Chapter 13 Defaults and Second Chances

If you’re the “TL;DR” type – skip ahead to the bottom of this post – that what’s written in red.  Because this post contains very important information.
For anyone who has ever filed a Chapter 13 Bankruptcy case, there is an obligation to make monthly plan payments to the Chapter 13 Trustee, who – in turn – makes distributions to certain creditors (read more here on what gets paid and what doesn’t get paid in Chapter 13).
Homeowners in Chapter 13 also have an additional duty to make monthly mortgage payments (unless they are surrendering their home or if their future payments are being paid through the bankruptcy (known as a conduit mortgage provision).
A default on either one of these payments will eventually trigger a motion – a motion to dismiss the bankruptcy case, in the event of a default on plan payments, or a motion for relief from stay, in the event of a default on mortgage payments.
For as long as I can remember, conventional wisdom has been that either type of default can be resolved with an objection and the almost certain guarantee that the debtor would be given a second (or third or fourth) chance under what we call a doomsday provision.  A doomsday provision is a period of time (usually 6 months) during which all plan or mortgage payments must be made, and that there are no second chances in the event of a default during the doomsday provision.  Also, plan payments would often have to increase to either accommodate a supplemental claim for the defaulted mortgage payments or to otherwise get the debtor caught up on missing plan payments.
But that conventional wisdom seems to be changing – at least with one judge.  While waiting my turn for a telephonic confirmation hearing several days ago, I was able to listen in on several hearings regarding motions to lift the automatic stay (debtors who had defaulted on their mortgage payments).  From just the handful of hearings I was able to observe, it seemed clear that the judge was no longer willing to hand out doomsday provisions and “second chances” that we had become so accustomed to  and taken for granted in the past.
This is not to say that a motion for relief from stay cannot be defeated.  But it seems that the standard for getting that second chance has been raised significantly.
If I were to summarize and characterize a new doctrine based on the hearings I observed – I would say that motions for relief from stay will be granted unless the debtor can demonstrate a good faith effort to make mortgage payments and remain current on those payments.  Cases in which no mortgage payments have been made since the inception of the bankruptcy case and cases where no mortgage payments have been made in a long time may now be far more susceptible to having the stay lifted, even if an objection is timely filed.
The obvious disclaimer here is that this is an observation based on a handful of hearings in front of a single judge and on a particular type of motion.  But it is not unreasonable to expect that our other judges will adopt a stricter policy on issuing second chances to debtors, and that these policies may also be applied to motions to dismiss on account of defaulted plan payments.
I can’t say that I blame this particular judge for this new approach.  I have always cautioned my clients that there is no 100% guarantee that we will prevail on an objection to a motion to dismiss or a motion for relief from stay.  But now, what we used to take for granted as a 99% certainty may have been knocked down quite a few percentage points.
What to take away from this post?
If you default on your Chapter 13 Plan payments or your post-filing mortgage payments – DO NOT TAKE FOR GRANTED that you will be able to prevail in objecting to a Motion to Dismiss or a Motion for Relief from Stay.  Obviously, sometimes things happen that cause these defaults, and I am not at all suggesting that there is a strict “no second chances policy”.  But the more you can demonstrate a good faith effort to make good on these payments, the better chances you will have of earning that second chance.

Can I Lower My Chapter 13 Plan Payments?

