Chapter 13 is a voluntary legal structure in which debtors can repay debt. Though this concept of consumer bankruptcy is seemingly straightforward, understanding and applying the Bankruptcy Code and local rules of our district can be challenging. The Code provisions in Chapter 13 can be more complicated than in a Chapter 7, but you can readily address the issues with a little research and a good dose of common sense.
The Bankruptcy Code lays out requirements of the debtors and restrictions on creditors. The Code also contains rules that provide guidance in the applications of the various Code sections.
In establishing Chapter 13, Congress wanted to create a structure to move money from debtors to creditors in a civilized and structured manner. The goal is to ensure fairness and good faith to all parties.
The role of a Chapter 13 Trustee is to oversee the Chapter 13 process and ensure compliance with the Bankruptcy Code. The most important responsibility is to administer confirmed plans, which includes receiving payments from debtors and disbursing funds to creditors. Jack McCullough and Craig Phelps are Chapter 13 Trustees in this judicial district. They have been appointed to administer Chapter 13 cases and plans by the United States Trustee agency, which is part of the U.S. Department of Justice. The U.S. Trustee, Scott Michel, and his staff exercise their responsibility to oversee trustee operations; they approve annual budgets and issue guidelines on office administration.
Although there is Federal oversight, Chapter 13 Trustees and their offices operate as private businesses and are funded by an administrative fee, a percentage of the funds disbursed to creditors on behalf of the debtors. The U.S. Trustee sets this percentage, currently 5%, during the budget process.
Jack McCullough’s mission is to assist and support the bankruptcy community, including debtors, creditors, attorneys and the judiciary. We perform the statutory duties of trustee, furnish accurate and timely information, and facilitate communication. Through our efforts we aid in the successful completion of Chapter 13 plans by debtors, provide accurate and timely repayment to creditors, and enhance the value of bankruptcy administration through quality service and effective use of technology.
With over 9,000 open cases, we currently have twenty-five staff members, including three attorneys and the Trustee. The Clerk of the Bankruptcy Court assigns cases on a random basis to eight bankruptcy judges. In covering four judges, each trustee receives half of all cases filed in the district. Jack is assigned all cases in DuPage and Kane Counties, and Craig Phelps is assigned all Will County cases. When a debtor refiles, his case is assigned to the same judge and trustee. We handle about 5,000 new and refiled cases each year, a dramatic increase over the last several years. The work intensive period for our staff is between filing and confirmation. As a staff attorney in Jack McCullough’s office, I spend about 70% of my time examining pre-confirmation cases so I am happy to share my perspective.
Filing Petitions and Schedules
The Chapter 13 process is geared toward getting plans confirmed so that the flow of money from the debtor to the creditors may start. The process begins with the filing of a voluntary petition for relief under Title 11 USC Chapter 13 with the Clerk of the Bankruptcy Court. In most cases attorneys represent individuals or married couples with unmanageable debt who are seeking relief from creditor harassment, a repossession, or foreclosure. The quality of petition preparation by the debtor’s attorney has a direct affect on getting the plan confirmed with the least amount of effort and the fewest problems for the debtor, debtor’s attorney, and trustee’s office.
The petition itself consists of a straightforward set of forms that can be obtained from most office supply stores. There is also software available. The best way to look at the petition and schedules is to visualize them as a story of the debtor’s present financial situation. In preparing these forms, the debtor’s attorney must be attentive to detail and thorough. If the financial data presented in the petition is inconsistent or the petition contains incomplete information, additional work will have to be done to clarify the issues raised by the trustee’s office and judge. Inaccuracies or incomplete disclosure of information leads to an additional time commitment for re-writes and amendments.
The forms consist of a cover petition page that has the debtor’s personal information, a signature page, a set of schedules A through J, and a statement detailing the debtor’s financial affairs. The attorneys in our office evaluate the information presented on these forms and in the §341 meeting of creditors to recommend confirmation of the debtor’s plan to the judge.
Schedule A includes the specific nature of all real estate held by the debtor, such as single family, multiple family, or commercial property. List and disclose the full value of the property as well as the debtor’s interest or share in that property. Also on Schedule A, disclose the total secured debts with liens against the property. This figure will be used to calculate equity in the property. Please note that the total secured debts on schedule A should match and add up to the total debts against the property listed in Schedule D.
