “personal” life event changes that need to be disclosed in your Chapter 13 bankruptcy case. This is particularly true if a departing spouse has jointly filed the Chapter 13 case along with you. (It’s also true, even if it not a joint filing, that the spouse’s income was calculated in your Chapter 13 plan.)
Other examples include the birth of new children, the adoption of children, elderly family members joining the household, and the sale or loss of property.
Anything that changes should be discussed with your bankruptcy attorney. A failure to pick up the phone and call your lawyer when something changes while you in are in Chapter 13 becomes a problem that is, in fact, your fault after all.
Bankruptcy Law Changes
This is generally not something you should spend much time worrying about. However, from time to time, bankruptcy law has been changed by Congress. A good recent example is President Biden’s student loan forgiveness plan. (Regardless of the fact that this has been held up by certain states’ attorney generals, it’s still a good example.)
If the law or other rules change in a way that negatively or positively affects your ongoing Chapter 13 proceeding, this is certainly something that can “go wrong” that is not your fault.
Either way, your bankruptcy attorney will let you know what is happening and will help you to do with it—or take advantage of it.
If you don’t have an attorney, you will likely not know that the law has changed at all.
Things That Can Go Wrong in Chapter 13: The Bottom Line
The bottom line is that the odds of something going wrong during your Chapter 13 process that is not your fault is almost inevitable. As noted, life happens.
However, none of the events described in this Article are fatal to the success of your Chapter 13 bankruptcy process unless you fail to disclose them to your Trustee—and to your lawyer. (Exception: total job- or income-loss can indeed trigger the end of a Chapter 13 proceeding if the income is not very quickly replaced.)
A good bankruptcy lawyer makes the difference between a successful Chapter 13 discharge and a case dismissal.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully assisted thousands of Metro Detroit Chapter 7 and Chapter 13 Bankruptcy clients for over 30 years.
If you are considering filing for bankruptcy, contact us now to schedule your free initial consultation.