So, you’ve filed Chapter 13 Bankruptcy, made a few payments, but now you feel that your payment is too high.  You want to know if your payment can be lowered.
Generally speaking, plan payments are not set in stone.  Just because you filed a 5 year plan at $xxx per month, that doesn’t mean that the payment will or must remain constant for the entire 5 years.  HOWEVER, the circumstances in which a payment can be altered are limited, and the extent to which the payment can be changed is also limited.  In short – there is nothing arbitrary about your plan payment.  And the answer to your question – “Can my plan payment be decreased?” – is a complex question with no easy answer and depends on several different factors.
Let’s start with how your payment was determined.  Some people pay only a few dollars a month.  Others pay several thousand a month.  While that may seem unfair, plan payments are determined by the specific circumstances of the case.  In some cases, very little is required to be paid and the debtor has very little income.  In other cases, debtors may have a great deal of income and/or have certain debts that – because of what kind of debts they are – must be paid in full.  Your attorney, when calculating your plan payment, must determine what debts must be paid and at what rate they must be paid, given statutes, case law, local rules, and the considerations of your individual case.  Any good attorney will find every possible avenue to set your monthly payment as low as possible right from the start.
The ability to reduce hinges on a few things.  First of all, your budget must justify a lowering of the plan payment.  Presumably, when your bankruptcy case is filed, you presented a budget that showed that you could afford the proposed plan payment – no more and no less.  Let’s say that your plan payment was $500/mo, and your budget then showed approximately $500/mo in disposable income.  To justify lowering the plan payment, say to $400/mo, your budget must change.
And to do that, you can’t just say that you would like to spend an extra $100/mo going out to eat at restaurants.  Here are the criteria for allowable budget changes:
ACTUAL:  You cannot justify lowering your plan payment because you THINK you’re going to be laid off or have your hours reduced at work.  The lay-off or reduction in hours actually has to happen.
NECESSARY:  If claiming an increase in expenses, such expenses must be necessary.  If you’ve been living without premium cable television all this time, you’re not gonna be able to lower your payments to pay for that.
LONG-TERM:  Although there may be options to address short-term issues (like an auto repair or medical expenses), short-term issues do not justify a permanent change in plan payments.  It’s also not the subject of this blog post, so I’m not going to discuss what those other options might be.
SUBSTANTIAL:  A slight change in gas prices or grocery bills doesn’t justify a change.  Presumably, your income will also be increasing slightly, from year to year.
ADVERSE:  Hopefully this goes without saying, but either your income should go down or your expenses should go up.  If your new budget has more disposable income, you’re not going to be able to lower your plan payments.
The next question is: how much can the plan payment be lowered.  The first step is to simply look at the new budget.  If your disposable income dropped by $100/mo, then the most you’ll be able to lower your plan payment is $100/mo.
But that’s still not the end of the analysis.
Some plan payments simply cannot be lowered.  As I said at the beginning – certain debts must be paid in full.  For example – let’s say you owe $5k in child support arrears.  Except for rare cases, those arrears have to be paid in full over the life of the Plan.  Let’s say that the DSO arrears are the only thing your plan is paying.  If you can’t afford to make that payment, there may be no room for you to lower your plan payment.
In other cases, there are debts that have to be paid, but they can be scrapped – but with consequences.  Let’s say that you have $10k in mortgage arrears and filed Chapter 13 to save your home from foreclosure.  So long as you intend to retain the house, the arrears have to be paid.  You can refuse to pay the arrears in order to lower your plan payment, but you’d have to amend the plan to surrender the real estate.
By far, the people who have the greatest flexibility to lower their plan payments are the people who, when they filed bankruptcy, were paying a percentage of their unsecured creditors based on disposable income.  There is no obligation to pay unsecured creditors if a change in disposable income justifies lowering the dividend to them, and that can be accomplished without losing homes, vehicles, or anything else that might be an issue in the case.
Even people who are paying nothing to unsecured creditors MIGHT be able to lower their plan payment without losing things, IF there is some cushion in their plan.  The longer a Chapter 13 Plan has been active, the more likely a cushion will have developed as a result of administrative considerations.  For instance, attorneys must estimate the Trustee’s administrative fee, which is variable throughout the life of the Plan.  Since the fee is capped at 10%, most attorneys calculate the fee at 10% knowing full well that it will never actually get that high.  The extra money coming in would go to unsecured creditors, but can also create wiggle room if the plan needs to be lowered.  Cushions can also develop when the Trustee pays interest-bearing secured debts by front-loading them at the beginning of the Plan.  Less interest will be paid out (compared to how much would be paid if the loan were paid over the full term of the plan).  Again, that extra money can either go to unsecured creditors or offer wiggle room in the Plan.
If your plan payment cannot be lowered to something you can afford, you may have other options, such as conversion to Chapter 7.  People who filed Chapter 13 because they were disqualified from Chapter 7 due to a prior bankruptcy discharge will be unable to convert.  Others who are eligible to convert may not like the consequences of converting if they filed Chapter 13 for any reason other than their income.
In short, the answer to this question is intensely fact-specific.  If something has happened to your financial circumstances such that you cannot afford your plan payment, talk to your attorney about what options might be available for you.