Schedule B lists a full description of the debtor’s personal holdings. Each piece of property should be fully described and its approximate value listed. Many times debtors give the value as "unknown." Such a listing of value is inappropriate, will cause more questions, and may create the need for amendments. The Trustee must insure that the plans pay unsecured creditors as much as they would receive under a Chapter 7 liquidation. Any property listed as unknown value means that the Trustee cannot evaluate this test because unknown may mean ten or ten thousand dollars. It is the debtor’s responsibility to provide full disclosure and accurate information.
Schedule C lists the debtor’s claimed exemptions. Any unusual exemptions need to be explained and justified.
Schedule D lists all secured debts. Each debt needs to indicate clearly the total debt owed and the property associated with the lien. The property should also have a value listed—the same value disclosed on the property in Schedule B. With mortgages on Schedule D, we need to see the total debt on the property as well as an estimate of the arrearages on the mortgage. We cannot assess plan feasibility without these figures. The Trustee must pay all arrearages through the plan. Also, the Trustee generally pays undersecured cars through the plan.
Schedule E is a listing of priority debts falling under 11 USC §507. These priority debts are mainly tax. Student loans are commonly misplaced on Schedule E; they are general unsecured debt and belong on Schedule F even though they may not be dischargeable in bankruptcy.
Schedule F is the proper place for listing all unsecured debt. These debts must have associated estimated values. The law also requires complete, accurate addresses for all creditors so they may be properly noticed.
Schedule G lists all leases and H all co-signed debts. If a house is owned jointly, the name and address of the co-owner/co-debtor appears on Schedule H.
Schedules I & J are budget forms to report income, employment, dependent information, and expenses. We pay very close attention to these schedules in determining feasibility of the Chapter 13 plan.
Schedule I must contain all of the relevant household income. If the debtor is married, both the debtor’s income and the spouse’s income must be disclosed even if the spouse is not a joint debtor. All deductions from the income must be labeled and disclosed, such as 401 (k) plans, pensions, profit sharing, and credit unions. In proposing repayment plans, please keep in mind that for plans paying less than 100% to unsecured creditors, the Trustee will object to any voluntary deductions, especially 401 (k) plans.
Schedule J contains a breakdown of the debtor’s expenses. These expenses must be accurate, and they need to be limited to expenses generally considered "reasonable." In plans paying less than 100% to unsecured creditors, expenses are more closely scrutinized because the expenses have a direct impact on the amount of the plan payment and repayment to creditors.
The statement of financial affairs is a brief synopsis of the debtor’s financial affairs in the year prior to filing. Be careful to ask your client for complete information, and disclose all the pertinent details about the debtor’s assets and liabilities. All parts of the bankruptcy petition and schedules relate to each other to provide a complete picture.
Chapter 13 Plans
In most cases, a plan for repayment to creditors is filed with the petition and schedules. In accordance with Rule 3015, a plan must be filed within 15 days. The Trustee assigns dates and times for §341 meetings and confirmation hearings and sends out notices. We cannot notice the case without a plan, and the entire process is unnecessarily delayed when our office does not have this document.
The plan is a description of how the debtor intends to repay his debts. Our attorneys examine all plans to make sure they meet the requirements of 11 USC §1322. A plan indicates specific debt treatment for each scheduled debt or group of debts. We determine which debts are to be paid through the plan and which are to be paid by the debtor or some other party. The plan also contains the payment terms, length of the plan, and the proposed payment to creditors. The Trustee has a standard plan that can be modified as needed, and we are happy to provide copies of the language.
In order for a creditor to get paid through the plan, a claim must be filed. When the claim is filed, we look to the plan to see how to treat the claim. Unclear language in the plan creates problems in the proper administration of the case. Plans direct us in the disbursement of the debtor’s money to the creditors. We cannot read the debtor’s mind to determine intent when proposing a plan. The plan must be clear and specific in treatment of creditors.
A widely misunderstood aspect of Chapter 13 plans is the concept of a pot plan. In this district, all plans are administered as pot plans. To complete the plan, the debtor must make the required plan payments ($ amount) over the term of the confirmed plan (# of months). Secured, priority, and special class unsecured creditors must be paid in full through the plan and are commonly referred to as 100% creditors. Generally, after 100% creditors are paid in full, unsecured creditors are paid.
