Why Some Chapter 13 Cases End Before They Ever Get Started

Filing a Chapter 13 case is easy.  Keeping it going is the tricky part. 

A Chapter 13 case can provide immediate relief and peace of mind.  There is a certain element of “instant gratification” that gives it appeal on day one of the case.  In many jurisdictions a case can be filed for “no money down.”  Spending a few hours at an attorney’s office and signing some paperwork will make the foreclosure, repossession, garnishment or other collection efforts stop, as if by magic. 

Appearances can be deceiving.  

A successful Chapter 13 case usually requires a three- to five-year commitment involving monthly payments.  The jumble of rules, requirements, meetings and hearings can seem like a bad set of instructions for building a complicated piece of furniture.  Miss something important and the case will be dismissed, leaving you right back where you started, or maybe in even worse shape. 

Let’s look at the common reasons why Chapter 13 cases fail, and how to avoid that result.

Money

You probably saw this one coming.  As with many things, money is what makes the Chapter 13 world go round.  The monthly payment you send to the Chapter 13 Trustee helps to fund his or her business operations, pays your creditors (often for items you want to keep), and probably pays your attorney, too.  Miss a payment or two and you can count on hearing from someone. 

“So don’t forget to make your payments!” 

This simple admonishment raises a host of questions: What payments?  For how much?  When?  To whom?  Can you send a personal check?  Can you drop the payment off at the Court or Trustee’s office?  The local practice varies, but here are some basic guidelines.  Always ask your attorney if you have a question, and always follow your attorney’s advice (as opposed to something different that you read online, heard from a friend, or read in a blog!):

• Typically, your Chapter 13 payment will be due 30 days after you file your case.  Urban legends persist that no payments are due until after you go to a bankruptcy meeting, or until after the Court approves your plan.  There is no such provision in the Bankruptcy Code!  In fact, the Court usually cannot approve your plan until it’s clear you will be able to make your payments:  And the best way for the Court to determine that is to see that you have already been making your payments!  Plan to send your first payment to the Trustee so that it is received within the first 30 days of your case filing.  (And just as importantly, make regular payments every 30 days after that.)

• Your personal checks, credit cards and cash are no good here!  Many Courts and Trustees will not accept a personal check written by someone in bankruptcy.  For similar reasons, plus a general prohibition against borrowing money while in bankruptcy, you cannot use a credit card to make bankruptcy payments.  For security reasons, many Trustees do not want to handle cash.  The usual ways to make payment involve sending a money order or cashier’s check, or using your bank account to make electronic payments.  Your attorney and the Trustee should be able and willing to show you how to sign up for and use special electronic payment systems set up for this purpose.  If you pay with a money order, be sure to save the receipt attached to the money order so that you can track the payment.  It’s also a good idea to include your bankruptcy case number on the face of the money order to make sure that the money is credited correctly. 

• The Trustee is not the Court.  Bankruptcy can involve a confusing cast of characters: Clerks, Creditors, Judges, Trustees and U.S. Trustees.  The Chapter 13 Trustee is an independent office, completely separate from the U.S. Bankruptcy Court.  That’s important to remember, because you do not want to send your Chapter 13 bankruptcy payment to the Bankruptcy Court.  (It’s important to keep the idea of your monthly Chapter 13 payment separate from the filing fee.  The monthly payment goes to the Trustee, but the filing fee belongs to the Bankruptcy Court and is paid to the Court Clerk.)

Communication

Chapter 13 rules and procedures are complicated and confusing.  It’s easy to misunderstand or miss what’s expected. 

Too much information can be a problem.  When you file your case, you hopefully receive a set of instructions and requirements from your attorney.  Your mailbox will almost instantly be flooded with more instructions, directions and requirements from the Trustee and the Bankruptcy Court:  Are these new and different things, or are they the same things, phrased differently?  Why do you keep getting notices to go to the “meeting of creditors” in your case if you’re not a creditor?!  And what’s this “341 meeting” people keep talking about?  Is that the same as the confirmation hearing?  Why do people keep telling you to take credit counseling when you already took that course before you filed the case?   (Answers to these questions at the end of the blog.) 

If you have an attorney, you can rely on him or her – up to a point – to provide guidance and the occasional reminder.  But you should also be aware that this is your case, and nobody is relying more heavily on your case’s success than you.  That means you need to take all reasonable steps to make sure you are complying with all of the Chapter 13 rules requirements.  A few simple best practices will help:

• Read Your Mail!  Most of the important notices about your bankruptcy case still come by regular mail. 