End-of-the Year Reminders

  • Debtors who have not yet filed for bankruptcy and own real estate – you should be receiving your 2014 property tax bills within the next couple of weeks.  If you have previously submitted your 2013 property tax bill to my office for review in preparation to file, be aware that you should update your file with the 2014 tax bill once received.  This will be mandatory on or after 1/1/2015.
  • Debtors who have not yet filed for bankruptcy but intend to file under Chapter 13 – if you hope to file in early 2015, be advised that Chapter 13 Plans cannot be confirmed without the current year’s tax returns on file.  Even though your 2014 taxes are not due to the taxing authorities until 4/15/2015, they will be required for confirmation of your Chapter 13 Plan if you file on or after 1/1/2015.
  • Debtors who have already filed Chapter 13 Bankruptcy – remember to submit your 2014 tax returns to my office so I can relay them to the Chapter 13 Trustee.  Those of you who are required to – remember to submit one-half of your income tax refunds.  If you’re not sure whether you have that requirement, call my office or consult the most recent version of your Chapter 13 Plan.
  • If you have defaulted on your energy bill during the more expensive winter months, remember that the winter moratorium ends on 4/15/2015, after which, your utilities can be disconnected.  If you need the bankruptcy stay to prevent a utility shut-off, please consult with me well before 4/15/2015.  Bankruptcy cases take time to prepare, and you’re probably not the only person who will be facing a shut-off.  Also remember that Chapter 128 is no longer a viable option to stay a disconnection of utilities.

Form Modernization Update

Implementation of the proposed National Model Chapter 13 Plan has been pushed back another year – with an expected roll out date of December 2016 (2 years from now).  As near as I can tell, the proposed rule change that would shorten the time period that creditors have to file proofs of claim in Chapter 13 Bankruptcy has also been delayed.
Last year, we were introduced to “modernized” Schedules I & J.  We got a sneak peak at the amended forms being rolled out this year (December 1, 2015).  It isn’t the full set of schedules that we were told to expect last year.  But we are getting a new Means Test (Form B22A in Chapter 7 and Form B22C in Chapter 13).  The Means Test has actually now been split into two separate forms.  If you’re below median, you don’t complete the second form.  If you’re above median, you do complete it.
This is not entirely different from the old forms (below median debtors didn’t complete the second part of the form).  The only real difference here is that the unnecessary second half of the Means Test would not be printed with these new forms.  As benign as this change is, it’s actually nice because we’re expecting most of the modernized forms to cause the average bankruptcy petition to double in size (from about 60-80 pages to 100-120 pages).  For below median debtors, the new Form B22’s will shorten the overall petition slightly.

