Paying a Chapter 13 case off early.

With tax season drawing to a close, one question that frequently pops up with debtors currently in Chapter 13 Bankruptcy (or at least among those who are required to pay in 1/2 of their tax refund) is whether they are close to completing their plan.
I’ll give a real simple case as an example.  John Doe files for Chapter 13 Bankruptcy and has a $4,000 car loan that has to be paid in full.  His income requires him to pay nothing to his unsecured creditors, but he has to pay in 1/2 of this tax refunds.  After a year in the plan, he has paid down the car loan to $2,500.  He gets a $5k tax refund and pays in half – as he is obligated to – to the trustee.  That should be enough to pay off the car loan and end the plan, right?
Not quite.  Although it is true – the trustee will use the tax refund to pay the car loan first (secured and priority creditors get paid in full before any money goes to unsecured creditors) – the tax refund money is earmarked for unsecured creditors.  Therefore, John will have to continue making plan payments pursuant to the terms of his Chapter 13 Plan, and those future payments (which would undoubtedly equal or exceed $2,500) will then go to unsecured creditors.
Why is this?  Well, since secured and priority creditors are required to be paid in full in Chapter 13, most plans are required to fund those creditors in equal monthly payments over 3-5 years.  Tax refunds are the result of over-withholding taxes, which reduces disposable income.  Since plans require that all disposable income come into the plan, tax refunds are intercepted and earmarked for unsecured creditors.
There are, of course, exceptions (and unspoken truths and loopholes) to what I’ve just said.  But that is the main principle of the matter.
So, can you ever get out of a plan early?  Yes.  But with some caveats.
First, you may be eligible to convert to Chapter 7, but the factors that go into such a determination are too numerous for me to list in this article, so you should speak to your attorney if you think conversion is something you want to consider.  If you filed a Chapter 13 because you were ineligible to file Chapter 7 due to a prior bankruptcy, you won’t be able to convert.  Also, generally, there must be a change in financial circumstances such that you can no longer have disposable income.
Second, you can get out of a Chapter 13 Bankruptcy at ANY TIME if you can pay off all claims in full (the caveat here being that the claims deadline must pass, which is about 90 days after the 341 hearing for most creditors, but 180 days after filing for government creditors).  You’re not getting a discharge, but you’re ending the bankruptcy.
After 36 months, below-median debtors (assuming they’re in Chapter 13 for longer than 36 months to begin with) can buy out of a Chapter 13 early by paying off any balance owed on secured and priority debts plus any obligations to pay unsecured debts up to that point.  The plan must also be amended to shorten the length of the plan.
At present, many circuits have held that above-median debtors cannot get out earlier than 60 months (since that is their applicable commitment period)  without paying all debts in full.  It has not yet been established in the Eastern District of Wisconsin whether an above median debtor can buy out between 36-60 months with the benefit of a partial discharge on unsecured debts, but if and when that challenge is made, it is unlikely to go in the debtor’s favor.
On a side note:  Last week, I discussed conduit mortgage payments.  For those who will be making post-petition mortgage payments directly to their lender and have pre-petition arrears, be advised that your first mortgage payment is due with the first contractual due date after your bankruptcy case is filed.  Keep this in mind when planning to file your case.  I get a lot of clients who schedule their appointment toward the end of the month, and their mortgage due date is the first of the month.  They are unprepared to make their first mortgage payment within a few days.  On the other hand, if you file early in the month, you have most of the rest of the month to get ready to resume mortgage payments (just make sure that your reinstatement quote that you provide your attorney includes the current month’s mortgage payment!).

Debit Cards Now Accepted

Later this week, Holbus Law Office will begin accepting debit cards for payment of attorney fees.  We have had a dramatic increase in requests for debit card payments recently, and after carefully reviewing the Wisconsin Supreme Court Rules governing attorneys and the use of debit and credit cards, we have decided to open an account through Square.  You can learn more about Square here.
There will be some restrictions on these payments.  Some of these restrictions may be lifted after we gain some experience with this process (noted with an asterisk).  Some of these restrictions will be permanent because of the Supreme Court Rules and other laws.

