By Walter Metzen
There are a variety of things you should not do or should not fail to do with in an active Chapter 13 bankruptcy case.
The Chapter 13 process is highly beneficial and can ease you out of debt, save a home from foreclosure, stop a vehicle repossession, and allow you to repay delinquent tax and other non-dischargeable debt at a 0% interest rate.
However, the Chapter 13 bankruptcy process will also ask quite a lot from you in return.
Part of the reason why it is so necessary to retain an experienced bankruptcy attorney to assist you with your Chapter 13 process is so that you don’t have to worry about micro-managing your bankruptcy case. That’s your lawyer’s job. Your bankruptcy lawyer will ensure that “little” obligations and tasks do not slip through the cracks.
However, at the end of the day, when in a Chapter 13 bankruptcy process, it is your case and not your lawyer’s.
Your lawyer is not psychic and does not know what you don’t tell him or her.
That being the case, it is vital to the success of any Chapter 13 process that you take the reins and assume certain proactive responsibilities to ensure that your case is not dismissed by the court.
To that end, what should you NOT do during your Chapter 13 bankruptcy case?
Fail to Make Plan Payments
This is the most obvious entry here, but you should not fail to make your required monthly Chapter 13 Plan payments.
A Chapter 13 bankruptcy is a “reorganization” bankruptcy in which you pay what you can afford to pay to your creditors over 3-5 years by way of a monthly payment to the Bankruptcy Court.
The Chapter 13 Trustee appointed to your case by the Bankruptcy Court disburses these payment funds out to your creditors in a priority order specified by the “Chapter 13 Payment Plan” that you and your lawyer file with the court.
Naturally, the most basic requirement of a successful Chapter 13 process is that you actually make these payments.
In Detroit and the other Eastern District of Michigan Bankruptcy Courts, your Plan payment is generally deducted from your paycheck (if you receive one) like a garnishment.
Thus, if you change or lose your employment, the plan payments will cease to be forwarded to the Trustee by your employer.
It is always your responsibility to ensure that the Trustee receives your payment every month.
Change Jobs or Quit Your Job Without Telling Your Lawyer
For that reason, you must tell your bankruptcy lawyer if you suffer any change in employment circumstances whatsoever.
Your Chapter 13 Plan payment is calculated based on the average monthly income you are earning as of the date that you file your case.
Your bankruptcy petition schedules are filed with the name, payroll address, and your wages or earnings from the particular employer that employs you on the day that you file your case.
Your monthly average household expenses are, in those same schedules, deducted from the household take-home pay earned from that specific employer.
The difference between these 2 average figures, whether it is $200 per month or $2,000 per month, is your Chapter 13 Plan payment.
If you quit your job or change your job—or get a raise, or have your overtime cut, or anything of that sort—it messes all of that math up.
In addition, as noted above, the Plan payment will stop flowing to the Trustee from that employer if you lose that job entirely.
For all of these reasons, you need to tell your bankruptcy lawyer immediately if anything of this sort occurs.
Get Married or Divorced Without Telling Your Lawyer
You may have noticed the word “household” used in the description of the income and expenses disclosed and averaged in Chapter 13 bankruptcy petition schedules.
If you are married, your spouse’s income and expenses must be disclosed in your schedules as well as your own—even if the spouse is not jointly filing the Chapter 13 case with you.
If you are single, obviously, your schedules will represent only your own income.
Thus, if you change your marital status one way or another, you will again be radically changing the amount of “net” household income available to pay into your Chapter 13 Plan.
You are required by law to disclose such changes in circumstance after a Chapter 13 bankruptcy case is filed and confirmed by the Court.
It may be that the marital status change will not result in much of a change to your Plan payment amount. However, it may also be that it will result in a drastic change.
You need to give your bankruptcy attorney an opportunity to crunch your numbers and advise you as to the impact your new marriage will have on your Plan so that you can decide whether or not to get married at this time at all, or, if you do get married without first consulting your attorney, how to modify your Chapter 13 Plan.
Or even whether voluntary dismissal of your Chapter 13 case is in your best interest.
Purposeful non-disclosure of a new marriage is not a good idea.
You are required, in a Chapter 13, to turn your tax returns over to the Chapter 13 Trustee each year.
Your new circumstances will be discovered by the Trustee at least at that point. The Trustee will then file a motion to modify your Plan—usually to increase the Plan payment based on the gross income of the new spouse without taking any of his or her expenses into account. Welcome to Bankruptcy Litigation!
If you do, on the other hand, file a Chapter 13 jointly with a spouse and then divorce, this is an entirely different problem.
It is likely in this case that the Chapter 13 will need to be “bifurcated.” That is, it will be split into 2 separate cases, one for each of the divorcing spouses.
In nearly all such circumstances, it becomes, then, a conflict of interest for your current bankruptcy lawyer to continue representing either of you. New, separate lawyers will need to be retained.
