A California bankruptcy court recently issued an opinion on bankruptcy laws that cleared the air on how a Chapter 13 plan should work under the Bankruptcy Code. This case actually involved five different debtors who, after successfully declaring bankruptcy and going through the process, tried to discharge their debts early by shortening the length of the payment plan. This process brought objections by creditors, objections the court needed to resolve.

These issues arose because of a way that bankruptcy procedure is processed in a certain part of California. That is why the bankruptcy court took five cases, pooled them together, and issued a precedential opinion that will change how these plans are carried out in the future. This is just another example of how the Bankruptcy Code is more complex than meets the eye, and why you need experienced professionals to help you file for bankruptcy.

The Law of Plans Under Chapter 13

There are significant benefits associated with a Chapter 13 bankruptcy that may not apply to other chapters in the Bankruptcy Code. It is an ideal route to take in bankruptcy to achieve certain goals like keeping a primary residence, lowering car payments, and consolidating debts. To accomplish these goals, while still discharged certain unsecured debts, it is necessary for the person filing for Chapter 13 to construct a plan.

While every plan will differ based on the different circumstances and abilities of the people filing, there are certain principles that will apply everywhere. Under each Chapter 13 plan, a debtor agrees to certain provisions including dedicating a certain portion of their current and future earnings to the trustee in the case. The trustee then pools that money together and pays off different creditors claims.

The plan is not solely put forward by the debtor, but it must be approved by the bankruptcy judge presiding over the case. Approval by the judge will depend on several strict requirements outlined in the Bankruptcy code. Those requirements include making the plan in good faith and equal treatment of debts. Such plans typically last for three to five years. It is only after the plan is completed that debts are discharged.

The Issue Here

The issue in this case arose for debtors with a shared characteristic in their Chapter 13 plan. Like the five cases discussed in this opinion, they each submitted a plan that resulted in many of their creditors receiving a $0 payment for three years or more. What often happened under the norms of area was that debtors changed the plan midway through and had the debt discharged. But this was only happening when the debtor’s’ plan required them to make $0 payments.

The court put a stop to this way of doing things under their opinion. Now every debtor will have to complete the plan, or notify the trustee of a change to allow them to object or acquiesce to the modification. This opinion has cleared the law of this area and will set a precedent for how Chapter 13 bankruptcies are filed in the future.

If you are contemplating filing for bankruptcy, contact us. At the Bankruptcy Law Center we will help you understand what your options are, which chapter is best for you, and what steps you need to take going forward.

(image courtesy of Didier Weemaels)