“The debtor’s not even eligible to file a Chapter 13 case until they’ve gone through the credit counseling, group briefing requirement.”
Among the myriad changes set forth by the Bankruptcy Reform Act, the majority affect the realm of consumer bankruptcy. One part of that realm is Chapter 13.
Panelists noted that Chapter 13 of the U.S. Bankruptcy Code will undergo "numerous changes" as a result of the reform. The modifications affect everything from the timing of repeat filings, to the requirements for credit counseling.
During the roundtable discussion, Todd Esser, of Todd Esser & Associates, highlighted some of the most significant changes. One thing bankruptcy attorneys and consumer debtors will need to be aware of is the effect the reform will have on repeat filings.
"The new Chapter 1328(f) provides that the Chapter 13 debtor will be denied a discharge if the debtor received a discharge in a prior Chapter 7, 11, or 12 case during the four years preceding the filing of the order for relief in the newly filed Chapter 13 case," Esser explained. That limitation is reduced to a two-year restriction for those who have previously filed under Chapter 13.
That is likely to change the way debtors approach multiple bankruptcy filings. Debtors and their attorneys will have to consider different alternatives.
"It may mean that, instead of filing Chapter 13 after the completion of the Chapter 7 case, we’ll see debtors filing Chapter 11 cases," Esser observed. "There doesn’t seem to be a similar prohibition against filing Chapter 11 and receiving the discharge after the discharge in the Chapter 7."
Credit counseling is another significant element of the reformed rules. "The debtor’s not even eligible to file a Chapter 13 case until they’ve gone through the credit counseling, group briefing requirement," Esser explained. "The group briefing could be conducted by telephone or on the Internet, but it has to be approved by the UST."
The debtor must file a certificate of completion from the credit counseling service along with a copy of a debt management plan that the credit counselor helped the debtor develop. Then, prior to receiving a discharge at the end of the Chapter 13, the debtor must complete an instructional course on personal financial management.
"Other significant changes under Chapter 13 law involve treatment of secured claims in Chapter 13 cases," Esser said. "The law effectively eliminates the strip-down of secured claims.
"If there is a purchase money secured interest, like as a motor vehicle, within 910 days then that loan cannot be stripped down to the value of the vehicle, whether or not it involves purchase money, within one year as to all other collateral."
When the case is filed, the debtor must make adequate protection payments to the secured creditor. That takes place prior to plan confirmation.
"That’s difficult from an administrative standpoint, especially where, as practitioners, we’re used to providing for a payroll deduction to fund the plan," Esser said. "Now we have to split that payroll deduction. We’re going to have both the payroll deduction, and we’re going to be maintaining adequate protection payments preconfirmation to the secured creditor."
When it comes to unsecured claims, changes will require a debtor’s Chapter 13 plan to pay those claims in full with interest or to direct the debtor’s disposable income toward the plan. Under the new rules, confirmation of that plan will have to take place between 20 and 45 days after the meeting of creditors.
Throughout the Chapter 13, annual financial statements will have to be filed. Esser noted that those reports go beyond simply providing the Chapter 13 trustee with a copy of the debtor’s tax return.
"The debtor must file a financial statement annually under penalty of perjury showing income and expenditures of the debtors during the tax year most recently concluding and monthly income of the debtor," Esser said. "The annual statement must show how the income expenditures and monthly income are calculated. It must disclose the amount and sources of income as well the identity of the person responsible for support of dependents, identity of persons who have contributed and amount contributed to the household."
The changes in Chapter 13 will affect not only the consumer debtors. They will affect the lawyers helping them navigate the bankruptcy waters.
– Tony Anderson
Tony Anderson can be reached by email.