  • Debit cards may only be used to pay for attorney fees (advanced fees).  They cannot be used to pay for court filing fees, credit reports, counseling courses, or tax transcripts (advanced costs).
  • Only debit cards will be accepted from clients.  The word ‘DEBIT’ or ‘PREPAID’ must appear on the lower right corner of the card near the card logo (Visa, Mastercard, Discover, or American Express).
  • You must be at the office, in-person, to sign for the transaction.  We will not accept payments over the phone, by fax, by mail, or by e-mail.
  • We will only accept cards with the client’s name on them, and the client must be present.
  • Clients who have bounced checks in the past will not be allowed to pay with a debit card.
  • We will not accept credit cards, even if it belongs to a third party.
  • We do not anticipate that we will be charging processing fees for this service.

April 2013 Median Income Levels

Wisconsin debtors trying to squeeze into a Chapter 7 will have an easier time with it come April 1, 2013.   Across the board increases, plus an increase in the credit for households larger than 4 people.
Again, these numbers are only for Wisconsin residents.
Household of 1: $42,776
Household of 2: $57,479
Household of 3: $64,441
Household of 4: $79,648
Greater than Household of 4: + $7,500 each additional person.
NEW (effective April 1, 2013)
Household of 1: $43,661
Household of 2: $58,668
Household of 3: $65,775
Household of 4: $81,296
Greater than Household of 4: + $8,100 each additional person.

Tri-Annual Statutory Inflation Adjustments

On April 1, 2013, certain dollar amounts contained in the U.S. Code will undergo their three year adjustment.  The full adjustments can be found here, but I want to highlight the numbers that will impact clients of Holbus Law Office, LLC the most.
11 U.S.C. § 109(e).  Although almost any individual is eligible to file Chapter 13 (even if you’re not eligible for a discharge), there are debt limitations to Chapter 13.  That maximum amount of secured debt allowable in Chapter 13 is being raised from $1,081.400 to $1,149,525.  The maximum amount of unsecured debt allowable in Chapter 13 is being raised from $,360,475 to $383,175.
11 U.S.C. § 507(a).  Some debts that are owed to creditors are entitled to priority treatment.  Certain dollar amount restrictions placed on creditors have been increased.  Specifically, wages earned within 180 days of the petition or cessation of business have been increased from $11,725 to $12,475.  Allowable security deposits are being increased from $2,600 to $2,775.
11 U.S.C. § 522(d).  Federal exemption limits are increasing – always good news for the debtors.  The homestead exemption is increasing from $21,625 to $22,975.  The vehicle exemption from $3,450 to $3,675.  The household good exemptions are increasing from $11,525 to $12,250.  Jewelry from $1,450 to $1,550.  Wildcard from $1,150 (+ $10,825 in unused homestead exemption) to $1,225 (+ $11,500 in unused homestead exemption).  Tools of the trade from $2,175 to $2,300.  Life insurance policies with cash value, from $11,525 to $12,250.  Personal injury from $21,625 to $22,975.
11 U.S.C. § 523(a)(2)(C)(i).  Presumption of non-dischargeability on debts incurred just prior to filing for bankruptcy.  The dollar threshold being increased from $600 to $650 for consumer debts incurred within 90 days of filing, and from $875 to $925 for cash advances incurred within 70 days of filing.
11 U.S.C. § 707. Deductions and allowances on the Means Test.  I’m not going to go through each number here, but there are 8 provisions that have been increased anywhere from 5.6% to 8%.
It’s also worth noting that there have also been suggested changes to the bankruptcy forms, which you can read more about here.

