Category: Chapter 13 Bankruptcy

Roughly 30 days after filing your chapter 13 case you will have to attend a meeting of the creditors where you will meet with the chapter 13 Trustee Thomas P. Gorman. In 99 percent of cases no creditors will be present at this meeting and you will spend about two minutes answering a few questions by Mr. Gorman. After the hearing concludes most clients want to know: Now what? The answer is it depends.

The ball is now in the hands of the chapter 13 trustee. If he has absolutely no objections to your case (for example, you filed a “100 percent plan” and crossed all of your “t’s” and dotted all of your “I’s”) then things remain quite for about one month and then the case is confirmed by the bankruptcy judge. Confirmed simply means that the payment structure that you chose in your chapter 13 plan is approved by the bankruptcy court. A confirmation order will then be issued by the bankruptcy court.

On the other hand, if the chapter 13 trustee has a “problem” with your case he will file an Objection to Confirmation of the Plan. He will usually do this within about two weeks after the meeting of creditors takes place. The trustee must file his objection to confirmation no later than seven days prior to the confirmation hearing date. If he does not do so then the case gets confirmed.

The typical objections that the trustee will assert is that he simply does not believe that you are proposing to pay enough money to the creditors in light of your disposable income, that the plan is underfunded due to the fact that your monthly payments are not enough to pay out all the creditors the amount that you are proposing, or you have a feasibility problem. Meaning, despite your good intentions, he simply does not believe that it is realistically possible for you to pay your creditors the amount proposed since you simply do not have the income to support such payments.

The important thing to remember is that an Objection to Confirmation of The Plan by the trustee does NOT mean that your case is doomed or is about to get dismissed! If you feel that the trustee’s objections are improper or unfounded then you can respond in writing to the objections and appear in court on the date of confirmation and explain to the bankruptcy judge why the trustee is wrong. If the judge agrees with you then the objections by the trustee will be overruled and the case will get confirmed by the judge.

On the other hand, if you agree with the objections by the trustee you can consent to denial of confirmation which means that when the case appears before the judge the plan will be denied, BUT with leave to amend within 21 days thereafter. In other words, at the confirmation hearing the judge will give you up to 21 days to file an amended plan and to get the amended plan confirmed. If the amended plan is once again met by objection(s) by the trustee then you can file a second amended plan in order to get your plan confirmed. And if the second amended plan is met with objection and denied confirmation then….

The point is that an objection to confirmation is not fatal! You will get a second, third or even fourth bite at the apple in order to get your plan confirmed by the court. The cases will drag on for months and months during this process. However, keep in mind that all good things do come to an end. If the objections to confirmation simply cannot be cured –because you lack the income for example- then the case will eventually get dismissed or you will have to convert to a chapter 7 bankruptcy.

One of the things that is required of you while you are in chapter 13 bankruptcy (at least here in Alexandria, Virginia) is that you file your federal and state tax returns by April 15 during each and every year that you are in bankruptcy. Extensions are not permitted and the chapter 13 trustee Thomas Gorman will expect to receive copies of your returns by May 1^st of each year. Otherwise expect him to file a Motion to Dismiss your case if you fail to do so. Copies of your tax returns should be sent to his Alexandria office located at 300 North Washington Street, Suite 400, Alexandria, Virginia 22314. No need to send them to me as well.

As for tax refunds, and the issue of having to turn over those refunds in excess of $250.00 to his office, here are a few things to keep in mind. First, if your case ends with the letters “RGM” which are the initials of Judge Mayer then you do not have to worry about turning over your tax refunds regardless of the amount during the 3/5 years that you are in bankruptcy. If your case number however ends with “BFK” which are the initials for Judge Kenney, then unfortunately those refunds will have to get turned over. It is just a matter of luck in other words. There are just two judges in the bankruptcy court in Alexandria, Virginia so your odds are 50/50. And to make matters worse, the answer is “no,” as in the tax refund that you turn over will not go towards paying down the amount you owe so as to get you out of bankruptcy sooner. Think of the refund as a bonus for the creditors.

Second, typically the very first refund that you get while in chapter 13 bankruptcy can typically get exempt/protected so you will not need to turn over that first refund during year one or year two of your case. Also, if yours is a 100% chapter 13 plan, then no need to worry about turning over your tax refunds.

Third, just because your case was assigned to Judge Kenney does not mean that you need to despair. One fairly simple “trick” to employ is to modify the number of withholding that you claim on your pay checks and reduce the amount in payroll taxes that you pay during the year, thus reducing or eliminating your tax refund. You may not get the usual refund that you are accustomed to, but then again you will have more money in your pocket during the year.

And what if during the duration of your chapter 13 bankruptcy you happen to owe taxes one year? Fortunately the IRS, the gentle giant that it is, will allow you to pay off that liability during the remaining months that remain in your chapter 13 bankruptcy case. They will file an amended claim to reflect the new amount owed instead of forcing you to write one big check. They will only grant you this courtesy just once however. If you end up owing taxes yet again during the life of your case they will expect you to make arrangements to pay it outside the confines of your chapter 13 plan. As for the state of Virginia, their policy is different. Any tax liability incurred after the filing of your chapter 13 case must be paid by you outside of the chapter 13 plan.

Finally, in case you are wondering, the IRS and Virginia cannot intercept your tax refunds while you are in a chapter 13 and apply it to a tax debt that existed prior to the filing of your case since that would violate the automatic stay. But, if you incur tax liability after the filing of your case and then in a subsequent year obtain a refund, then the post filing refund can be applied to the post filing debt.

