Let's say you got laid off, you've used up your savings, and your credit report lights up like a Christmas tree when you ask for credit. Worse, car repairs mean you've fallen behind on your mortgage, three months. Then there's a knock at the door: It's the process server with legal papers from your mortgage bank: They have started a foreclosure action against you -- you have twenty days to respond to the papers.
You call your attorney, he reviews the papers and tells you the only thing you can do to stop the foreclosure dead in the water is to file a chapter 13. A chapter 7 will just delay things a bit - and you might even lose your house if there's too much value in the house.
So you see an experienced bankruptcy attorney. This is not something you want to do yourself -- about 99% of chapter 13's carried out without an attorney fail, sometimes resulting in loss of house or car.
The first thing he wants to know is when is the foreclosure -- he can file on an emergency basis and often does, but if the house has already been sold at the foreclosure auction you lose it all.
Assume you have time - if you just got served you might have 6-9 months, and much more if he finds a basis for opposition to the foreclosure. Then he will want to calculate the amount that has to be paid over the 3 or 5 year plan period.
Example: You have fallen behind about $12 000 in mortgage payments. He knows you have to pay 100% of that over the plan period. Suppose you also have property taxes of $3000. That too must be paid 100%. So he tells you you must pay about $18000 over a five year plan, or, dividing by 60 months, $300 per month to the plan trustee.
Next he looks to see if your income and expenses make this monthly payment possible.
This is key: You must prove to the chapter 13 trustee who runs your bankruptcy that this is not a wild goose chase. He does this at a Section 341a creditors meeting (see below).
What Actually Happens
STAGE ONE: File the petition. The petition is a 40 page book filled with facts about you and your creditors, your assets, your income, your expenses. It's a critical document and must be truthfully put together. Lies in the petition can get you jail time, no matter who you are. It's filed together with a PLAN, that spells out what you will pay to the plan, and how different types of creditors will be treated (Taxes 100%, Mortgage arrears 100%, and the balance to unsecured creditors like credit cards). Note that unsecured creditors must get at least 10%, or more depending on special calculations your attorney will work out.
Once your signed petition is filed (a complex process these days -- it's done online and hard copies must also be delivered for the trustee) all creditor actions against you must stop -- creditors can be severely sanctioned for breaking this rule.
STAGE TWO: MEET THE TRUSTEE
The trustee is a hard taskmaster. First thing he wants is documents showing your income pay stubs, and tax returns. Also, unless you are going to pay all creditors 100% of their claims, he wants appraisals of your house and car.
Next you have to travel to a 341A meeting where he will go through your petition, income and expenses in detail. He'll also give you some idea of any more information he needs.
STAGE THREE: REVIEWING THE CLAIMS FILED
Meanwhile the creditors in a chapter 13 will not get paid unless they file a claim with the court, known as a proof of claim. Your attorney will pay great attention to these, first because some may be so outrageous that he advises you to file an objection to claim. Be careful about this, as it costs extra usually. The judge, who you will probably not meet, will decide that battle.
There are some claims which must be filed, or the case will not confirm. So if your mortgage holder forgets to file a claim, your attorney may have to file one instead.
STAGE FOUR; CONFIRMATION
The whole point of all this is to get your case permanently approved by the court, or confirmed. It's a difficult process, requiring careful scrutiny of the claims filed, and then putting together various documents for the court and trustee, showing which creditors will get what, and showing finally the details of your plan as it has been modified. The reason it often gets modified is that your earlier estimates of claims were too low.
On the appointed day you go up to see the trustee again -- usually the judge too.
In many cases your attorney will have sent advance copies of the new documents up so the trustee has a chance to see them and make his own calculations as to whether they comply with the specific rules of the bankruptcy code.
STAGE FIVE: KEEP ON PAYING
Remember that from the first day of your bankruptcy, the clock ticks. You have to continue normal payments to your mortgage or car loan company on the same date as before. If you don't, the creditor will quickly file a Motion for Relief from Stay so he can go ahead outside of the bankruptcy and repossess or foreclose. This will blow your chapter 13 out of the water, since the trustee insists that you stay current on secured debt.
And if you call on your attorney to help you with an agreement to catch up, its going to cost you. Its also going to cost you from the creditor, who has his legal fees from your late payment.