Coming Changes for Bankruptcy

Some big changes are coming down the pipe for bankruptcy.  Typically – we will see very minor changes in forms once a year in December.  This year (2013) we saw a dramatic change in Schedules I & J (income and expenses).
Schedule I introduces some interesting changes.  There are now lines dedicated to making a distinction between mandatory retirement contributions, voluntary ones, and repayments on retirement loans.  Expenses relating to business and rental income have been moved from Schedule J to Schedule I – so your net profits are what end up displayed on forms.  There is also now a separate line for what we refer to as “household contributions”.  This is “income” arising from other people (such as roommates, unmarried partners, children with jobs, friends, or other relatives that contribute to household expenses from their funds.
Information concerning dependents has been moved to Schedule J – you’re also required to indicate whether your claimed dependents actually live with you or not, and whether you are paying the expenses of non-dependents.
On Schedule J, groups of expenses have been grouped together a little better.  Telecomm utilities have been lumped together.  Food has been lumped together with “housekeeping supplies” which I found a little odd.  Personal care products (soaps, shampoos, shaving kits, dental products, etc.) and services (e.g. haircuts) have been given their own slot.  Perhaps I find that new arrangement odd because we used to have a separate line under miscellaneous expenses for ‘personal grooming and household supplies’.  Transportation is now specifically defined to include public transit and maintenance.  Entertainment is now defined to include subscriptions and club memberships.  Again, under the old forms, we had some of these items broken up on separate lines.
* * *
Schedules I & J are basically early releases.  Most if not all of the remaining bankruptcy forms will be revamped come December 2014.  These changes have been touted as “form modernization”.  Essentially, most of these forms are getting considerably longer than they were previously.  As it is, the average set of bankruptcy forms that we file is about a 60-80 page packet (depending on the number of individual creditors).  From what I’ve been hearing, these new forms could easily inflate the packet to about 100-120 pages.  Time will tell.
* * *
By December 2015, we are expecting to see a new National Model Chapter 13 Plan, and use of said plan is expected to be mandatory.  I think it’s pretty clear this is a move that favors creditors – many of which have national operations, but receive a wide array of plans from 94 districts, and not all districts have a mandatory model plan.
A national model plan will make it easier for creditors to find information that they are looking for, and for more uniform understanding of plan provisions.  What will undoubtedly concern bankruptcy practitioners (and should concern debtors) is that a model mandatory plan could end up curbing certain district customs.  I don’t want to speculate on what those are going to be.  Suffice it to say, I’ve reviewed an early draft of the model Chapter 13 plan, and I made quite a few notations of possible conflicts with the way we do things here in the Eastern District of Wisconsin (certain customs and practices which we have statutory freedom to do).  As the draft goes through revisions from attorney feedback, we’ll get a firmer idea of what the plan will look like, and whichever concerns I still have at that time, I’ll bring up so as to give people an opportunity to file before the plan takes effect in December 2015.
* * *
Not all of the changes will be bad.  There is a rumored change to the Federal Rules of Bankruptcy Procedure that I am particularly excited about.  Currently, the deadline to file a proof of claim is 90 days after the first meeting of creditors (which is itself usually 4-6 weeks after the bankruptcy case is filed).  The government gets 180 days from the date the case is filed.  And the rule does not apply at all to secured creditors.
The rumored change will establish a bar date to file claims that is 60 days from the date the case is filed and it will apply to secured creditors.  I have not heard yet as to whether the government bar date will change.  I assume that they will continue to have more time than general creditors, but I suspect their deadline may be shortened a little as well.
This news sucks for creditors but is great for debtors.  Under the existing framework, there really was no way to know if a plan was feasible by the time of the hearing, when the trustee recommends for or against confirmation.  In certain cases where the trustee was not confident of feasibility, or when the amount of claims might greatly control the required plan payment, or where there was doubt as to the amount of claims, the trustee would sometimes withhold a recommendation and adjourn out beyond the bar date.  This didn’t happen often, but it happened enough to be irritating.  Technically, the feasibility of all plans is unknowable until the bar date passes, but nobody wants to wait 3 months for a plan to become comfirmable.
Under this new structure, the bar date will be about 2-4 weeks after the hearing date, which means – worst case scenario – a single one month adjournment should be enough to check feasibility.
If the trustee recommends for confirmation before the bar date passes (as happens now, and I suspect may continue to happen), then debtors can take comfort in the fact that they will know much sooner whether their plan payments need to be adjusted to account for any unanticipated or underestimated claims.  In short – they won’t have been paying for 5 – 6 months before they know whether their plan needs to be adjusted.
If you ask me – that’s win-win, and I’m excited for that particular change.  I wish they had implemented it this year.

Budget Errors – What “Weekly” and “Bi-Weekly” Really Mean

“I do not make $2,600/mo.  I’m only paid $1,200 every two weeks!”
“I spend $100/week in fuel, so $400/mo.”
“I’m getting paid three times this month, therefore, the trustee is getting too much money!”
“I didn’t miss any payments.  I made two each month.”
I hear erroneous comments like this (or get similar questions) from clients all the time.  I’ve been flooded with them recently, so while this isn’t necessarily a bankruptcy-specific topic, I think it’s worth taking a minute today to discuss it.  It would certainly go a long way to helping people better manage their finances if they understand what “weekly” and “bi-weekly” really mean.
Somehow, this pervasive idea got stuck in people’s minds that there are only four weeks in a month.  It’s true – every month has at least 4 weeks.  February – the shortest month of the year – has 28 days (except in leap years, obviously), which is exactly 4 7-day weeks.
But every other month has 30 or 31 days (3-4 days beyond 4 weeks).  What this means is that if you are paid weekly, every three months, you get 5 paychecks instead of 4.  If you are paid bi-weekly, every six months, you get 3 paychecks instead of 2.
So, when your attorney prepares budget schedules that show you making $2,600/mo when you’re paid $1,200 every two weeks, it’s because he is properly taking into account that third paycheck you get every six months.  Instead of 1200 * 2, the equation is 1200 * 26 (two week periods in calendar year) / 12 (months per year), which yields $2,600.
If you are filling up the gas tank every week, and spending $100 each time you do, you actually spend about $435 per month, not $400.
Payroll orders for Chapter 13 plan payments are pro-rated.  So, if your plan payment is $500/mo, but it’s coming out of your bi-weekly paycheck, the deduction won’t be $250, but instead, it will be $230.77.  For five months, you will be paying in less than $500/mo, but the third paycheck in the sixth month catches you back up.
And if you are making payments every two weeks, then you have to make a payment every two weeks.  If you only want to make two payments a month, then you have to increase what you’re paying to the monthly amount divided by two.
Common time definitions:

