Settling with Creditors During Chapter 13 Repayment, Possible?

[bkballer]

First time poster, but glad I found this forum. Going through a hellish Chapter 13 after a terrible custody battle and need some help with an idea.

I am currently in month 20 of a 60 month plan. With the required alimony payments, my plan actually steps up at months 30 and again at month 48. In addition, the court is requiring me to surrender bonuses and future stock options. While my payments don't reach 100%, if the the other assets mature I will easily hit a 100% plan. My plan is very back loaded, so it seems logical I should try to settle these debts if at all possible, once secured tax debts are paid.

I initially filed Chapter 13 because my former divorce attorney required me to sign a confession of judgement to complete the trial. I had no choice, given the future of my children was on the line. He was very aggressive in collections, pushing me into Chapter 13. I did not have sufficient cash flow to make min payments on my debt. Fast forward a few years, and I can see a place where I could generate some cash to settle these debts at lower amounts, assuming the credit card companies will play ball. A few questions:

1) Will creditors even talk to me, given the automatic stay?
2) For those that have successfully navigated this endeavor, did you make all the deals and then move to dismiss? Or did you have to move to dismiss first? If the deal is in writing, is it binding? Would a Ch 13 dismissal affect those deals?
3) In the eyes of the trustee, is it acceptable to have these discussions with creditors?
4) What if most settle, but not all. Does the trustee see this as preferential treatment? Will trustee move to dismiss?
5) Does it matter what funds I use? I've heard that this could be done with exempt funds. such as a retirement loan. I've also heard the Trustee might try to take all your money if they get wind of it.
6) Any other watch outs?

Thanks in advance for any perspective.

BK

[159515951]

I'm not an expert on this, but I do know that any forgiven debt subsequent to settlement will result in 1099 forms coming your way. Just wanted to be sure you were aware of the potential tax consequences of this course of action.

Also, if your creditors are receiving close to 100% payback through your plan, there may be little reason to settle.

[bkballer]

Based on the payment plan only, they will get 26% under current plan. It's the backloaded bonuses and stock options that would take it up considerable, which I am trying to avoid via settlement and dismissal. Settling would save 40-50K pre-tax.

[justbroke]

First time poster, but glad I found this forum. Going through a hellish Chapter 13 after a terrible custody battle and need some help with an idea.

Welcome to the Forum.

1) Will creditors even talk to me, given the automatic stay?

They should not. In fact, most unsecured debt, especially that from major creditors, is sold to third parties.

2) For those that have successfully navigated this endeavor, did you make all the deals and then move to dismiss? Or did you have to move to dismiss first? If the deal is in writing, is it binding? Would a Ch 13 dismissal affect those deals?

I don't know anyone who would choose a clear path to discharging debt, to "attempting" to settle with unknown creditors (remember the sale of debt) and the tax consequences. No creditor in their right (legal) mind would ever enter into any settlement agreement on an allowed claim during an active Chapter 13 outside Trustee approval.

3) In the eyes of the trustee, is it acceptable to have these discussions with creditors?

You mean in the eyes of the law? No, the creditors are not allowed to communicate with the debtor related to anything related to pre-petition debt (claims) or the collection thereof. The creditor would need to file and be granted a Leave From Stay (Motion Requesting Leave From Stay... aka an "RFS"). Remember, the Trustee in a Chapter 13 represents the creditors in general but the unsecured creditors more strongly. The Trustee's job is to maximize the (unsecured) creditor's distribution.

4) What if most settle, but not all. Does the trustee see this as preferential treatment? Will trustee move to dismiss?

You can't do this inside an active Chapter 13. As one Judge in Tampa opined, and whom I admire, that when you enter into the protection of the bankruptcy court, you can't do "outside" deals while enjoying that protection. As she wrote... it's pay to play. You pay -- plan payments -- in order to enjoy the protection. If you don't want the protection then don't pay have your case dismissed, and then deal with the consequences. (The consequences include, but not limited to, the accrual of additional taxes, penalties, interest, and quite possibly attorney fees from the bankruptcy attached to the "original" debt.)

5) Does it matter what funds I use? I've heard that this could be done with exempt funds. such as a retirement loan. I've also heard the Trustee might try to take all your money if they get wind of it.

