Two overarching constraints limit the plan. First, the unsecured creditors must receive at least what they would have received in a Chapter 7 bankruptcy. Second, the debtor must devote all or substan tially all of his or her disposable income to the repayment plan. Disposable income is money available from income after reason- able living expenses. This opens another avenue for disputes, as a creditor or trustee may have an objection stating that a given debtor’s living expenses are not reasonable.
Areas of dispute—in addition to the normal cost of food and enter tainment—are expenses for charitable giving, repayment of loans against retirement plans, and the cost of private schooling for the debtor’s children. The plan will also state which creditors are to be paid directly, what property is to be surrendered, and what executory con tracts and leases will be kept or given up.
keep and use the property but is accountable to the court for its use. He or she is treated as a debtor in possession of bankruptcy property or debtor in possession. Since the court could have taken the property to settle debt but did not, the debtor must stand ready to account for this property.
Sale of property. The main time this debtor-in-possession theory causes a problem is when people want to sell their home or their vehicles. Since it is the property of the bankruptcy estate, people are not free to just sell the property and pocket the money. They must first obtain permission of the court for the sale and account for the money received. By the same token, you cannot, for example, just give a vehicle to your child because everyone in the family knows it is really the child’s car.
New debt. While you are under Chapter 13, you are not allowed to incur more debt. This means you must stop charging on credit cards and cannot borrow money during the life of the plan without the court’s or trustee’s specific permission. This often causes problems when cars wear out or when the debtor must move.
Before the court will allow new or additional debt, it will want to know the terms of the new debt, what is being bought, and why. Be sure the additional debt can be repaid without hurting the old creditors.
Car wrecks. A problem that is fairly common during the life of the Chapter 13 plan is a car wreck. Sometimes it seems that car wrecks seek out peo ple in Chapter 13. In a certain number of these wrecks the debtor’s car will be totaled. This means the debtor must replace the car and will need new financing. The system allows for this financing to be done by the old lienholder, if there is one, with the old lienholder obtaining a lien on the new car.
In practice this can be a problem. If a car is totaled, the insurance company often does not pay enough to replace the car. The creditor, if it is to substitute collateral, will want a car at least as valuable as the one that was wrecked and does Chapter 11 Bankruptcy and Chapter 13 Bankruptcy 133
not care that the insurance payoff was not enough to purchase such a car. Often the creditor will refuse to allow any substitution on collateral and the debtor must ask for help from the court. All of this takes time, and the debtor may very well have to pay extra money to obtain the replacement car. This is very hard on debtors who are without a car to drive to work and short of ready cash.
Insurance lapses. When a person takes out a loan on a car, a standard clause in his or her loan agreement requires him or her to keep collision insurance. This will allow the lender to recover some of the loaned money if something happens to the car.
Once in a Chapter 13, people often have a hard time making ends meet. They may have suffered a drop in income or have agreed to a repayment plan they really could not quite afford in an effort to save a home or a car. To make ends meet, there is a temptation to let insur ance premium payments slide.
This is a mistake. The creditor has the ability to repossess cars when the debtor fails to keep insurance on them, as required by the security agreement. The idea behind this is that the creditor is being kept by the bankruptcy filing from taking the car, and in exchange the debtor has a duty to give the creditor the protection offered by the col lision insurance policy.
Drop in income. When considering filing a Chapter 13, people usually want to know what will happen if their income drops or they have unexpected expenses.
This is a real problem for self-employed business owners, as their month-to-month income is not steady. They often have slower sales during certain seasons.
The short answer is that you are expected to make the Chapter 13 monthly payment whether or not you have a shortfall in a given month. Sometimes the trustee will give you a chance to make a short payment. However, this is often not much help. You will usually be expected to make increased payments until the shortfall is made up in a short period of time. Often people find themselves
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in a downward spiral. They could not afford to make their regular payments, and now they have to come up with the money to make their regular payments and the money to make up a missed payment. Unless the shortfall was a one-time blip, this may be impossible, and they will be dropped from the Chapter 13 program.
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With a few exceptions, the filing of bankruptcy sets your financial pic ture. It is like a financial snapshot was taken on the day you filed your bankruptcy petition. What you have in your possession is reachable by the bankruptcy trustee, and to protect it you must use the exemptions allowed by applicable state and federal law. However, there are excep tions to this general rule.