Debt Treatment Under Chapter 13
1.0 How is Priority Debt Handled?
1.1 In General
Most priority debt must be paid at 100% plus interest in a Chapter 13. There are some important exceptions, however. These will be discussed in the following material.
1.2 Tax Liabilities
All business taxes, timely filed tax obligations that are less than three years old, and taxes that have not yet been filed must be paid at 100% plus interest over a three (3) year period. In the event that you owe personal income taxes on returns that have been filed, and more than three years have passed since the filing, and , you have not filed a voluntary extension of the collection period, or the IRS has not filed a lien for those taxes are considered to be unsecured.
Interest and penalties on tax obligations were generally considered unsecured under the old law and discharged at the end of the plan. The reform act makes unsecured priority taxes, penalties, and interest non-dischargeable. As a result, even though these debts are treated as unsecured in the plan, any portion of these debts that are not paid as part of the plan will still be due and owing at the end of the plan. A new provision allows interest to be paid on non-dischargeable debt if it will not reduce the amount to which unsecured creditors are entitled.
1.3 Student Loans
The general rule is that student loans are treated as unsecured debt. As a general rule you may not repay 100% of a student loan in a chapter 13 unless you also repay 100% of your unsecured debt. In the event that your plan does not pay 100% of the student loans, after your plan is complete, you will still owe the balance of the student loan plus accumulated interest. Any dischargeable student loan is treated as an unsecured debt and any remaining balance is discharged upon completion of the plan.
1.4 Fraud and Personal Injury
This debt is generally treated as unsecured debt. However, on occasion, a higher percentage must be repaid to these creditors than normally allowed for unsecured claims. Under a recent change in the law any amounts not paid as part of the chapter 13 plan will still be owed after completion of the plan.
1.5 Government Fines & Penalties
Government fines and penalties are generally not dischargable. In addition, criminal fines may not be paid through a Chapter 13 Bankruptcy Plan. You must pay these obligations directly each month as part of your budget. In some cases it may be possible to pay a percentage of restitution through your plan, but you should seek approval of the Criminal Court Judge before you do so. Any amounts not paid in the plan will not be discharged.
1.6 Domestic Support Orders
On going amounts for alimony and child support must be paid monthly as they come due as part of your regular budget. However, past due amounts for child support and alimony may be paid through the plan at 100%. We do not yet know how the law will impact payment of debts ordered to be paid as part of a divorce decree (such as a credit card or old phone bill). Whatever portion is not paid in the plan will probably be discharged.
1.7 Recent Consumer Debt over $500.
While resent consumer debt over $500 is a priority debt that is non-dischargable in a Chapter 7, these debts are treated as general unsecured claims in a Chapter 13 and are discharged upon completion of the plan.
1.8 401K and Other Retirement Loan
The new law provides that payments on these debts may not be altered. As a result they will continue to be paid each month as a deduction on your paycheck.
2.0 What Happens to Secured Debt?
2.1 In General
Debtors generally have two options in connection with secured debt. They may surrender the item, in which case the debt is often extinguished; or they may keep the item, in which case payment is made through the plan on the “allowed” value of the creditor’s claim. How this claim is calculated has been changed under the new law and will be discussed below.
If you elect to surrender property, the property should be returned to the creditor as soon after the filing of the Bankruptcy as possible. As a result, if you intend to surrender a motor vehicle, you should not expect to continue driving the vehicle for a substantial period of time. Some creditors will allow you to keep the collateral until the first meeting of creditors. However, you have a legal obligation to surrender the property as soon as possible.
If the property being surrendered is a home, the mortgage creditor will often prefer you remain in the home for a period of time until they can actually take possession. This is to ensure that the property is not damaged or vandalized while it sits vacant. Nonetheless, you should be prepared to move as soon as a request is made to do so by the creditor.
Surrendered property is usually assumed to be “surrendered in full satisfaction of the secured creditors claim.” This means, the value of the collateral being surrendered is equal to or greater than the amount of debt, no deficiency is assessed against you, which needs to be paid as part of your Chapter 13 Plan. However, in some cases the collateral will be clearly worth less than is owed on it or the creditor will dispose of the collateral after you surrender it for less than its debt. In these cases, they may file a claim in your Chapter 13 for a deficiency amount. This deficiency is treated as an unsecured claim.
If you have luxury items, such as boats, campers, snow mobiles, wave runners, or vehicles valued in excess of $20,000; the court may require you to surrender these items. The theory is that you should not be allowed to retain expensive property with the assistance of the Court and pay only a small amount to your unsecured creditors. The Court will often allow you to keep these items if you return 100% plus interest to each of your unsecured creditors as part of your Chapter 13. However, each judge and each Chapter 13 Trustee reviews this matter differently and even with a 100% plan, you may not be able to retain certain luxury items. Some have speculated that under the new law debtors may actually be able to retain luxury items so long as the amount required by 707(b) is paid to unsecured creditors.
2.3 Retaining the Collateral
If you determine, as part of your Chapter 13, to retain a secured creditor’s collateral, they are entitled to payment, over the term of the plan in equal monthly installments, of the “secured value” of the property plus interest. On rare occasions, if the value of the collateral exceeds the amount of the debt, you may be allowed to pay the payments directly to the creditor. Otherwise, all payments are made through the Court.
