Initiating a Chapter 13 Case and the Automatic Stay

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Because under a Chapter 13 case, monthly payments under a plan are intended to cure and reorganize all of the client’s debts, a client’s income and expenses must be carefully calculated for a monthly budget that must allow for payments to satisfy the monthly amount required under the Chapter 13 plan. Documentation for such income in terms of pay stubs, bank statements, and affidavits of contribution need to be obtained to demonstrate that the client can potentially sustain the payments required in the case. If the case is not the client’s first Chapter 13 bankruptcy case, the client may need to file an affidavit of changed circumstances and potentially file a motion to extend the stay past the initial 30 days of the case. The plan must account for the curing of a client’s mortgage arrears, car loan arrears, credit cards, taxes and student loans over a five (5) year plan that is binding on the client’s creditors. The filing of a Chapter 13 case will instantly cause an “automatic stay” to go into effect which will stop all creditor activity including imminent foreclosure sales or repossessions. However, while the Chapter 13 case allows a 5 year or 60 month period of time to catch-up on pre-petition mortgage arrears under a “traditional” plan (see below), the debtor is required to remain current with post-petition payments for secured debt such as mortgages and car loans. A secured creditor not getting regular post-petition payments, such as mortgage payments or car loan payments, can move for relief from the automatic stay, which in a Chapter 13 case would usually be contested, with the debtor seeking to quickly cure the post-petition amount in arrears.

“The Co-debtor Stay” –

The co-debtor stay is a procedural delay acting against the creditor, who retains all their substantive rights to collect any unpaid balances from a co-debtor. In re Burkey, No. 09-12371, 2012 Bankr. LEXIS 5516 (Bankr. N.D.N.Y. Nov. 28, 2012). The co-debtor stay applies only during the pendency of the Chapter 13 case; the co-debtor stay will end when the case is closed, dismissed, or converted to Chapter 7 or 11. The commencement of a Chapter 13 case may protect non-debtors, like spouses, from collection actions on joint debts. Non-filing co-debtors are immune from the collection efforts of creditors when the creditor is seeking to collect on debts relating to the pendency of a Chapter 13 proceeding. Thus, it is not always necessary for spouses to commence joint or separate bankruptcy proceedings to discharge joint debts, if, those debts will ultimately be paid in full under a debtor’s Chapter 13 plan. The co-debtor stay
automatically goes into effect when the three requirements for the co-debtor stay are met. First, the debt must be a “consumer debt”, debt which is incurred by individuals “primarily for a personal, family, or household purpose.” In re Lemma, 392 B.R. 299 (Bankr. E.D.N.Y. 2008). Majority of courts have held that a mortgage lien is a consumer debt. Second, the cosigner must be a natural person. Third, the cosigner did not become liable for the debt in the ordinary course of the individual’s business. 11 U.S.C.A §1301(a)(1). A creditor who attempts to collect a consumer debt from a co- debtor will be in violation of the co-debtor stay and in contempt of court. The co-debtor stay prevents the creditor from prosecuting a lawsuit against the co-debtor or garnishing the co-debtor’s wages. Furthermore, the co-debtor stay prevents the foreclosure of real property or repossession and disposition of personal property owned by the co-debtor that secures the debt, while the debtor is in Chapter 13. A creditor may get around the co-debtor stay if they can prove (1) the co-debtor is the one who received the benefit of the claim in question; (2) the debtor’s chapter 13 plan does not propose to pay the debt in full; and (3) the creditor can show that the continuation of the stay will cause irreparable harm.

Qualifications for Chapter 13 Bankruptcy Relief –

To qualify for Chapter 13 Bankruptcy relief the debtor needs to be an individual or a married couple with regular income. The debtor cannot be a corporation or a legal entity other than an actual, living individual residing in the jurisdiction where the Chapter 13 case is filed. While there is no income limit in Chapter 13, as with Chapter 7, ideally the income to file in Chapter 13 should at least be sufficient to form a positive disposable income in the monthly budget to enable the Chapter 13 debtor to pay the monthly anticipated payment under the proposed Chapter 13 plan to the Chapter 13 Trustee and if the plan is a “traditional” plan, the monthly post- petition mortgage payment to the mortgage holder. There is however a debt limit in a Chapter 13 case with a debt limit, as of April 1, 2022, on secured debt of less than $1,395,875. and on unsecured debt of less than $465,275., for liquidated and non- contingent debt. Other qualifications are that the real property in distress, that the debtor seeks to protect, needs to owned by the debtor or the debtor needs to have some sort of ownership interest in the property to consider the property part of the debtor’s estate and entitled to protection. In addition, if the proposed Chapter 13 plan is a “loss mitigation” plan where the Debtor will try to modify the mortgage while being protected by the Chapter 13 case, the Debtor needs to be liable on the note for the mortgage loan.