In our last blog post, we introduced the topic of things that can go wrong during a Chapter 13 bankruptcy.
In that post, we discussed the first 5 of the Top 10 things that can go wrong in Chapter 13. We also discussed the Chapter 13 bankruptcy process generally, as a necessary introduction to the topic.
After all, to understand what can go wrong in Chapter 13 bankruptcy, you must understand, first, what Chapter 13 bankruptcy is.
To that end, if you have landed on this page first, please read our prior article first, in order to learn some basics before moving on to Part 2 of the topic, here.
That said, the purpose of this Article is not to scare you away from filing a Chapter 13 bankruptcy in Michigan. To the contrary, Chapter 13 bankruptcy is a powerful tool that carries enormous advantages over debt consolidation, debt settlement, and other non-bankruptcy alternatives.
As it is vital to keep this topic in proper context, we will review a few of those advantages before moving on to the next 5 of the Top 10 things that can go wrong during Chapter 13 bankruptcy.
Advantages of Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a powerful tool when managed properly by an experienced Detroit bankruptcy attorney.
In contrast to non-bankruptcy alternatives, the primary advantage is that Chapter 13 does not require your creditors’ permission.
Chapter 13 bankruptcy is simply something to which you are entitled under US law. Creditors will have the right to file claims in your Chapter 13 proceeding and even object formally to specific provisions of your Chapter 13 payment plan. But that’s all that they get to do.
Debt consolidation does not reduce your overall debt load. Debt modifications or settlement negotiations will always require the agreement of your creditors. With your signature on the loan application, promissory note, or other contract, your creditors hold all of the cards in those alternative mechanisms.
Not so in Chapter 13. In Chapter 13, you pay what you can afford to pay—and nothing more.
Beyond that, some other advantages in Chapter 13 include the ability to:
- Save a home from foreclosure;
- “Cram down” a vehicle loan and pay only the vehicle’s fair-market value;
- Repay non-dischargeable tax debts at 0% interest;
- Catch up and pay property taxes and water utilities to stop county foreclosures;
- The requirement to pay you can afford only;
- Protect all personal and business assets;
- To run and operate a business during the bankruptcy process.
These are just a few of the advantages of Chapter 13 bankruptcy not just over non-bankruptcy options but over Chapter 7 bankruptcy as well.
That established, let’s continue where we left off at the end of our prior post with the next 5 of the Top 10 things that can go wrong during your Chapter 13 bankruptcy.
Missed Mortgage Payments or Ignoring Escrow Changes
If you are using your Michigan Chapter 13 process to save your home from foreclosure, it is likely that you are paying your mortgage payment through your Chapter 13 payment plan.
When you include your ongoing mortgage payment in your monthly Chapter 13 plan payment amount, this is known as a “conduit” mortgage payment. This is because the Chapter 13 Trustee, who accepts your monthly payment and disburses it out to your creditors, is acting as the “conduit” to your mortgage servicer.
A Chapter 13 plan payment is formulated and decided at the outset of a Chapter 13 case. It is premised upon your average net monthly household income as of the date you file your case.
If you are paying your mortgage via conduit payment, through the plan, your plan payment is also premised upon your mortgage payment as of the date that you file the Chapter 13.
Like monthly income and expenses, however, a mortgage payment can change.
If your property taxes and homeowners’ insurance is escrowed into your mortgage payment, it will be re-calculated annually. It may be that it is revised downward to a lower amount than on the day that you filed. This is not a problem from the Chapter 13 perspective, although you may be required to make certain disclosures to your plan.
If your escrow increases, on the other hand, the amount that your payment plan directs the Chapter 13 Trustee to send to your mortgage servicer each month will be insufficient.
Your mortgage servicer will file an escrow change disclosure with the Bankruptcy Court when such a change occurs. They will also directly mail you an annual escrow disclosure as required under Michigan state and Federal law.
Ignoring these documents will result in your entire Chapter 13 process collapsing. When your escrow increases, your Chapter 13 plan needs to be modified to account for the new mortgage payment amount.
