In a Chapter 13 Bankruptcy case the Debtor (that’s the term for the person filing the case), submits a plan to repay some portion of their debt over a period of time (usually 36-60 months).
Chapter 13 bankruptcy cases are complex and should not be undertaken without an experienced attorney. A recent study done by the Central District Bankruptcy Court (Encino is part of the Central District of California) showed that 99.6% of all Chapter 13 cases filed without an attorney never get confirmed! The statistics clearly show the odds of success in a Chapter 13 case without an attorney is essentially zero. For a Chapter 13 bankruptcy case to have success, it is imperative that Debtors seek out an experienced bankruptcy attorney. This is especially surprising considering that Chapter 13 fees, unlike Chapter 7 fees, do not need to be paid in full prior to filing. In a Chapter 13 case, the Debtor can pay the case fees through the bankruptcy plan instead of coming out of pocket to the attorney up front.
Debtors typically file Chapter 13 cases for one of two reasons. Either they are not eligible for Chapter 7 under the Means Test, or they want to do something that only Chapter 13 will allow.
The Means Test looks at a Debtors household income for the six months preceding the bankruptcy case. The first step of the test compares the Debtor’s income to the median income for the area where the Debtor lives. If the debtor is below the Median income for their household size, then they “pass” and are eligible for Chapter 7. If they are above the median income for the area where they live, then they move on to the second step of the Means Test. For above-median Debtors, their average income in the last six months will be calculated and they a hybrid of actual expenses and hypothetical expenses provided by the United States Trustee are used to determine the Debtor’s Disposable Monthly Income (DMI). The Debtor’s DMI is then used to determine how much Debt they are required to repay. If the Debtor’s DMI is negative (or very slightly positive), they do not need to repay anything and they can file Chapter 7 even though the Debtor’s income is above median. If the Debtor’s DMI shows enough income to make payments to creditors, then their DMI is used to determine how much must be repaid in a Chapter 13 plan.
The second reason for filing Chapter 13 is that is allows Debtors to do things that are not available in Chapter 7. In a Chapter 13 case the Debtor can propose a “lien strip” to remove a wholly unsecured junior deed of trust. Many people file Chapter 13 to get rid of their second mortgage when their house is underwater. Debtors can also use Chapter 13 to stop foreclosures and force a defaulted mortgage loan current. There are other advantages as well including “cram-downs” of certain secured loans. Sometimes, Debtors are able to bring the amount they must repay on a car loan down to the current value of the car. Chapter 13 cases also allow Debtors to stop collection on certain priority debts such as taxes and repay them at an affordable monthly payment.
Here in Encino, when someone files for Chapter 13, the Central District Bankruptcy Court has determined an “guideline” fee for the services. Virtually all attorneys charge either the guideline fee, or a higher amount. To charge more than the guideline fee, the attorney must submit a detailed application to the Court outlining the work that demands a higher fee than the guideline amount. As mentioned above, even though the overall fee is almost always tied to the amount set by the Court, Debtors do not have to pay that fee up front. Bankruptcy attorneys have discretion over how much of the fee they will require up front and how much they will take through the Chapter 13 bankruptcy plan payments.
If you think a Chapter 13 bankruptcy case may help you, contact one of our experienced Encino bankruptcy attorneys today to set up a free consultation.