Again, you should not be doing this in an active Chapter 13. People have used exempt funds to "payoff" a Chapter 13, but not to negotiate settlements on allowed claims while "inside" an active Chapter 13. I don't know any Trustee that would ever permit this.

6) Any other watch outs?

Yes, don't stay in your plan while "negotiating" settlements with unsecured creditors. Don't settle allowed claims while in a Chapter 13. If you choose to exit the Chapter 13, then you deal with the consequences (see above).

If you're going to attempt to work with creditors holding (unsecured) claims in an active bankruptcy then you need to just exit the Chapter 13 voluntarily. Understand that you could be considered a serial filer if you decide to go back into bankruptcy protection if your plan to settle does not pan out.

My personal read is that you don't think that you should "surrender bonuses and future stock options" since your Chapter 13 payments are already high and escalating. You have to think of Chapter 13 bankruptcy as solely a shield to protect you from creditors and suit while you reorganize your debt. During that period, you must either pay 100% of the allowed unsecured claims (and priority debt) OR surrender, to the custody and control of the Chapter 13 Standing Trustee, ALL DISPOSABLE INCOME for the applicable commitment period.

It's a choice.

I know that divorce and bankruptcy are strange bedfellows and typically one leads to the other. Bankruptcy, however, is a place for protection from creditors. Maybe I'm wrong about you but you seem to have run to bankruptcy not to deal with your debts and reorganize, but to leverage the system to your advantage when you find that you may, in fact, need to pay back 100% of your debt. I clearly remember my judge saying to me, after a debtor that had a hearing before mine ended up in a 100% plan, that "Mr. Justbroke, you just may end up in a 100% plan as well!" That didn't phase me because I wanted the protection of the bankruptcy court. If I had the disposable income to pay 100%, then that was okay. It kept the creditors away without escalating interest, lawsuits, and an unknown future.

[bkballer]

Thanks for the response. The escalating payments are making it very difficult to put food on the table. I didn't game the system and buy a bunch of extravagant items leading up to my Ch 13. I saved my kids from a terrible life. It's unfathomable to me that people can buy boats, cars etc and work all that into a low %age plan, while the many of us eat ramen noodles to pay it off. It's a broken system. I'm simply trying to recover any shred of financial security from this mess.

[justbroke]

Thanks for the response. The escalating payments are making it very difficult to put food on the table. I didn't game the system and buy a bunch of extravagant items leading up to my Ch 13. I saved my kids from a terrible life. It's unfathomable to me that people can buy boats, cars etc and work all that into a low %age plan, while the many of us eat ramen noodles to pay it off. It's a broken system. I'm simply trying to recover any shred of financial security from this mess.

You can't have cars (more than 2), boats (even one) and work into a low %age plan. It just doesn't happen unless there are circumstances supporting such a "reorganization".

People quickly forget that a Chapter 13 is actually one of the Reorganization chapters of bankruptcy. A Chapter 13 allows debtors specifically to keep property. If that property is a boat and more than 2 cars, then a debtor can pay 100% or at least the value of those items during the life of the Chapter 13 Plan of Reorganization. On BKForum we tell people to ignore the %tage payback becuase it means nothing in the end. (For example, you may have heard of someone keeping a boat and paying back 5%, but that boat may be only worth $20,000 and they owe $1,000,000 in unsecured debt. Compare that to the person that is paying back 100% because they have a boat worth $20,000 but they only owe $20,000 in unsecured debt. The percentage payback would be higher because it's a function of both your DMI and the total allowed unsecured debt (claims).)

In some cases, Chapter 7 debtors may fare a little better, but the liquidation value is what you must pay in a Chapter 13. I ask that debtors never compare their bankruptcy with the terms and property of another person's bankruptcy. Unless you understand the valuation and the "Chapter 7 hypothetical liquidation value" of that specific (Chapter 13) bankruptcy estate, then you can't even speculate as to why they can keep property. As I already wrote, Chapter 13 is the bankruptcy chapter that specifically allows a debtor to keep property. Debtors typically keep their property in a Chapter 13 if they can afford to pay the liquidation value. The liquidation value sets the MINIMUM amount that must be paid back.