Currently, there are two types of pot plans, straight pot plan and minimum percent pot plan. In a straight pot plan, the percentage paid to unsecured claims is determined by what remains in the plan after 100% creditors are paid. Unsecured creditors can receive zero or 100 percent of their claims, depending on how much is paid to 100% creditors, how many unsecured creditors file claims, and the length of the plan. In straight pot plans, the proposed percentage payment to unsecured creditors in the plan is only an estimate. The disbursement percentage can vary from what is projected when the plan is written. Unsecured creditors are paid last in these plans because the amount available is unknown until all other claims have been paid. Problems arise when 100% claims are filed late or post-confirmation attorney fees are awarded late; the percentage to unsecured creditors must be adjusted as circumstances change.
Debtors also propose minimum percent pot plans. These plans employ the same method as straight pot plans, but guarantee that unsecured creditors will receive a specific percentage. The difference is in the language contained in the plan itself. This language calls for the plan to continue until unsecured creditors receive a given percentage, even if it takes longer than the proposed term of the plan (up to 60 months, a statutory limitation). In this type of plan, unsecured creditors still may receive more than the estimated percentage, up to 100%, depending on the claims filed, but will receive no less than the plan’s proposed percentage. Again, unsecured creditors are paid last. The same problem with readjustment to unsecured percentages occurs in this type of plan as in the straight pot plan.
These pot plans have been confirmed in our district since 1993. They have led to confusion on the part of attorneys and debtors—and also our office staff! Here’s an example. In a straight pot plan (debtor paying X amount for X months), if the debtor refinances and pays a mortgage or other creditor directly, the claim is withdrawn. The debtor still must pay the full amount called for in the plan; more money is available for unsecured creditors. The debtor assumed unsecured creditors would be paid the amount proposed in the plan, and didn’t intend through refinancing to pay unsecured creditors a larger amount. Our staff has had some difficult calls from confused or angry debtors who didn’t understand the impact of their refinancing.
Our Trustee would like to see a third variation on the pot plan, an unsecured pot plan, because he believes administration would be less confusing to both debtors and attorneys. This type of plan calls for all 100% creditors to be paid in full and sets a dollar amount (a pot) to be shared by unsecured creditors. The percentage paid on unsecured claims varies depending on the number and amount of unsecured claims filed. The advantage lies in having a predetermined amount for unsecured creditors, not an amount dependent on secured and other 100% claims. Unsecured creditors can look at each case prior to confirmation and determine their repayment if all unsecured claims are filed.
Because the amount to be paid to unsecured creditors is fixed, late filed 100% claims and post-confirmation attorney’s fees will not reduce the total funds to be paid to unsecured creditors. The absolute percentage can be determined after the bar date for unsecured claims, and won’t vary during the remainder of the plan. This plan method is advantageous to debtors because they will be certain of what they are required to pay into a plan to get a discharge. If a debtor refinances or a secured claim is withdrawn, the money paid in will not go to increase the percentage paid to unsecured creditors. Unsecured creditors are benefited because large secured or priority claims will not diminish their right to share in the unsecured pot. All parties can better assess what they will receive through the plan, and statutory requirements are met.
§341 Meeting and Confirmation
Once all the pertinent information has been filed, the Trustee will set up a meeting of creditors pursuant to 11 USC §341. This meeting, held at the Trustee’s office in Chicago or Wheaton, gives the Trustee an opportunity to review the schedules and plan for compliance with the Bankruptcy Code and to uncover any incomplete information or inaccuracies. The meeting of creditors, however, is not the place to start re-writing the plan and schedules. The Trustee has limited time to hold these meetings, especially in light of the increase in filings. Corrections should be made before the meeting. It is the debtor’s responsibility to file amended schedules and plans and to notice these corrections out to affected creditors.
The Trustee and his staff cannot advise debtors on legal matters at any time during the life of the case. In fact, we are expressly prohibited from doing so by statute. The Trustee’s function is administration. The preparation of correct schedules is imperative to successful, efficient confirmation a plan. If done properly before filing, the debtor’s plan can be confirmed with a minimum of effort.
