Once More Into The Bankruptcy Breach: Fighting In Chapter 13 Makes Economic Sense – November 2016
Terry Jessop & Bitner Newsletter
Issue 37, November 2016
ANOTHER CHAPTER 13 NOTICE COMES IN THE MAIL! Do you find yourself groaning and then throwing it in the trash, or maybe filing a proof of claim and then forgetting it? While it’s true, chapter 13 bankruptcy feels like legalized theft, it doesn’t mean filing the proof of claim or doing nothing is the only thing that makes economic sense. Usually, for a fixed fee of around $400, you can object to poor treatment in a chapter 13 plan with respect to a car loan, for example, and get the debtor to pay at least 90% of the NADA retail value, with an interest rate of at least 3.5% to 6.5%. We call this amount the “secured claim.” In addition to that, you should also be receiving monthly payments from the trustee within at least 45 days from the bankruptcy filing. These payments are called “adequate protection,” and ought to be at least 1% per month of the secured claim. Finally, these adequate protection payments should not last more than six months, after which you should be receiving the balance of the secured claim, amortized over no more than 54 months, but usually less than that. If you are not getting that, you ought to be calling us or your attorney.
Why Am I Getting Less?
If you are not being treated this well, it usually means one of two things: (1) either the debtor is so strapped for cash that he is probably not a very good candidate for chapter 13 in the first place and will not last very long before he is thrown out of bankruptcy; or (2) the debtor’s attorney knows he is not going to receive an objection from the creditor so he can get away with not paying what the bankruptcy law allows.
We recognize that bankruptcy law allows debtors to change contractual obligations even on over-secured claims where the debtor is required to pay the whole debt. The benefit of interest rate reductions and extended terms available under bankruptcy law can have a big impact. Consider this: by reducing the interest rate down to 3% or 4% and extending the term for as much as 4 extra years, the debtor sucks the life out of the creditor’s vehicle while making much smaller payments. He then surrenders the car when it stops working or keeping it is no longer economically justified. That hurts and suggests that creditors shouldn’t just blindly accept what the debtor offers.
910 and 365 Claims
Secured creditors with collateral other than real property whose contracts are recent might be entitled to more favorable treatment. If an automobile loan is incurred with 910 days of bankruptcy, the debtor must pay the full debt. Courts will allow the debtors to get a better interest rate, but the full debt must be paid. If the contract is secured with something other than a motor vehicle, such as furniture or other personal property, and the debt was incurred within 365 days of the bankruptcy filing, once again, the entire debt must be paid.
Creditors should make certain that when their claim is over-secured, they are not only being paid the claim amount, but also the interest accrued as well as all fees and costs including attorney’s fees. Creditors should also be fighting for the contract interest rate if it is higher than the rate offered in the bankruptcy plan.
If you are not getting what you should out of chapter 13, please give us a call. And don’t forget, equity aids the vigilant, not those who slumber on their rights.
© Terry Jessop & Bitner November 2016