Chapter 13 Bankrputcy Essay, Research Paper

Bankruptcy Law:

Chapter 13,

Reorganization of Debt

The federal statute for the form of bankruptcy commonly known as Chapter 13 is cited in legal briefs as 11 USC CHAPTER 13 – ADJUSTMENT OF DEBTS OF AN INDIVIDUAL WITH REGULAR INCOME. Section 1301 this code not only relieves the bankrupt debtor, but it also relieves the codebtor.

US Code as of: 01/23/00

Sec. 1301. Stay of action against codebtor

(a) Except as provided in subsections (b) and (c) of this section, after the order for relief under this chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor, or that secured such debt, unless –

(1) such individual became liable on or secured such debt in the ordinary course of such individual’s business; or

(2) the case is closed, dismissed, or converted to a case under chapter 7 or 11 of this title.

(b) A creditor may present a negotiable instrument, and may give notice of dishonor of such an instrument.

(c) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided by subsection (a) of this section with respect to a creditor, to the extent that –

(1) as between the debtor and the individual protected under subsection (a) of this section, such individual received the consideration for the claim held by such creditor;

(2) the plan filed by the debtor proposes not to pay such claim; or

(3) such creditor’s interest would be irreparably harmed by continuation of such stay.

(d) Twenty days after the filing of a request under subsection (c)(2) of this section for relief from the stay provided by subsection (a) of this section, such stay is

terminated with respect to the party in interest making such request, unless the debtor or any individual that is liable on such debt with the debtor files and serves upon such party in interest a written objection to the taking of the proposed action.

Legislative Intent

This law is intended to allow individuals to pay off their debts in three to five years and start over with a “clean slate”, that is, they will be debt-free. However, there is concern about abuse of the bankruptcy law. Individuals may run up high debts, then go bankrupt and not have to pay their debts. When they run up their debts with the intent to go bankrupt, it is fraud. However, it is difficult to prove that they intended to go bankrupt when they ran up their debts.

The number of bankruptcy filings reached an all-time record of 1,366,887–one filing for every seventy-six American households–during the year ending 30 September 1997, even though it was a period of strong economic growth. The bankruptcy rate is now six and one-half times the average annual rate of the 1970s. In fact, there were more filings during the second half of 1997 than during the entire decade of the Great Depression. The Bankruptcy Reform Act of 1994 tried to ease the situation by having Congress establish a bipartisan National Bankruptcy Review Commission to redraft the US bankruptcy laws. Many of the Commission’s recommendations, which were submitted to Congress in October 1997, actually would not do much to make situation better: “The proposed legislation would increase debtors’ entitlements and property they retain upon declaring bankruptcy. Rather than reform, these changes are welfare under another name, with creditors seemingly forced to foot the bill. Overall, these changes may actually increase the bankruptcy rate” (Pomykala, 1997).

Under Chapter 7 bankruptcy rules, the debtor’s assets are liquidated (sold for cash) and the proceeds are distributed to the creditors. However, Chapter 13 allows consumer debtors to retain possession of their property as an alternative to liquidation. They are required to submit a debt repayment plan that gives their creditors future disposable income that is not necessary to support the debtor and any dependents. The plan lasts three to five years while the automatic stay remains in effect. Unsecured creditors must receive at least what they would under a hypothetical Chapter 7 liquidation, with “value” determined by court testimony as opposed to actual market sales.

Although the intent of the law is to allow debtors to start over with a “clean slate”, it also has the intent to make the creditors whole as far as possible under the circumstances.

Chapter 13 of the Bankruptcy Code is structured for wages earners or small businesses. It enables debtors to immediately stop all debt collection activities, including wage attachments, mortgage foreclosures, lawsuits, telephone calls, letters, bank setoffs or any kind of collections activity at all. Although this collection activity is stayed, the individual or the attorney proposes a plan of repayment and the debtor begins pay on it. In most cases, the plan can propose payments in an amount that is less than 100 percent of the debts. Many debtors repay 10 percent, and some even pay less. The plan usually continues for three years, but it cannot last more than five years. When the court confirms the plan, it becomes binding on the creditors. After the debtor completes the payments under the plan, the court cancels the balance of the debt. Chapter 13 is often used to stop mortgage foreclosures and can save a person’s home, even at the last moment. However, payments to mortgage creditors generally cannot be reduced or modified.

Case Law

The two most important cases that I know of in bankruptcy law are known as Ron Pair and IN RE LAGUNA. Ron Pair established that the bankruptcy will allow the collection of “interest, regardless of whether the agreement giving rise to the claim provides for interest [United States v. Ron Pair Enterprises, Inc., 489 US 235, 241], until a plan’s confirmation date. However, several cases since that time have reversed the Ron Pair decision and specifically state in their decisions that the Ron Pair decision was misconstrued or interpreted wrongly.