Conduit Mortgage Payments

Effective March 18, 2013, it will be the policy of this office to prescribe “conduit mortgage payments” to clients who have pre-petition mortgage arrears to be cured in Chapter 13 Bankruptcy.
Ina traditional Chapter 13 Bankruptcy case that provides for the curing of pre-petition mortgage arrears, the debtor makes two payments: (1) plan payments to the trustee which is then distributed to creditors, including the mortgage company for pre-petition arrears, and (2) direct payments to the mortgage lender for post-petition obligations.
If the debtor defaults on plan payments to the trustee, the trustee files a motion to dismiss the case.  This is usually resolved by a slight increase in plan payments to cure the default plus a six month “doomsday provision” during which the debtor must make all plan payments on-time, otherwise, the case is automatically dismissed without further hearing.  The same is true on post-petition mortgage payments, except the lender files a motion for relief from stay to proceed with foreclosure.
What is a conduit mortgage?
Put simply, a conduit mortgage is where the post-petition mortgage payments are funneled through and distributed by the trustee.  Instead of two payments as described above,the debtor has only one payment to the trustee, plus ordinary living expenses (groceries, fuel, utilities, insurance, etc.).
It’s also worth pointing out that conduit mortgages are required in several districts throughout the country. Although conduit mortgages are not currently required in the Eastern District of Wisconsin, that may soon change.
What are the disadvantages?
One payment instead of two?  That sounds great, doesn’t it?  So why haven’t we been doing that all along?  Obviously, there is a drawback.  The trustee gets paid a fee out of payments he distributes to your creditors under the plan.  That fee is set by the U.S. Trustee and is capped at 10%.  Usually, it hovers between 3-7%, but since the fee is variable, we have to compute your plan payments based on a presumption of 10%. Since most mortgage payments run between $500 – $1,500 a month, that can be a $50-$150/mo increase.  For this reason, we have been reluctant to implement conduit mortgages.  However, based on recent behavior of certain mortgage lenders, we now believe the advantages of conduit mortgages far outweigh the disadvantages.
What are the advantages?
The main advantage is that if you default during the Chapter 13 Plan, you will only have to deal with a trustee’s motion to dismiss.  There should be no motion for relief from stay from the mortgage lender.  This means…
  • Having 21 days to object to a trustee’s motion to dismiss rather than only 14 days to object to a creditor’s motion for relief from stay.
  • The trustee’s records of payments to the mortgage lender are accessible and easier to prove.
  • Fewer motions, fewer objections, and fewer amended plans means a decreased likelihood of a supplemental fee application from debtors’ counsel.
  • Fewer attorney fees from the mortgage lender.
  • Never having two doomsday provisions running concurrently.
  • It is far easier to negotiate a settlement with the trustee’s office than it is to negotiate a settlement with the mortgage lender.  The trustee’s office is more responsive, more accessible, and they want your plan to succeed.
  • Eliminates problems with mortgage lenders who refuse to timely file motions for relief from stay or supplemental claims, theoretically reducing the foreclosure walk-away problem.
  • Districts where conduit mortgages are mandatory tend to have an overall higher plan success rate.

Gobal Economic Collapse Explained

I came across this video while I was researching a different, personal project.  I like it because it seems to be non-partisan and unbiased, and it explains very complex economical ideas that most people (including myself) have a hard time wrapping their heads around, and translates them into easily-accessible themes.
I decided to share it here because the economy is very much intertwined with the business of a bankruptcy law firm, but also because some of the themes in this video also teach valuable lessons in the individual consumer level.

Your yearly April 15 reminder…

As the calendar races nearer to April 15 once again, we at Holbus Law Office LLC would like to issue a few reminders as this important day approaches.
Those of you presently in Chapter 13 must send a copy of your 2012 federal and state income tax returns to the trustee.  This is true REGARDLESS of whether or not you are required to remit 1/2 of your tax refunds.
Some Chapter 13 debtors must send in 1/2 of their tax refunds to the trustee.  This should be done promptly to avoid dismissal of your case.  If you are not sure if this requirement applies in your case, please consult your copy of the Chapter 13 Plan or contact your attorney.
If you have not yet filed for bankruptcy, your 2012 federal and state income tax returns should be filed by April 15.  Unless you are not required to file tax returns because your income is too low, it is the policy of this office that, after April 15, the current year’s tax returns be filed before a bankruptcy case is filed.
If you have defaulted on your utility bills, remember that Wisconsin’s winter moratorium ends on April 15, and that your services may be disconnected for nonpayment.  If you are behind on your utility bills, please do not wait until April 14th to consult with an attorney!  You will not be the only person facing this problem.
Also be advised that Chapter 128s are no longer a viable method for staying utility disconnections under the Joyce Smith case from 2011.