Determining the “secured value” of a secured creditors claim is a bit tricky under the new code. The number used is the “replacement” price of the item, unless it is a vehicle purchased within the last 910 days (2.5 years) or it is any other collateral given within the last year. Then the number used is the actual loan balance.
In the event the collateral is valued at less than the debt, something can occur called a “cram down”. This means that the secured creditor receives 100% of the secured value of the collateral plus interest on the secured amount of their claim with the balance of the debt being considered unsecured. For example:
Car Fair Market Value: $7,000
Car Replacement Value $8,000
Car Debt: $10,000
Unsecured Portion: $2,000
Hypothetical Plan Treatment:
$8,000 @ 100% + 7% interest = ~$10,400
+ $2,000 @ 20% = $400
If you are upside down on a motor vehicle, a cram down can be very beneficial to you.
Because collateral tends to depreciate more rapidly than they may be paid down in a Chapter 13, the secured creditor is entitled to “adequate protection”. This means that a certain portion of your monthly plan payment prior to Confirmation is ear marked for the benefit of that creditor. Under the new law, these funds are sent directly to the secured creditor until the plan is confirmed. An adequate protection payment does not increase your monthly payment to the Court. The new law also states that the minimum amount paid on a secured creditors claim must be al least the adequate protection amount.
In the event you have a home mortgage, and you decide to retain the home, you must continue to make the regular monthly payments as they come due. This includes second and third mortgage payments if any. As a general rule, you cannot reduce the amount paid to a mortgage holder in a Chapter 13. If at the time of filing, you were behind on your mortgage payments, these arrearage’s have traditionally been paid through the court at 100% over a three year period. No one is sure if they must be paid over this same period under the new law. Usually interest is not paid on mortgage arrearage’s, because the mortgage arrearage itself is mostly interest.
2.4 Cross Collateralized Debt
Cross collateralized debt is not as much of a problem in a Chapter 13 as in a Chapter 7. The Court will allow you to pick and choose between the secured debts, and you need only treat as secured the items you are retaining. However, you should be aware that the particular financial institution will close your checking account and will no longer do business with you in the future.
2.5 Co-Signed Debt
Cosigned debt may be treated in a number of ways in a Chapter 13. First you may surrender the property if any, and treat the creditor as unsecured. In this case, the creditor can pursue the co-signer for the different between the debt balance and the amount you are paying through your Chapter 13 Plan. Second, you may keep the property and treat the creditor as secured. Any amount not paid as part of the plan become the liability of the co-signer. Finally, you may be allowed to protect the co-signer by paying 100% of the debt.
3.0 What Happens to Executory Contracts?
There are two basic options in connection with executory contracts. You may accept the contract, meaning that you either retain the property (or continue receiving the service) and continue to make each of the regular payments as they come due, if you are current on the account. Alternately you may reject the executory contract which means you cancel the service and return the property if any. Acceptance or rejection of each executory contract you have on the date of filing must appear as a term in your plan of repayment. Executory contracts are deemed automatically rejected at the conclusion of the confirmation hearing if they are not assumed in a confirmed plan.
Traditionally the Court would not allow you to accept executory contracts in a Chapter 13 on luxury items. However, under the new law if you can make the minimum required payment to unsecured creditors you may be able to keep such contracts. Further, in the past if your executory contract payment terminated during the term of your plan, your monthly Plan payment then increased by that amount. This provision may have changed as well although that is uncertain. Under the new code you must submit an annual statement of “income and expenditures” and proof of filing of tax returns.
4.0 What Happens to Unsecured Debt in a Chapter 13?
A major change has taken place in how unsecured debt is treated. First, you are required to pay to unsecured creditors as a minimum the amount they would have received if you had filed a chapter 7 and the trustee had liquidated your non-exempt personal property. Second, a series of calculations are made to determine your disposable income. Sections 1325(b)(2) and 101(10A) are used to determine your income. Then expenses are determined under 1325(b)(2)(A) and (B) plus 707(b)(2)(A) and (B) if your income is over the Utah Median. Expenses are subtracted from income to get disposable income. The percentage paid to unsecured creditors will be the higher of (a) the liquidation analysis amount or (b) disposable income times the length of the repayment period.
At this point in time we are uncertain as to how disposable income is calculated if your income is lower than the Utah Median. There is a split in opinion. Some say expenses should be calculated using 707(b)(2)(A) and (B) which incorporates IRS Guidelines for certain expenses. Others say expenses are the actual out of pocket expenses which may be lower.
Some have also speculated that the court may impose the old good faith rule on debtors under the Utah Median. This rule required debtors to pay the higher of (a) a minimum of 5% (in hardship situations) to 20% (all other cases), (b) the value of their non-exempt property, or (c) their disposable income.
The local OUST and the chapter 13 trustees have indicated that they will consider any budget expenses up to the IRS guidelines to be reasonable; subject to being overruled by the judges. However, the chapter 13 trustees have also indicated that in order to make plans feasible (pay out all the necessary amounts over the correct period of time) the budget amounts entered on schedule J will probably be lower in most cases than those allowed by the IRS guidelines. This is generally good news for those with high income and bad news for those with low incomes.
5.0 Plan Length
Under the old law a debtor had to make payments over a minimum of three years and a maximum of five, unless 100% payment to unsecured creditors could be made over a shorter period of time. Under the new law the minimum and maximum lengths have not changed. However, if your income is over the Utah Median your are required to pay for five years. The option does still exist for early payoff if all unsecured creditors are paid 100% of their claims.