IN RE LAGUNA, 944 F.2d 542 (9th Cir. 1991) is a case in which the debtors fell six months behind in their mortgage payments on their home. The debtors submitted a Chapter 13 plan that proposed to resume all current payments to SLMC while paying off the arrearages over a period of not more than 36 months. The lender, SLMC, objected to confirmation of the plan, arguing that it failed to provide for postpetition interest on the prepetition arrearages, in violation of 11 U.S.C. 506(b), 1322(b)(2), and 1325(a)(5), as recently interpreted by the Supreme Court in United States v. Ron Pair Enters., as well as the Fifth Amendment. The bankruptcy court overruled SLMC’s objection and confirmed the plan, noting that neither the debtors’ promissory note nor their deed of trust provided for any interest on arrearages. SLMC appealed to the Ninth Circuit Bankruptcy Appellate Panel (”BAP”) which affirmed, with one judge dissenting, in a published opinion. [Shearson Lehman Mortgage Corp. v. Laguna (In re Laguna), 114 B.R. 214 (9th Cir. BAP 1990).] SLMC appealed to the Ninth Circuit Court, but the appeals court affirmed the judgment of the lower courts, thus reversing the decision in the Ron Pair case. This allows debtors to have a period when they do not have to pay additional interest on the debts that they were not able to pay before they filed for bankruptcy.

Conclusion

Social Impact

The huge number of bankruptcies has had a strong negative effect on the economy, especially where creditors do not get paid. Nothing has changed as of this date, but there is a new bill called S.420 (Senate version-passed 3/15/01)/ HR 333 (House version). This bill would limit a consumer’s bankruptcy rights severely. Some of the changes proposed are:

? A “needs-based” bankruptcy in chapter 7’s. Debtors could be carefully scrutinized and compared to the national median family income. Debtors that have income minus necessary expenditures, when multiplied by 60 months that is not less than 25 percent of the debtor’s nonpriority unsecured claims in the case or $5,000, whichever is less would have their cases dismissed by the court as an `abuse’.

? Mandatory credit counseling before filing, except in exigent cases, and in those cases, then within 30 days thereafter. The debtor would have to file with the court a certificate of compliance from the counselor and a copy of the debt repayment plan created by the counselor. A failure to file the above documents could lead to an automatic dismissal.

? Non-dischargeability of most debts incurred within 90 days of filing.

? Non-dischargeability of debts incurred to pay non-dischargeable debts (e.g. alimony, support, taxes, drunk driving claims, etc.)

? A severe reduction on what is considered “household goods” (this has a great effect on exemptions and avoiding certain types of liens that lenders sometimes take on personal property and household goods to coerce debtors to pay after filing).

? Sanctions on debtors and their counsel for filing a chapter 7 that should have been a chapter 13.

? Provisions effectively forcing debtors to pay full amounts due on depreciated secured property (i.e. a refrigerator from Sears) in order to retain that property.

? Increasing the time between filing from six years to eight years.

? Preventing debtors from filing “Chapter 20’s,” that is, a chapter 13 following a chapter 7. However, the changes proposed could affect who can file.

? Forcing debtors to attach three to five years worth a tax returns to their schedules, and this may be arguably true even if the debtor did not have to file with the IRS because of no income (can you imagine filling out five returns with nothing but 0’s?). (Rubin, 2001)

This much could take away the rights of ordinary citizens, just because some people are abusing the bankruptcy law. If any of these proposals pass Congress and get signed by the president, it is likely to hurt regular middle-class people and the rights of consumers. Moreover, it is highly likely that some of these proposals will become law in the near future.

Personal Opinion

I think that you should consider filing a chapter 13 bankruptcy if your house is being foreclosed, or if you have received a notice from your mortgage company that they intend foreclosure at any time in the future. Maybe you just need some time to catch up, so that you can regain control of your life from your creditors. Maybe you are in serious financial trouble, and you have tried, but you cannot work out other arrangements with your creditors. Chapter 13 allows consumers to keep their property (real or personal) that they need to protect and are in danger of losing to a creditor. Sometimes people do not have enough income to pay 100 percent of the debts they owe and would like to make (in most cases) interest-free payments to unsecured creditors. If they really have an honest desire to not run away from their creditors, but are not in a financial position to pay all the debt, or all the debt and all the interest on that debt., then they need Chapter 13. It should not be taken away.

References

Pomykala, Joseph. (1997). Bankruptcy reform principles and guidelines. Revised Edition. Regulation 1997, Vol. 20, No. 4. Cato Institute. www.cato.org.

Rubin, Lawrence S., Attorney. (2001, March). Chapter 13 frequently asked questions. pennlawyer.com.

Bibliography

Pomykala, Joseph. (1997). Bankruptcy reform principles and guidelines. Revised Edition. Regulation 1997, Vol. 20, No. 4. Cato Institute. www.cato.org.

Rubin, Lawrence S., Attorney. (2001, March). Chapter 13 frequently asked questions. pennlawyer.com.