This is certainly something your attorney needs to be able to consider as a matter of professional ethical obligation, regardless of your own interest in the case.
Fail to Turn Over Tax Returns or Tax Refunds
As noted above, you are required to turn over your Federal tax return every year while in an ongoing Chapter 13 proceeding.
Depending on whether you file your case in Detroit or Flint or Bay City in the Eastern District of Michigan, or Grand Rapids or elsewhere in the Western District of Michigan, and depending on how much of your debt you are paying in your Plan (100% or less than 100%), you may also be required to turn over your Federal tax refund to the Chapter 13 Trustee while in your Chapter 13 proceeding.
If you do not do these things, your case will either be dismissed on Motion of the Chapter 13 Trustee or a creditor, or you will spend 3-5 years making Plan payments only to have your discharge denied at the end of the process.
Fail to Disclose Debts Before or After Filing Your Chapter 13 Case
All debts and all of your creditors must be disclosed in your Chapter 7 or Chapter 13 bankruptcy schedules.
It is to your benefit to disclose all of your debt to your bankruptcy lawyer prior to filing a Chapter 13 bankruptcy case in particular.
While there is settled case-law out there holding that an unsecured debt that is “in good faith” omitted from a Chapter 7 bankruptcy filing is still discharged, any debt not disclosed and properly noticed to the creditor in a Chapter 13 is not discharged at all.
All creditors in a Chapter 13 must be offered the opportunity to file a “proof of claim” form with the Court, which the Trustee will base its payment disbursement to the creditor upon.
If a creditor fails to file a proof of claim by the court’s deadline, it will receive no payment at all and will also then be fully discharged.
This happens often, and it is the right way to do it.
A secured creditor such as a mortgage servicer or car loan lender that is not disclosed will simply cause the entire Chapter 13 process to fail, one way or another.
After filing, you must disclose any new debt incurred to your attorney because you are actually prohibited from incurring new debt without an order of the court allowing it.
Thus, ideally, you will inform your attorney of the need to incur debt before you actually do it.
If the need is demonstrable to the court, it is not that complicated to obtain the order allowing it. Depending on what it is and what the terms of the loan are, it is possible on occasion to obtain the stipulated agreement of the Chapter 13 to entry of the order allowing the debt.
It is much more difficult for your bankruptcy lawyer to modify your plan seeking such an order retrospectively. This requires your attorney to also explain, on your behalf, why you violated the court’s order to begin with.
Sell Property Without Telling Your Attorney
Likewise, all property must be disclosed in your Chapter 7 or Chapter 13 bankruptcy schedules.
When you file for either form of bankruptcy, you are creating by operation of law something called the Bankruptcy Estate.
This “estate” is a legal construct in which all of your assets, property, and claims to assets are contained.
The Chapter 7 and Chapter 13 Bankruptcy Trustees are, in fact, the Trustees of this Bankruptcy Estate.
The upshot of this is that your property is under the legal custody of the Trustees for the duration of your bankruptcy proceeding.
In a Chapter 7, known as a “liquidation bankruptcy,” the purpose is to allow the Chapter 7 Trustee to sell or liquidate non-exempt (from the Estate) property in order to generate a pool of money to distribute to your creditors.
In a Chapter 13 bankruptcy, no assets are seized and liquidated, but the dollar-value of non-exempt property can affect the required amount of your Chapter 13 Plan payment and the minimum amount that creditors must be paid.
In order to accomplish either end, your property must all, of course, be disclosed and valued.
Failure to disclose assets will result in your Chapter 13 Plan being denied confirmation and then dismissed.
It may also draw the scrutiny of the US Trustee—the division of the US Department of Justice that polices the integrity of the bankruptcy system.
It is the US Trustee that prosecutes people for the Federal crime of Bankruptcy Fraud, a felony carrying a possible 5-year prison sentence.
7. Fail to Disclose a Personal Injury lawsuit or other significant Asset acquired After Filing
Should you have an automobile accident or sustain injuries as a result of the negligence of another person and you intend to file a lawsuit, be sure to notify your attorney as an amendment to your bankruptcy schedules should be filed otherwise. Likewise, your attorney should be informed about any important newly acquired asset that is of more than a nominal value to discuss whether or not an amendment is required.
What Not to Do In Chapter 13 Bankruptcy: The Bottom Line
The bottom line is that a Chapter 13 bankruptcy is a highly interactive process requiring that you fully participate every step along the way.
It will not be successful if your presumption is that you will simply pay some money to a bankruptcy lawyer and then sit back and await the positive results.
Think of your relationship with your bankruptcy lawyer as a partnership, in which your lawyer may drive the car for which you provide the fuel.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully guided Detroit area Chapter 13 clients through the bankruptcy process for over 28 years.
If you are considering filing for Chapter 7 or Chapter 13 bankruptcy, contact us now to schedule your free initial consultation.