Shortly after the meeting of creditors, a Bankruptcy Court judge will hold a confirmation hearing of debtor’s plan (in Chicago, Wheaton, or Geneva for McCullough cases). Confirmation or court approval of the debtor’s plan binds the debtor and creditors to the terms of the confirmed plan. Bankruptcy courts typically focus upon §1325 and §1322 in determining whether or not to confirm a debtor’s plan.
The confirmation hearing is set up on notice to all creditors. The Court and Code require that the Trustee give his assessment of each case and whether the plan should be confirmed. If the Trustee does not feel that the plan complies with the various sections of the Code, the Trustee will ask that confirmation of the plan be denied. It is the debtor’s burden to submit a confirmable plan. Attendance at the confirmation hearing is not mandatory. However, our staff attorney at the hearing cannot represent your client and may not have all the details on issues the judge may raise. You may call, e-mail, or fax the Trustee’s attorneys before the hearings to find out the Trustee’s position regarding the proposed plan.
The bankruptcy judge examines the debtor’s good faith in filing, the distribution available to unsecured creditors were the debtor to liquidate under Chapter 7, the treatment of secured claims, and the debtor’s ability to pay. In cases where unsecured creditors are to receive less than 100% of their claims, attention is given to the disposable income requirement of §1325(b)(1)(B).
Pursuant to 11 USC §1326, plan payments must start within 30 days after the filing of the plan. The debtor must be current with plan payments for our office to recommend confirmation to the judge. Direct employer deductions are a good way to ensure that payments are flowing to the Trustee’s office. You can initiate this process by getting the client to sign the payroll deduction order at your initial meeting and submitting it to the Trustee’s office. Either way payments are made, it is the debtor’s responsibility to insure the Trustee has received the required payments on time. That means they have been received by the Trustee and entered into the Trustee’s receipt records. All plan payments should be sent directly to our lock box at the bank for processing. The bank sends us receipt information daily. Payments should be in the form of certified funds and should include both the debtor’s name and case number.
Disbursements to Creditors
When a plan is confirmed, money starts to flow to creditors. We can pay only on claims filed with the Bankruptcy Clerk’s office or on court orders requiring specific payments (such as attorney’s fees). We examine all documents for a file stamp by the Clerk’s office or a Judge’s "entered" stamp. Because we disburse funds the third Friday of each month, we need these orders and claims by the second Friday of each month to be included in that month’s disbursement. We do offer creditors the option of disbursement via electronic fund transfer so the money is available in their accounts sooner than disbursement by mail.
Debtor and creditor attorneys can view status information and all disbursements and receipts on a case on our web page located at http://www.chicago13.com. This status information is password protected. To receive a password, call our office at (312) 431-1300 for an application form. We’ll communicate by fax and respond quickly with your password. On our web site, we have more than case information, and it’s not protected. Please check it out. You’ll find it a helpful resource with staff e-mail addresses, meeting and confirmation schedules, frequently asked questions, and links to other bankruptcy sites.
We are limited by the size of our staff in responding to general inquiries regarding payments received, claims filed, and funds paid out so we encourage everyone to use our web site. It is updated daily. Our general inquiry number is the same as above—(312) 431-1300, and staff members are available between 1 and 4 p.m. Since our office cannot give legal advice, we will refer debtors with legal questions to their attorneys.
Our attorneys cover different judges, and they respond to plan confirmation questions directed to a specific phone number associated with that court call. Please call our general number, and our staff will provide the number you need. The other number you will find helpful in dealing with our office is the §341 meeting desk—(312)431-6536.
Over the life of the plan, our office monitors conformance by the debtor in making payments and disburses to creditors. At least once a year as required, we send each debtor a financial summary. Upon completion of the plan, we present a final report of all receipts and disbursements to the judge, who enters a discharge order. The Bankruptcy Clerk’s office closes the case and provides discharge papers to debtors upon request and payment of a fee. We do not have copies of discharge orders.
We are committed to meeting the needs of debtors, attorneys, and judges to the best of our ability. We work toward ongoing improvement of our office. We look forward to continuing the process with you.
O. Anthony Olivadoti is a Staff Attorney for Chapter 13 Trustee Jack McCullough. He received his Undergraduate Degree in 1990 from Purdue University and his Law Degree in 1993 from Valparaiso.