Only individuals (not corporations, LLC’s or partnerships) with ‘regular income’ whose unsecured debts are less than $419,275 and whose secured debts are less than $1,257,850 are eligible for relief under chapter 13. Only debts that are noncontingent (not subject to the occurrence of an as-yet undetermined and undeterminable event) and liquidated in amount are included. For example, if you’ve been in a car accident and you’ve been sued for $5,000,000 in damages in a case that hasn’t yet gone to trial or settled, that $5,000,000 does not count toward the debt limit totals.
In chapter 13, you propose a plan to repay debts. Chapter 13 debtors are required to commit their “projected disposable income” to a repayment plan over a period of between 3 years and 5 years. The ‘applicable commitment period’ for a chapter 13 plan is determined by the means test, discussed further below. Bankruptcy Code § 1325(b)(4). If a debtor’s “current monthly income” under the means test formula is greater than the median income for the debtor’s household size in New York, the commitment period is 5 years. Otherwise it is 3 years. A debtor with a commitment period of 3 years may elect to enlarge the plan period to up to 5 years if necessary to accomplish the debtor’s goals under the plan.
With the exception of past-due payments (arrearages) owed on secured claims for property you are keeping (like your home) and on claims entitled to a priority in payment, plan payments in the Southern District of New York are not determined based on what you owe. Holders of allowed unsecured claims share chapter 13 plan distributions after payment of, e.g., chapter 13 trustee fees, domestic support obligations, attorney’s fees, recent taxes, past due mortgage installments, car payments, etc.
You can think of this in terms of a pot of money, left over after payment of priority and secured arrearage claims. An unsecured creditor’s share is determined by the size of its claim as a percentage of the money left over in the pot after the above-mentioned priority and secured claims have been paid. The percentage distribution on unsecured claims such as credit cards and medical bills can vary from very low to as high as 100%, depending on the amount of different kinds of claims, the size of a debtor’s monthly plan payments, and the length of the plan. There’s more to it than this, but this is a pretty good approximation of how it works.
The chapter 13 plan is administered by the chapter 13 trustee. Unlike chapter 7, the trustee in a case under chapter 13 does not have the duty or power to sell assets, or to sue to recover avoidable transfers. Rather, the chapter 13 trustee is a federal court authorized collection and distribution agent. The chapter 13 trustee has the duty to appear and be heard on the confirmation or modification of the chapter 13 plan (and on paper at least, on the value of property subject to a lien) and may seek conversion of the case to another chapter or dismissal of the case as the trustee deems appropriate. The decision on such matters in the Poughkeepsie Division of the Southern District of New York always rests with the bankruptcy judge.
The most common use of chapter 13 in New York’s mid-Hudson Valley is to avoid foreclosure by attempting to modify (and, failing that, to cure and reinstate past-due payments on) a home mortgage. Note that the purpose in filing a chapter 13 case must be a bankruptcy purpose, that is, to reinstate secured debt or to discharge personal liability on debt. With that proviso, the Loss Mitigation procedures established by the U.S. Bankruptcy Court for the Southern District of New York afford debtors a valuable tool for avoiding the foreclosure of a mortgage on their primary residence.
Since the 2005 amendments to the Bankruptcy Code, chapter 13 (rather than chapter 7) may also be required for certain debtors based on “current monthly income” (or “CMI”), as determined by a congressionally mandated formula. CMI is neither current nor monthly, and is based in part on a debtor(s) income, excluding Social Security benefits, in the 6 calendar months prior to the month in which the case is filed. If household income in that 6-month look-back period exceeds the median income for a debtor(s)’ household size in New York as determined by the Census Bureau, there is a complex formula used to determine CMI. Chapter 13 is indicated as the appropriate form of bankruptcy if the means test results in a “presumption of abuse”. An attempt to seek relief under chapter 7 with a presumption of abuse shown by the means test will result in a motion to dismiss being filed by the United States Trustee. Rather than suffer dismissal, the debtor in this situation can convert the case to chapter 13.
Chapter 13 debtors share most but not all of the powers of a chapter 7 trustee. Chapter 13 debtors may sell property, borrow money, assume or reject leases, surrender property, bifurcate undersecured claims into their secured and unsecured components based on the value of the collateral securing the claims, strip-off entirely unsecured junior mortgages and liens on a primary residence, and sue to recover money or property for the benefit of the bankruptcy estate. Chapter 13 debtors whose cases were originally filed under chapter 13 (i.e., not converted to chapter 13 from another chapter) have the absolute right to dismiss their case, without the necessity of a hearing, absent bad faith.
Subject to certain limited exceptions, all of the chapter 13 debtor’s property as of the commencement (filing) of the case constitutes ‘property of the estate’, along with earnings or other property received after filing and during the pendency of the case (think, e.g., personal injury settlements, inheritances, and marital property settlements, after exemptions). Bankruptcy Code §§ 541 and 1306. Chapter 13 debtors must commit enough of their non-exempt property to fund the chapter 13 plan so that creditors receive at least as much in chapter 13 as they would have received if the debtor had instead filed for relief under chapter 7. Bankruptcy Code § 1325(a)(4).
Priority claims ordinarily must be paid in full under the chapter 13 plan. Bankruptcy Code § 507 lists claims in the order of their priority. First are claims for domestic support obligations, i.e., separate maintenance (alimony) and child support. Next are expenses of administration, such as attorneys’ fees for services rendered and not covered by a pre-filing retainer agreement. And in consumer chapter 13 cases, the next relevant priority claims are for certain taxes. To be confirmable, a chapter 13 plan must propose to pay priority claims in full over the life of the plan, unless the creditor(s) holding such claims agree otherwise. Bankruptcy Code § 1322(a)(2).
In the Southern District of New York, and subject to available exemptions, a debtor may retain up to $1,500 in tax refunds each year during the plan period. In a jointly filed case (married couples only), the debtors may retain a total of $3,000 in tax refunds annually. Refunds beyond this amount must be paid to the chapter 13 trustee. Failure to provide the chapter 13 trustee with copies of tax returns and excess refunds during the plan period will result in the trustee filing a motion to dismiss the case.
As in chapter 7, chapter 13 debtors may file a motion to avoid the lien of a judgment on their homestead if the judgment lien interferes with the debtor’s homestead exemption. Unique to chapter 13, however, is a debtor’s ability to strip off an entirely unsecured junior mortgage lien from the debtor’s home. If the balance of senior liens (such as a first priority mortgage) exceeds the value of the debtor’s primary residence, a chapter 13 debtor may file a motion to (i) value the property and the liens on the property; and (ii) seek an order determining that a junior mortgage lien is entirely unsecured and is void, subject to the debtor completing payments and obtaining a discharge under the chapter 13 plan.
Michael D. Pinsky, P.C. represents clients throughout New York’s Hudson Valley in a full range of bankruptcy matters. Please call 845-394-2616 or contact me online for a free initial consultation at my office in Newburgh.