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CHAPTER 13 Chapter 13 is a debt repayment plan for
individuals (and married couples ) with regular income and is available to sole proprietor businesses. Chapter 13 is
not available if total secured debt exceeds $1,081,400.00 or unsecured debt exceeds $360,475.00. In that case a chapter
11 reorganization may be available, but is much more expensive. When the case is filed, creditors are
immediately prohibited from taking further collection action under a temporary restraining order, the "automatic
stay", which remains in affect so long as payments are being made under a confirmed plan. Except long term debts payable
over longer than 5 years, like house loans, all debts are usually paid through the plan. Secured debts, like car
loans, can be modified by the plan but must be paid in full up to the value of the collateral securing the debt. To
the extent that the debt exceeds the value of the collateral, it is treated as unsecured and can be paid along with other
unsecured debt at less than 100 cents on the dollar. Interest is normally paid on secured debts but can be reduced from
the contractual rate. Unsecured debts are paid with no further interest accruing after the case is filed. When the plan
is completed, any unpaid balances are discharged just like a chapter 7 so they can never be collected.
Lien Stripping: A recent development in this era of declining real estate values is the concept of lien stripping.
If the value of the real estate does not exceed the balance of the first loan, any junior secured loan is treated as unsecured
and can be paid at less than 100 cents on the dollar. At the end of the plan the unpaid balance is discharged and the
security interest should be released. Unfortunately, it may be necessary to sue the creditor at the end of the plan
to force the release of the security interest which will add to the cost of the case. This strategy is new and there is some
uncertainty as to how successful this strategy will be in any given case. Ability to Pay: The extent
to which a plan can propose to pay unsecured creditors at less than 100 cents on the dollar is a result of several factors,
the first of which is ability to pay. Just as the Court calculates eligibility in chapter 7 through the Means Test,
the same calculation is required in chapter 13 for debtors who have above median income. Unfortunately, because it is
a cookie cutter one size fits all test, it can show a greater abiity to pay than one would expect. Non-Exempt Property, Preferences and Fraudulent Transfers:
( See the discussion under Chapter 7 ) In chapter 7 the trustee liquidates non-exempt property, preferences and fraudulent
transfers to generate funds to pay creditors. In chapter 13 the trustee does not liquidate property, the trustee collects the
plan payments and distributes the funds to creditors under the terms of the plan. The existence of non-exempt
property, preferences or fraudulent transfers affects the amount that unsecured creditors receive under the plan; unsecured
creditors must receive as much or more in chapter 13 than they would receive in chapter 7 from the liqidation of non-exempt
property, preferences and fraudulent transfers. 5 Reasons to do a chapter 13: 1. Not eligible for Chapter 7 under
the Means Test. 2.
Too much non-exempt property that will be liquidated in chapter 7. 3. Too much non-dischargeable debt that
cannot be controlled in chapter 7, like taxes and student loans, can be repaid over time in Chapter 13. 4.
Lien stripping.
5. Stopping a foreclosure by paying the delinquent payments through the plan over as many as 5 years.
IF YOU HAVE QUESTIONS OR WOULD LIKE TO SCHEDULE A FREE INITIAL CONSULTATION WITH ONE OF OUR 2 ATTORNEYS, CALL (916) 985-3330 NOW.
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