 

I really should have titled this blog “How does chapter 13 bankruptcy work in Alexandria, Virginia.” Why? Because in each and every jurisdiction things are done just a bit differently than in other parts of the country, or even other parts of the state for that matter. Drawing inspiration from David Letterman and his famous “top 10 list” the following are the top 10 issues to keep in mind if you are thinking about filing a chapter 13 bankruptcy case in Alexandria, Virginia:

1. There is only one chapter 13 bankruptcy trustee in Alexandria, Virginia and his name is Thomas (goes by Tom) Gorman. If you are shopping around for a chapter 13 bankruptcy attorney in Northern, Virginia, your attorney should certainly know who he is. And yes, he is a pretty nice guy, and has a great sense of humor to boot.
2. The meeting of the creditors will take place in Old Town Alexandria and it will always be on a Tuesday. For most people, this will be your only “court appearance.” It is at this hearing that you will be meeting with the trustee, Thomas Gorman. Unlike other places, if no objections are filed to your proposed plan, then there will be no need for you to appear at the Confirmation Hearing.
3. Alexandria is unique in that the judges have decided that in chapter 13 cases, the post filing course, the debtor education course, needs to be taken in person (instead of online) on the day of the meeting of the creditors. The class will begin at 9:45am and is designed to answer whatever general questions you may have about the chapter 13 process.
4. Unlike Washington, DC for instance, once you file your chapter 13 case you will be responsible for making the first several monthly payments to the chapter 13 trustee before the court will issue a Wage Order commanding your employer to begin deducting these payments from your pay check. The court will issue this Wage Order once your plan has been confirmed. In DC that Wage Order will be issued within a matter of days of the filing of your case.
5. Unless you are filing a “100% plan,” the chapter 13 trustee will expect you to produce your tax returns each to him each and every year while you are in bankruptcy and will expected you to turn over to him any tax refunds you get that are in excess of $250.00! Of course, your experienced chapter 13 bankruptcy attorney can tell you how to fairly easily avoid having to “donate” any of this money over to the trustee.
6. In Alexandria things are set up so that you will continue to make your normal mortgage and car payments once you file your case, while the trustee will use the money you pay him each month to catch you up on your mortgage/car arrearage, if any. In other parts of the country, the trustee will make all payments on your behalf. Basically, the courts there do not trust you to directly make your own mortgage/car payments while in bankruptcy.
7. Some parts of the country are extremely tough about missing your chapter 13 payments. As in, miss one payment to the trustee and your case gets promptly dismissed. When they say no excuses, they mean it! In Alexandria, I will tell you from experience that the trustee tends to be understandable and reasonable.  You will usually get a second or even a third bite at the apple before your case gets dismissed for lack of payments to him.
8. The two judges that we have in Alexandria are not here to “rubber-stamp” the objections of the chapter 13 trustee. Meaning, if the trustee objects, and you insist on having the matter heard before the judge, then as long as the facts and/or law are on your side, there is no reason to doubt that the judge will rule in your favor.
9. If you are thinking about trying to dispose of a judgment lien on your home, or a lien strip, an appraisal will certainly be required by the judges.
10. I cannot think of # 10 at this time.

 

The short answer is no. The bankruptcy court will not make you give up your house if you file for bankruptcy. If there is little or no equity in your home at the time that you are thinking about filing for bankruptcy, then you can safely file a chapter 7 bankruptcy case. The chapter 7 bankruptcy trustee is only interested in assets with equity that cannot be exempted. No equity means the house is all yours. Of course, you have to continue paying your mortgage if you do not want the bank to foreclose on the home.

However, if you live in Virginia and have significant equity in your home it may mean that your option will be to file a chapter 13 bankruptcy due to something in bankruptcy known as the “liquidation test.”

And what is the liquidation test? It is a mathematical formula used by the bankruptcy courts whereby the more equity you have in your home, the more you will be expected to pay into the chapter 13 plan. The principle behind the liquidation test is that the total amount you pay in a Chapter 13 bankruptcy plan needs to be at least as much as you would have paid had you filed for chapter 7 bankruptcy.  As a reminder, in a chapter 7, you must surrender all of your non-exempt assets. Your equity in your home is your primary asset.

So to use sophisticated legal jargon here, what the bankruptcy law is saying in this situation is: Hey buddy, if you have been paying your mortgage for a number of years and are sitting on $100,000 in equity don’t go thinking that you can purposefully file for chapter 13 and pay only say, $10,000 during the next 5 years instead of the $40,000 you owe to your creditors. Had you filed for a chapter 7 bankruptcy your unsecured creditors would have received the full $40,000.00 owed to them since the chapter 7 trustee would have had the right to sell your home and pay your creditors. As such, $40,000 is what the court will expect from you to contribute into the chapter 13 plan during the next five years.

So what is the lesson here? Well, for those seeking to file bankruptcy in Virginia, having equity in your home is a disadvantage, to put it mildly! The significant equity in your home may mean that a chapter 13 bankruptcy is your only bankruptcy option.

NOTE: If you do not have a ton of equity in your home you can always file a chapter 7 case in order to test the waters and see if the chapter 7 trustee “will bite.” If it turns out that there is in fact significant equity in your home and the trustee has made it clear that he is interested in liquidating your home, then you can convert your case to a chapter 13. Hope for the best but prepare for the worst is how to look at it.