And if you're late with the trustee he will file a motion to dismiss your case. Assuming you are current with him, he pays out your money to creditors every quarter.
Sometimes you can file again, but under certain conditions (for example if there's a motion for relief filed) you may not file for 180 days -- that means in many cases that your house will be sold.
It is sometimes possible to modify the plan. And it is almost always possible to dismiss your own case. Finally, after the plan period ends, and all payments made, all debts are discharged, including those unsecured debts which were not filed
with the court -- perhaps 10 to 25% of creditors are discharged without payment. .
Advantages of Chapter 13
First it's possible for just one of you to file and your spouse or other co-debtor gets protected for the duration of the case on joint debt. There are some rare exceptions to this -- be careful of tax and commercial situations.
Second, you can get out at any time. This right of dismissal is very valuable if, lets say, you decide to sell your house. But re-filing is now a real problem--don't dismiss lightly.
Third, it can give you valuable breathing room to regroup. Some plans provide for low early payments and perhaps a sale of property within a 6 month period. All creditors get paid, but you get time and an opportunity to sell at best price.
Fourth, this chapter stays on your credit report for less time, and allows you to state that all creditors were paid.
Fifth, it stops interest and penalties on most unsecured debt.--huge in the case of credit card and some tax debt.
Sixtth, if creditors don't file a claim, you don't pay them anything.
What if You Cannot Fund a Chapter 13 Plan?
You lose a job and four months later they start foreclosure action. You don't have a job yet -- it takes 6 months on average to find a job. So there is no chance of making either mortgage or plan payments. What on earth can you do?
This is a common situation. What you need above all is time -- time to regroup, time to get a job, and time to gradually catch up on the payments.
It is a good idea to make sure your attorney carefully reviews the foreclosure process, submits opposition where the papers call for it, and advises you of the progress of the foreclosure. In this way you can get a year or more to get re-employed, or to sell your house and pay the mortgage off. And once you are employed with reasonable income, you can file a chapter 13, or even try a workout arrangement with the mortgage bank.
Alternatives: Workouts, Deeds-in-Lieu and Short Sales
Many banks will simply not work with you once the foreclosure has started.
Others will, after a prolonged application and review process. There is no standard rule.
Workouts (cast as a modification where they tack the arrears on the end and start afresh, or cast as a forbearance agreement when they agree to hold off foreclosure while you catch up) often involve time consuming applications, and are usually disappointing. The more cash you have upfront, the better -- a standard agreement might be 50% cash, and the balance over 6 months, to catch up. But if, during the foreclosure you have been putting the mortgage payment under the mattress, you might have say $12 000 to offer in cash. Very few mortgages will turn down that offer, since they have nothing to lose.
A Deed in Lieu of foreclosure is where you offer your property in return for not foreclosing - more common in a bad property market. Make sure you have an attorney to review the papers. Banks will not do this if there is a junior lien.
A short sale, also common in a bad market, is where you have a buyer for the house, but her price is not enough to pay off the mortgage. So the deal fails unless the mortgage holder agrees to be paid short of the actual balance. These are very hard work, often requiring multiple party negotiations often, and some risk of exposure (eg, for realtor commission when the sale fails).
Typically, a second mortgage is more likely to take a substantial cut, because they are facing complete wipeout from the senior mortgage foreclosing.
Timing And Costs
It is wise to give your attorney two or three weeks notice of a chapter 13, but remember that an experienced bankruptcy attorney can file an emergency petition with great speed -- if she wants to. After filing it's a month to the 341a meeting, three more before the last day for creditors to file claims. Currently confirmation, which may be delayed for special proceedings such as objections to claim, takes place two months after the 341a meeting.
Legal fees for experienced lawyers vary from $2000 to $3000 for consumer cases, and more for cases involving a business. Initial retainer deposits may be $500 to start. To this legal fee must be added a court fee of arolund $200 which changes routinely.
Conclusion
Chapter 13 filings have risen dramatically with the increase in property values, which have made the standard chapter 7 case too risky to clients' homes. The only way to get relief is through chapter 13, which offers complete security of assets in exchange for regular fair payments to creditors, often at rates as low as 10% to unsecured creditors.
