Michael J. O'Connor, Attorney at Law
20 Corporate Woods Boulevard, Albany, New York 12211-0400
Telephone: 518-465-0400 • Facsimile: 518-641-7000
Email: moconnor@1stlaw.com

Alternatives for Over Indebted Consumers

Careful budgeting, credit counseling, or other debt management programs can solve debt problems for most consumers. But some over-extended consumers may need to consider legal options to resolve their debt problems. Title II of the United States Code offers two legal procedures for consumers to resolve their financial problems.

This pamphlet is designed merely to acquaint you with Chapter 7 and Chapter 13 alternatives. It is not intended to be a substitute for consultation with qualified legal or financial advisers.

What is Debt Relief?

Consumers and commercial businesses sometimes cannot pay their debts as they fall due. Title II of the United States Code permits consumers to file for protection to prevent creditors from continuing lawsuits and wage garnishments.

Federal Insolvency Laws, for both Chapter 7 and Chapter 13, exist for the benefit and relief of both lenders and borrowers. On the one hand insolvency laws provide an orderly process for dividing the borrower's property and repaying each lender to the extent possible. On the other hand, laws are intended to give borrowers a fresh start in rebuilding their economic lives. The Chapter 7 and Chapter 13 alternatives were designed to accommodate the competing interest of individuals whose obligations exceed their ability to pay and the creditors of those individuals. Its purpose is to give people who have incurred more debts than they can pay an opportunity to discharge those financial obligations in a fair and equitable manner and to prevent creditors from collecting their claims after the filing of a Chapter 7 or Chapter 13 petition.

Chapter 13: The Chapter 13 Repayment Plan

Eligibility

Chapter 13 is available to individuals with regular income, who owe less than $290,525 of unsecured debts and less than $871,550 of secured debts. These figures are adjusted on April 1st of each year.

How does it work?

A wage earner plan, or a Chapter 13 plan, is an option that permits consumers to pay debts under Court protection through a long range plan from three to five years funded out of future earnings. The wage earner plan permits individuals with steady income to pay all, or a portion of, his or her debts. The law requires consumers to make a good faith proposal with respect to their debt repayments. The law contemplates that individuals often times will not be able to pay their debts in full, and affords the opportunity to consumers to pay as much as they can afford, even if that amount may only result in as little as 10 or 20 percent of the indebtedness owed. Under Chapter 13, your attorney prepares a Chapter 13 petition, schedules and proposed payment plan. The payment plan is computed as follows: Your attorney first examines your monthly living expenses, including food, utilities, rent, mortgage, clothes, educational expenses, automobile expenses, travel, recreation expenses and personal care expenses. After preparing a monthly listing of expenses, the budget then analyzes monthly net income of the consumer. Provided that the net income exceeds the expenses and can provide a meaningful payment to creditors, your attorney will then propose to pay creditors based upon the extent that the net income exceeds monthly expenses.

A repayment plan under Chapter 13 typically extends your time to pay your debts, usually up to three years, or with the permission of the trustee and the Court, up to five years. The plans often provide for a repayment of less money than is actually owed

Procedure and Involvement of Chapter 13 Trustee

Once your attorney has prepared your Chapter 13 petition and schedules, the papers are filed with the United States Bankruptcy Court. The Court filing fee is $185.00, however this fee has been periodically increased in recent years. Once the petition is filed, consumers are protected from further action by creditors including continuation of wage garnishment or payroll deductions by unsecured creditors. Upon the filing of the petition, the Court appoints a Chapter 13 Trustee to administer your plan. The Chapter 13 Trustee and your attorney work together toward plan confirmation. Prior to the time that your plan in confirmed by the Court, a hearing known as a Meeting of Creditors is scheduled, usually within two months from the date of filing of the petition. At the Meeting of Creditors the Trustee has an opportunity to inquire of consumers as to whether any circumstances have changed since the date of the filing of the petition or with respect to any information contained in the Chapter 13 petition and schedules. Creditors are also given an opportunity to appear at this hearing, it is unusual for creditors to take advantage of this opportunity. In the usual case, the only appearance required by the consumer is at the initial Meeting of Creditors. Thereafter, the Chapter 13 Trustee and your attorney will present your plan to Court for confirmation.

Advantages of Chapter 13

1. Once you have filed a Chapter 13, creditors may not institute legal proceedings against you, they may not continue to prosecute lawsuits that they have started against you, they may not enforce judgments against you by having your property sold, they may not attach your wages, and they may not take any other action to try to force you to pay your obligations, unless the Court approves.
2. In the event that a friend, relative or spouse has cosigned a debt for the consumer, the consumer is permitted to file a plan to provide for full payment to the lender and at the same time to prevent the lenders from requiring payment from the cosigners.
3. Certain types of debts are normally declared nondischargeable in a straight bankruptcy Chapter 7. These nondischargeable debts can be relieved in a Chapter 13. These types of debts include, but are not limited to, debts incurred by misrepresentation of financial information on credit application, claims arising out of negligence.
4. The Chapter 13 plan permits consumers to pay arrears due mortgage and car lenders, thereby preventing any foreclosures or repossessions. Chapter 13 also permits you to restructure car loans.
5. There may be one other advantage to using Chapter 13. When you want to reapply for credit, after your Chapter 13 plan has been completed, potential lenders might prefer to see a Chapter 13 filing in your credit record instead of a Chapter 7 Bankruptcy, since the Chapter 13 option results in the payment of a greater percentage of your indebtedness than the creditors would receive in a straight bankruptcy. Lenders have no legal obligation, however, to give you any special consideration on this basis. This is something that you would have to discuss with them individually when the time comes. Some lenders have made it clear that they do not distinguish between Chapter 13 wage earner plans and Chapter 7 straight bankruptcies with respect to granting of future credit. There is a move amongst the credit reporting agencies, to reduce the number of years that the Chapter 13 stays on credit reports. The proposal would involve reducing the number of years the Chapter 13 information stays on the credit report. The information currently stays on 7 years and there is a possibility that it may be reduced to 5 years in the future. Chapter 7 straight bankruptcy information normally stays on for a ten year period.