Failing to Review Creditors’ Claims
Likewise, failing to review the claims filed in your Chapter 13 bankruptcy case by your creditors is a potentially serious mistake.
What do we mean by “claims?”
When your Chapter 13 is filed, your creditors will have a certain, set amount of time in which to file what is called a proof of claim form with the bankruptcy court.
This form will include the amount claimed owed, the basis of the debt (contract, lease, or other), the classification of the debt (secured vs. unsecured, priority vs. non-priority), and other required information. The proof of claim form is also supposed to include sufficient documentation to provide evidence of the creditor’s proper ownership of the debt and legal standing to file the claim.
While a number of Bankruptcy Rules of Procedure have eroded this latter requirement, each and every proof of claim form must be reviewed for accuracy.
It only takes 1 proof of claim form claiming a larger-than-expected or, occasionally, completely fraudulent debt to totally upset the math of the Chapter 13 plan.
Sold Assets or Incurred New Debt
Even though assets and property are not liquidated in Chapter 13 as they may be in a Chapter 7, they are nevertheless assets of what is called the Bankruptcy Estate.
The Bankruptcy Estate is the legal estate created upon filing a bankruptcy case. All of the property you own is an asset of the Bankruptcy Estate. The Chapter 13 or Chapter 7 Trustee is the administrator of the Bankruptcy Estate, for the benefit of the Estate’s creditors.
What exactly this means differs from Chapter to Chapter. In a Chapter 7 bankruptcy, it means that, if you cannot “exempt” all of property from that Bankruptcy Estate, it will be seized, sold off, and the proceeds distributed to your creditors.
In a Chapter 13 bankruptcy, this doesn’t happen. But the value of any non-exempt assets of your Bankruptcy Estate can require that your unsecured creditors be paid, as a class, that same value. (Otherwise, the default that unsecured creditors must be paid is zero.)
You cannot sell the assets of your Bankruptcy Estate without an Order of the Bankruptcy Court allowing you to do so. If you do sell property without Court authorization, you will have breached the Court’s Order Confirming your Chapter 13 Plan.
Likewise, you cannot incur new debt without Court authorization. This is for the obvious reason that a Chapter 13 plan is a finely tuned mathematical construct. Adding new debt that requires repayment from the income that you are required to deposit into your plan each month upsets the balance.
And it upsets the Chapter 13 Trustee, who may move to dismiss your case if you begin missing plan payments because you are servicing your new debt instead.
Failed to Tell Your Bankruptcy Attorney About These Things
If any of the items described in this post or our “Part 1” article do occur in your Chapter 13 bankruptcy case, the worst mistake is failing to tell your bankruptcy about it. Or failing to tell your lawyer about it soon enough to remedy the situation.
Most of the things that can go wrong during your Chapter 13 bankruptcy case can be fixed. But all of those things will require the attention of an experienced Michigan bankruptcy attorney.
Eventually, however, the damage is done, and a problem cannot be addressed. Ships can sail, in Chapter 13, and it is vital to keep a channel of communication open to your bankruptcy attorney.
Failed to Retain a Bankruptcy Attorney
That being necessary, the worst thing that can happen during your Chapter 13 bankruptcy case is to have filed it on your own, without experienced legal assistance.
As a former Chief Judge of the Eastern District of Michigan Bankruptcy Court once opined from the bench, it is highly unlikely that your Chapter 13 bankruptcy will complete and discharge successfully—or complete at all—without a good bankruptcy lawyer assisting you.
The Chapter 13 bankruptcy process, as should be clear, is a highly complex and esoteric legal process. Your brother-in-law the estate planning attorney will not be competent to advise you. Nor will your realtor, CPA, or business advisor.
Competent bankruptcy attorneys spend years learning the ins and outs of the US Bankruptcy Code, local court rules, and the whims of specific Trustees, US Trustees, and Bankruptcy Court judges.
This is the level of professional you need on your side when facing home foreclosure or any of the other
Attorney Walter Metzen is a Board Certified Bankruptcy Expert with more than 30 years of experience successfully representing Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients.
If you are considering filing for Chapter 13 bankruptcy, contact us now to schedule your free initial consultation.