If your Chapter 13 payments are "too" high, then you need to have this revisited with your bankruptcy attorney. If you have 100% custody of your children then that should have factored into your household size. You should not be having difficulty putting food on the table unless there are other things affecting your budget. If your attorney filed your plan with the wrong household size then you would have plan issues and need to modify the plan.

If you're trying to keep property that you otherwise can't afford, making your payment higher, then you would need to consider giving up the property. However, that's not my outsiders read. My read, because your plan payments are increasing, is that you do have disposable income. Disposable means this is above the allowed expenses. Trust me, even with my $7,100/month plan payment I wish I didn't need to pay that, but that's what it was to keep my home, pay the IRS, and the Trustee commission (10%). I could do hardly any of the things I used to do such as when it came to impulsive travel or purchases.

I can tell you firsthand that a Chapter 13 will never work if a debtor can't or refuses to budget. The system isn't broken. In my experience, for Chapter 13s, it's either the plan or the debtor that is broken. Some debtors end up with poor plans because they either filed Pro Se or their attorney didn't give them "some" wiggle room and/or the debtor can't or refuses to budget.

If any person or attorney ever said that a Chapter 13 is "easy" a "cakewalk" or "very doable" (okay scratch that last one) then they are selling you a dream. A Chapter 13 is not easy because a debtor is compelled to follow a strict budget. A debtor is compelled to learn to save. A debtor is compelled to think about property that s/he kept (forcing your payments higher). In the end these are all choices because a debtor could just face the creditors on their own. A debtor that can't do those things, has only created a plan which will fail (true in over 75% of the cases).

(There is some evidence that 99.99% of Pro Se Chapter 13 cases fail and over 90% of attorney-filed Chapter 13 cases fail. Noting that some Chapter 13 cases are converted to Chapter 7 and the debtor does receive a discharge but not as a Chapter 13.)

[159515951]

(There is some evidence that 99.99% of Pro Se Chapter 13 cases fail and over 90% of attorney-filed Chapter 13 cases fail. Noting that some Chapter 13 cases are converted to Chapter 7 and the debtor does receive a discharge but not as a Chapter 13.)

That fail rate does point to a system that's broken. I don't know of any program where a 90% fail rate is acceptable. Even if we drop that to 40 or 50%, that's an extraordinary fail rate that speaks to a need to take a close look at the system and address the issues.

[justbroke]

That fail rate does point to a system that's broken. I don't know of any program where a 90% fail rate is acceptable. Even if we drop that to 40 or 50%, that's an extraordinary fail rate that speaks to a need to take a close look at the system and address the issues.

Actually, the system was looked at very closely. The problem, in a Chapter 13, is that there are Debtors that can't or refuse to budget. The "stubborn" or "incapable" debtor makes up for 50% of the 90% of failures. The other problem is that life happens. However, even where life happens, there are mechanisms to change the payments unless they are insurmountable (such as trying to keep property that the debtor simply can't afford).

A broken system? Absolutely not. Broken debtors? Absolutely.

You see, a Chapter 13 bankruptcy seldom teaches a person how to budget. It allows a person who can budget and can keep steady employment to deal with financial issues. It will never fix the impulse buyer or the person who doesn't really want to pay back his/her creditors. It was never meant to solve that problem. Chapter 13 is an offering to protect, what many Judges would call, the help the honest debtor reorganize their debt and achieve a discharge of the dischargeable debt by paying as much of that debt as possible.

In fact, probably 25% of Chapter 13 bankruptcies are simply filed to stop or delay a foreclosure, a garnishment or other legal action against property. There are people with and without attorneys that use the Chapter 13 process for a breathing spell to deal with creditors. I just read a case recently which they did exactly that and tied up a bank for almost 18 months so they could get a mortgage modification. It's more common than you/we may want to believe.

Pro Se debtors fail at an alarming rate because in almost EVERY case they are trying to save property and later give up. Count me among them, although my case converted to a Chapter 7 (and received a discharge). At some point, most Chapter 13 people realize that saving the property... was just not worth it to begin with. That is in no way a problem with bankruptcy, but a comment on what is important to a debtor (property).