• Ask Questions.  This stuff can be confusing.  Odds are, you are paying an attorney to help you.  Your attorney or the attorney’s staff should be happy to answer all of your questions.  In most cases, their compensation depends on your success, so making sure you do what you are supposed to is in their own best interest.  Whatever you do, don’t be shy!  There’s nothing “dumb” about asking a “dumb question” to make sure your car stays protected by the bankruptcy case. 

• Get Your Questions Answered.  If you don’t understand the answer, don’t be afraid to speak up and ask for clarification.  Sometimes the “why” is as important as the “what.”  If you aren’t sure why you are being asked to do something, your attorney should be able to explain what’s going on, how it relates to everything else in the process, why this is important, and wat could happen if you don’t do it. 

Feasibility

Some cases are doomed to failure.  A Chapter 13 case cannot be approved by the Court if it is not “feasible.” “Feasible” means that the debtor will be able to make all of the payments proposed by his or her Chapter 13 plan. 

For example, a household of four with total monthly income of $1,850 per month could not realistically be expected to make bankruptcy payments of $1,000 per month and still be able to afford food, rent and other basic living necessities.  The $1,000 payment may be necessary to hang onto and pay for two late-model cars.  Filing a case will temporarily save those cars from being repossessed, and the vehicle owners will feel good about that for a short time.  The “sticker shock” comes later, when they realize they cannot afford the bankruptcy payments.  They may be able to limp along for a while, but sliding farther and farther behind is probably inevitable.  When the bankruptcy case fails they may be farther behind on vehicle payments than when the case began.  

The lesson here is to make sure you know what your Chapter 13 payment will be before you agree to file the bankruptcy case.  Part of the work you will do with your attorney before filing is to go over your monthly budget.  Review your monthly income and expenses carefully and make sure your budget is realistic and that you will be able to make the required payments. 

Talking about an obvious feasibility issue early in the process is important because it helps to explore all of the options, and potential outcomes.  In the example above, the Debtors may have been able to surrender one of the cars in order to make payment on the remaining vehicle affordable. 

Tax Issues

Many tax debts need to be paid back in full during the bankruptcy case, and that can sometimes push a Chapter 13 payment past the feasibility point.  There are other, time-sensitive rules about taking care of unfiled taxes. 

If you have unfiled taxes you should plan to get those returns filed in the first 120 days of your case.  The Bankruptcy Court may be willing to grant one 30-day extension, but the Bankruptcy Code does not allow more time than that to take care of unfiled tax returns in a Chapter 13 case.

The Trustee is entitled to receive a copy of the tax return for the most recent year that you filed.  This information must usually be provided at the beginning of your case, and at least seven days before you are set to appear at the meeting of creditors.  If you don’t provide this information the Bankruptcy Code says your case can be dismissed. 

Failure to Respond

Communication is a two-way street.  If your attorney asks you for information or documentation, it’s probably for an important reason.  The information could be required in order to respond to an issue raised by the Trustee or the Court.  The Bankruptcy Code allows the Judge to dismiss a Chapter 13 case for “unreasonable delay by the debtor that is prejudicial to creditors.”

Let’s address another common misunderstanding: Bankruptcy cases don’t just get mysteriously “cancelled” somehow by a Trustee or creditor.  Bankruptcy cases can only be dismissed by a Judge, on a written Court order.  If you are worried about your bankruptcy case being dismissed, you should know that these things usually happen during a hearing, or after the time has passed without response to a written motion. 

Keep up with any notices about your case, especially if they set a hearing or set a deadline for a response.  Check in with your attorney to ask what the hearing is about, and whether you are expected to attend.  Your attorney might be waiting to hear from you! 

A final word here.  Make sure your attorney knows how to get in touch with you.  How will you receive messages from your attorney?  Whatever the arrangement, make sure you check for messages frequently. 

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Answers to the “Communication” questions:

1. The “meeting of creditors” is the not-very-well-named meeting at which the person filing bankruptcy must attend, but creditors may attend; the meeting of creditors is also referred to as the “341 meeting” after the Bankruptcy Code section that creates the requirement.  The Trustee presides at these meetings, not a Judge.
2. The “confirmation hearing” is the hearing at which a Bankruptcy Judge can decide to approve or “confirm” your bankruptcy plan if it meets all of the requirements of the Bankruptcy Code, including findings that the case is feasible, and that all tax returns have been filed. 
3. The Bankruptcy Code requires filers to take a credit counseling course and get a certificate before commencing a case; a second “Financial Management Course” is required after filing, but before completing the case.

The 7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit my website at narmorelawoffice.com.

Narmore Law Office LLC is a debt relief agency and helps people file for relief under the Bankruptcy Code.