  • Weekly = once per week.  There are an average of 4-1/3 weeks per month.
  • Bi-Weekly = once every two weeks.  There are an average of 2-1/6 of these per month.
  • Semi-Monthly = twice a month.
  • Monthly = once a month.
  • Bi-monthly = once every two months.
  • Quarterly = once every three months.
  • Semi-Annual = twice per year or once every six months.
  • Annual = once a year.
  • Bi-Annual = once every two years.

Separately classified unsecured debts in Chapter 13.

Chapter 13 of the bankruptcy code provides for, among other things, the curing of priority debts, such as taxes and child support.  This is a good thing, because most priority debts are non-dischargeable, so by having them fully paid in a Chapter 13 Plan, it helps the debtor exit bankruptcy with less surviving debt.
However, not all non-dischargeable debts are priority debts.  Student loans are a prime example.  Since interest continues to accumulate on student loans, what is a debtor to do to avoid coming out of Chapter 13 with bigger student loan problems than he or she had going into bankruptcy?
Bankruptcy courts in this district have ruled that debtors can provide for separate classification of student loans – to pay them separately, outside of the Chapter 13 Plan.  Two of those cases that we will be looking at today are In re Truss, 404 B.R. 329 (Bankr. E.D. Wis. 2009) (Judge McGarity) & In re Hanson, 310 B.R. 131 (Bankr. W.D. Wis. 2004) (Judge Kelley).
Both cases declined to allow the debtor to deduct payments to a student loan creditor on the Means Test (Form B22C).  However, the debtors were allowed to maintain payments on the student loans.  In order for the plans to be confirmable, the judges weighed two seemingly contradictory statutory provisions.  11 U.S.C. § 1322(b)(1) (which prohibits unfair discrimination amongst classes of unsecured claims) and 11 U.S.C. § 1322(b)(5) which allows the maintenance of long term debts.
To avoid scrutiny under (b)(1), the maturity date of the student loan had to be out past the term of the Chapter 13 Plan.  The debtors were also required to maintain the loan (they couldn’t propose to accelerate payments, and they couldn’t propose to make less-than-contractual payments).
Other special classifications have been allowed under what is referred to as the Crawford test.  Examples of these are creditors who may file criminal charges and creditors who can revoke occupational licenses.  In these cases – should the debtor not be allowed to pay these creditors in full and face the consequences, the result would most assuredly be that the debtor would lose his or her source of income and be unable to fund the plan – a lose-lose scenario for both the debtor and the other unsecured creditors.  In such cases, it is better to have one or two creditors paid with preference over all other creditors, rather than see all creditors get paid nothing at all.

Proposed National Model Chapter 13 Plan

This is a post that will probably be more of interest to bankruptcy practitioners than bankruptcy debtors.  However, there is potential for some substantial changes that will drastically impact how Chapter 13s are administered, so potential bankruptcy filers shouldn’t completely blow this off.
Currently, each federal district has its own way of handling Chapter 13 Plans.  Most if not all have a “model plan” which is the form template attorneys and debtors are encouraged to use when drafting the Chapter 13 repayment plan.  Many districts have made use of their model plan mandatory.  I was on the Local Rules Committee back in 2009, which ultimately made our model plan in the Eastern District of Wisconsin mandatory in early 2010, if memory serves (and over my sole objection).  In districts without a mandatory plan, attorneys can and do have their own versions.
But even if each district adopted a mandatory model plan, it would still leave 94 different plans, which makes it difficult to create uniform case law.  It also becomes burdensome to creditors who do business nationally (though as debtors’ counsel, I care less about that).
So, for quite some time now, a committee has been established to draft and propose a national model plan for use everywhere in the United States.  There are also proposals floating around to the Federal Rules of Bankruptcy Procedure to accommodate this national model plan.  The proposal for FRBP 9009 would prohibit alteration of the model plan except in the special provisions area of the plan.  That rule seems to suggest that the committee will recommend that the model plan be mandatory (and frankly, if it isn’t mandatory, there isn’t much point in having a model plan).  The downside to a mandatory plan, of course, is that if the plan is not drawn up well, it will – at the very least – create some administrative problems.  Worst case, it has the potential to force changes on the rules and procedures at the local level.  Also, there are rumors that what is allowed in the special provisions section of the model plan will be far more restrictive than what we currently do in the Eastern District of Wisconsin (which is basically – ‘anything goes’, so long as it doesn’t violate established law).
So what do we know?  Well, the rule-making process is a long and arduous one.  If everything remains on schedule, the earliest we expect to see implementation of this proposed national model plan is December 2015.  That’s right – 2.5 years from now.  On the upside, this gives us more time to address concerns that exist concerning the current draft of the model plan.