Resolving Problems that Occur After Plan Confirmation

Often times, after a plan has been confirmed, the debtor's circumstances change as a result of illness, interruption of employment, divorce or other factors which render the consumer unable to pay the Chapter 13 payments. Because of the extended payment nature of Chapter 13's, there have been a significant number of Chapter 13 filings that were not successfully completed and ultimately dismissed for nonpayment. It is especially important to choose a competent, reputable attorney to advise you on your repayment plan and to resolve any post-confirmation problems that may arise. It may be possible for Chapter 13 consumers to complete their plans if their inability to complete the plan arises from circumstances beyond their control. Likewise, under certain circumstances, it may be advisable for Chapter 13 consumers to convert their case to a Chapter 7 proceeding, or modify their plan, as a result of interruption of employment, illness or other factors discussed above.

The Role of a Financial Counselor

Once your Chapter 13 plan is confirmed, it is important that accurate budgetary items are adhered to. In many districts throughout the United States Chapter 13 trustees require mandatory budget counseling. In the Northern District of New York, the trustee does not require this counseling, however, consultation with budget counselors is recommended. A reputable budget counselor can be obtained through employee assistance programs. Budget counselors are also listed in the yellow pages under credit and debt counseling services.

Chapter 7

Straight Bankruptcy under Chapter 7 is available if less drastic methods will not solve your financial problems. Chapter 7 allows for the discharge or nonpayment of pre-bankruptcy claims with the exception of certain types of claims that cannot be discharged, such as support, alimony, certain fines and penalties, some tax claims and claims for debts which were incurred through fraud or dishonesty. In a straight bankruptcy, income earned by you after the commencement of the bankruptcy proceeding usually is free from creditors claims and is not required to be distributed to them, however, you still may choose voluntarily to pay some of your creditors by means of a reaffirmation agreement which requires Bankruptcy Court approval. Reaffirmation generally is used when you want to keep a specific piece of property such as your home or car, which otherwise would be taken from you or sold to pay off secured creditors having an interest in that specific property.

Do you Lose Property if You File a Chapter 7?

Pursuant to the laws of the State of New York, certain assets are exempt and are not lost in a bankruptcy. In an overwhelming majority of all of the bankruptcies filed, consumers do not lose any of their assets. The property that you keep is referred to as exempt property. Generally speaking, for an individual consumer, they can keep up to $5,000 for cash, personal property and household goods. For valuating household goods and personal property, a trade- in value is used rather than the original cost. In addition, if the consumer is involved in a trade, there is a provision for keeping tools of trade that have a value of up to $600.00. When assets exceed the exempt asset limitations, your attorney should advise you of the Chapter 13 option which may enable you to keep all of your assets. These exemptions are being reviewed by the State Legislature and they may be increased in the future.

Procedure for Filing Straight Bankruptcy

Preparation of the petition, the schedules and related forms in a bankruptcy is not as involved as that in a Chapter 13 in that there is no plan formulation or calculation of disposable income necessary to fund the plan. Once the papers are filed with the Bankruptcy Court, together with a $200.00 filing fee, which is subject to change, the Court then schedules a Meeting of Creditors. The meeting is normally scheduled within two months from the date of filing of the petition. The Meeting of Creditors affords the opportunity for a Court appointed trustee to review the information contained in the schedules with the consumer. Creditors also have an opportunity to appear at this hearing, however, they rarely take advantage of that opportunity. Provided that there are no assets or other problems with the case, the discharge order is usually issued within six months from the date of the filing of the petition.

Summary

Neglecting your bills, or getting into debt over your head can affect your credit history unfavorably for many years. Filing a petition under Chapter 13 or Chapter 7 of Title 11 of the United States Code is not necessarily the answer for all individuals facing financial difficulties. The Chapter 13 or Chapter 7 option, however, may be a necessary step for the overwhelmed debtor who must choose between meeting basic financial needs such as clothing, housing, food and other financial necessities as opposed to satisfying the demands of creditors. The United States Constitution provides for the enactment of Bankruptcy Laws. You have a legal right to file for relief under Chapter 13 or Chapter 7 to resolve financial difficulties.

How To Set Up A Consultation Appointment

Consumers who desire further information on how the alternatives discussed above can help them, can contact Mr. O'Connor's secretary at (518) 465-0400. There is no fee required for an initial consultation. If a consumer wishes to file a wage earners plan under Chapter 13, Mr. O'Connor's fee is paid inside the plan and there is no requirement to pay a legal fee in advance. The consumer must bring with them the $185.00 filing fee that is required by the Court. In the Chapter 7 situation, the attorneys fees are required to be paid in advance, the amount of which will be discussed at the initial consultation. The Court filing fee for a Chapter 7 is $200.00.