How Does Filing Under Chapter 13 Bankruptcy Affect Any Lawsuits And Attachments That Have Already Been Filed Against Me?

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1. The Court Has Not Entered A Judgment Yet

If a lawsuit has been filed against you, but has not yet gone to judgment, then when you file the bankruptcy, the lawsuit is stayed by the automatic stay that is triggered by filing a bankruptcy petition. However, the plaintiff has some options.

A. Motion For Relief From The Automatic Stay

The plaintiff can file a motion for relief from the automatic stay to ask the Judge to lift the stay for the limited purpose of returning to the California Superior Court to complete the case. If the plaintiff wins, it can return to the Bankruptcy Court to ask the Bankruptcy Judge to apply the doctrine of res judicata (“the thing has been adjudicated”) to the judgment. This is necessary in Chapter 13 because the creditor needs a sum certain to list in its proof of claim. After all, the amount the creditor requested in the lawsuit is not necessarily the amount that is in the judgment.

B. Adversary Proceeding To Determine Nondischargeability

The plaintiff/creditor may also wish to initiate an adversary proceeding in the Bankruptcy Court to determine that the debt is not dischargeable. This is important because:

1. if the debt is determined to be nondischargeable, then the debtor must either pay it in full through the plan, or owe the unpaid portion after receiving a discharge; and
2. if the creditor doesn’t get the nondischargeability determination, then if the debtor converts to Chapter 7, or seeks a hardship Chapter 13 discharge, the debt will be discharged.

2. The Court Has Already Entered A Judgment

Things are a little different if the Court has already entered a judgment because the creditor already has a certain sum to put into the proof of claim. However, for the reasons previously stated, the creditor may still wish to challenge the dischargeability of the debt.

3. What Is The Trustee In A Chapter 13 Bankruptcy Case, And What Does The Trustee Do?

Trustees in Chapter 13 serve an administrative function.

A. Preconfirmation Duties

First, the Trustee reviews the plan to see if it complies with all the requirements a plan must satisfy. The Trustee will object to confirmation if the plan doesn’t comply with the requirements. The Trustee also presides at the meeting of creditors under section 341(a) of the Bankruptcy Code.

The creditors will also review the plan because — as required by the rules — I send copies of it to them. A creditor is also permitted to object to confirmation.

B. Post confirmation Duties

Second, once the Judge confirms the plan, then the Trustee serves as its disbursing agent: You send your Chapter 13 plan payments to the Chapter 13 Trustee, who distributes the money to the creditors according to the terms of the confirmed plan.

Third, the Trustee monitors the case.

If you fall behind on plan payments, the Trustee may seek dismissal or conversion to Chapter 7.

Each year you’re in the plan you must send a copy of your tax returns to the Trustee. If you fail to do so, the Trustee will seek dismissal or conversion of your case. Based on a review of your tax returns, the Trustee may ask the Court to increase plan payments if your income has substantially increased.

The Trustee reviews motions either you or creditors file, and makes recommendations to the Court.

If you used the plan to catch up on a prepetition secured debt arrearage, at plan completion the Trustee will ask the creditor to confirm that: (1) you have cured the arrearage, and (2) there is no postpetition arrearage. If there is a postpetition arrearage, you may face a motion to dismiss the case for failure to make all the payments due under the plan. Moral: You must make all postpetition secured debt payments as they come due.

4. How Long Does A Chapter 13 Bankruptcy Case Typically Take?

According to the Bankruptcy Code, a Chapter 13 case takes between three and five years.

If the debtor’s income exceeds the median income for a family of the debtor’s size in the debtor’s state, then the plan must be five years, i.e., 60 months. It cannot last more than that. (While there was a temporary change under the CARES Act due to the COVID pandemic, it’s expired.) If the debtor’s income is below the median income, the plan lasts 36 months; though it can be extended to 60 months with Court approval.

Occasionally, I have had a client who had a postpetition windfall, and wanted to pay the plan off early. When that happens, the plan can be shorter than even three years.

5. If I’m Not Eligible, Or A Chapter 13 Is Not Suited For Me, What Are My Other Options?

Unless you are a family farmer, or commercial fisherman, you can file under Chapters 7, 11, and 13.

A. Chapter 7

You must be eligible for Chapter 7 relief. We determine eligibility using a three-part test that looks at income and its interaction with expenses. Most of the analysis is in the first two parts, the so-called means test. If you’re ineligible, or if you have nonexempt assets you don’t want to lose, then Chapter 7 is not available.

B. Chapter 13

If you’re ineligible for Chapter 7, you can try Chapter 13. However, if your debts are too large, Chapter 13 is unavailable.

C. Chapter 11

If you can’t do a Chapter 7 or 13, you can try Chapter 11. However, Chapter 11 is the most complicated chapter, and it’s concomitantly expensive.

D. Negotiations

You can try negotiating directly with creditors. Negotiations can be effective provided you have the right set of facts. Unfortunately, that isn’t always the case.

One factor that affects the success of negotiations is the multiplicity of creditors. If you have many creditors, negotiations can be a logistical challenge.

Ultimately, the key to a successful negotiation is summed up in one principle: You have to appeal to your interlocutor’s self-interest. If you appeal to compassion, you’ve lost. Creditors are not in the business of compassion, and they are not in the business of looking out for your best interest. They are in the business of maximizing their profit.

E. Ignore The Problem

You can stop paying the debt and ignore the creditor. The creditor will then sue you, and obtain a judgment against you. The creditor will then use the judgment to record a lien against assets, levy funds from your bank accounts, and garnish wages. This is an awful option unless you’re judgment-proof. What does that mean? Occasionally, an elderly person tells me, “I’ve got this debt I can’t pay, and my sole source of income is social security. I live in a one-bedroom apartment, I have no ownership interest in any real estate, and I’ve got an old car.” While I can certainly put the debtor into a Chapter 7 bankruptcy, the person is judgment-proof because: (1) there are no assets for the creditor to go after, and (2) the Social Security Act takes social security off the table.

For more information on Chapter 13 Bankruptcy In California, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.