It is worth noting that there is a form modernization project in the works (also referred to as the form lengthening project).  Although there appears to be no set date yet, I expect the new forms to go into effect December 2013, roughly coinciding with the eight year anniversary of BAPCPA.

Because this is the early draft, and is likely to go through substantial changes after feedback has been submitted, there’s not much point in going through the document line by line.  I do want to highlight a few of the expected changes that I think will be the most dramatic.
FRBP 3002 – would shorten the time-frame for filing proofs of claim.  Currently, it is 90 days after the sec. 341 meeting of creditors, which itself is scheduled between 21 and 50 days after the bankruptcy petition is filed.  So all in all, creditors have upwards of 4-5 months to file a proof of claim.  The government has 180 days (or 6 months) after the petition date to file its claim.  This makes administration of a case difficult, as plans are often confirmable long before the bar date to file claims has passed, and feasibility can’t really be addressed until all claims have come in.  So, the new bar date should really help in administration.  The catch is – the government’s 180 days appears to be unaffected by the proposed rule change.  I don’t mind the government getting more time to file claims that private creditors, but 6 months seems excessive to me.
Certain actions to strip liens that have traditionally been done by separate motion or adversary proceeding.  Those are now being folded into the plan, which does cut down on paperwork.  To address notice requirements, however, Rule 3015 is expected to be amended to integrate enhanced service requirements of the Chapter 13 Plan in those circumstances.
The current draft of the plan is no doubt reflective of the districts that its chief authors hail from.  There are a lot of references to confirmation hearings, which not all districts have (unless a creditor objects to confirmation).  Our judges have stopped having confirmation hearings in cases that are not being contested (after the appropriate time to object has passed).  At the moment, lessons learned in law school escape me, and I forget the relative authority of the federal rules to district court cases.   But if this model plan doesn’t force districts to hold confirmation hearings, the language is going to make administration of the plan tricky.
The current draft also is pretty rigid in how payments are structured.  It doesn’t provide for splitting payments between joint debtors, it doesn’t provide for customization of payroll orders into weekly or bi-weekly pay periods, and it only provides for one step provision.  Of course, these issues can be addressed in the special provisions section, but we could save a LOT of unnecessary special provisions by having a better structured paragraph.
The tax refund committal paragraph is similarly rigid and doesn’t account for variances in local customs on the subject.
Another concern is that the plan allows certain “options” that are not available in all districts or not available in all circumstances.  It is said that the Chapter 13 Plan is being drafted to help pro se debtors.  Quite frankly, Chapter 13 is complicated enough that no debtor should try it without an attorney.  Moreoever, without the legal knowledge, pro se debtors will be filing uncomfirmable plans because they won’t know in which districts or in which circumstances certain plain provisions are available.
Other concerning language – the absence of a provision that discusses which aspects of administration are controlled by the plan and which aspects are controlled by the proof of claim; and language in the signature section allowing debtor’s counsel to sign the plan without the debtors’ signatures; the conduit mortgage provision isn’t terribly detailed enough for districts that do not have conduits as a default.  On the upside, this version provides for vesting of property of the estate upon “closing of the case” instead of upon “discharge”, which helps resolve an ambiguity in attorneys who prefer not to have revestment on confirmation, but are filing cases in which a discharge is not available.
Those who wish to review the proposed rule changes or the proposed model plan can try the following links:

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!).

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.