Bankruptcy Wizard
I don't know either, NoMoney30, but Chapter 13s are specifically to allow for keeping any property (so long as you are under the unsecured and secured debt limits). I was trying to list the underlying reason for the suggestion that an attorney may make to liquidate property to pay creditors.
The code does not permit a Chapter 13 Trustee to liquidate any property that a debtor wants to keep. The underlying problem is really the equity and whether a debtor, with significant equity and lacking significant (regular) income, could propose a feasible plan that doesn't include selling or refinancing the home. It's being between a rock and a hard place; propose a 100% plan that the debtor can't afford to fund, or refinance or sell the home to pay the creditors (perhaps outside the bankruptcy).
I believe cases in which a debtor would be in a 100% plan anyhow, should not go the bankruptcy route but to refinance their debt with a consolidation loan; if both feasible and possible. Or, sell the property and payoff the debt. If I really had a ton of equity and my lawyer suggested selling and paying off the debt, I would listen to them. If I didn't have the equity and was trying to save the property, then I would go the Chapter 13 route.
I do also think that in other cases, where the property is significantly outside the norm for the debtor's income, standard of living, and/or location, the Chapter 13 Trustee could suggest that the home is a detriment to the unsecured class because it takes up too much of the debtor's income. My house was $625K and I was paying, with the arrears, over $5,000/month in the Chapter 13. The Chapter 13 Trustee didn't care, but another Chapter 13 Trustee could have cared about it. Even in cases where the home is deemed excessive, the Chapter 13 Trustee's only recourse is to seek denial of confirmation (not liquidation).
It happens. I was prepared for it to happen.
The code specifically doesn't permit a Chapter 13 Trustee to sell property that a debtor is keeping. Now, what the Chapter 13 Trustee could do is tell the debtor that they don't think the debtor is contributing "enough" to the plan and that it needs be a XX% plan -- typically 100% -- to accommodate the equity. If a debtor can't afford to pay 100% through earned income, then the Chapter 13 Trustee could object to confirmation and suggest that the debtor sell or refinance the home to pay 100% to the unsecured pool. This could still go before the judge to fight, but if the equity suggests a 100% plan there's not much a debtor could do to stay in a Chapter 13. (There is a lot of caselaw with respect to the Trustee suggesting the sale of the property in these types of cases... but specifically only denying confirmation if the debtor doesn't propose a feasible 100% plan.)
It's all about the Chapter 13 Reorganization Plan. Some debtors will put forth a plan where they do a lump sum near the end to get around the feasibility issue (not enough income to support the plan to pay 100%). I do not know the rate at which such plans are suggested or approved. I do know that it is a strategy (one that I looked at when I thought I might be in a 100% plan because I kept investment property).
(My biggest pet peeve with debtor attorneys and Chapter 13 Trustees is when, in a 100% plan, they suggest the debtor commit "all disposable" income to the plan, as if it's required by the code. Sure, it makes the Chapter 13 Trustee happy, but I make the Trustee happy by paying on time and staying in plan! My Trustee was making $700/month from me, and all they did was to send out 5 checks a month.)
These are only my suggestions for dealing with this potential issue with unprotected equity in a Chapter 13. Debtor attorneys and the Chapter 13 Trustee may say many things that are not required by the code, but are designed to get the Trustee to accept the Chapter 13 Plan without a fight. If the attorney is suggesting that a debtor liquidate their home and payoff their creditors, they may just be looking at the debtor's best interests overall should the debtor really need the Chapter 13.
Personally, I would want to keep my home and I would fight... just as you did.
The code does not permit a Chapter 13 Trustee to liquidate any property that a debtor wants to keep. The underlying problem is really the equity and whether a debtor, with significant equity and lacking significant (regular) income, could propose a feasible plan that doesn't include selling or refinancing the home. It's being between a rock and a hard place; propose a 100% plan that the debtor can't afford to fund, or refinance or sell the home to pay the creditors (perhaps outside the bankruptcy).
I believe cases in which a debtor would be in a 100% plan anyhow, should not go the bankruptcy route but to refinance their debt with a consolidation loan; if both feasible and possible. Or, sell the property and payoff the debt. If I really had a ton of equity and my lawyer suggested selling and paying off the debt, I would listen to them. If I didn't have the equity and was trying to save the property, then I would go the Chapter 13 route.
I do also think that in other cases, where the property is significantly outside the norm for the debtor's income, standard of living, and/or location, the Chapter 13 Trustee could suggest that the home is a detriment to the unsecured class because it takes up too much of the debtor's income. My house was $625K and I was paying, with the arrears, over $5,000/month in the Chapter 13. The Chapter 13 Trustee didn't care, but another Chapter 13 Trustee could have cared about it. Even in cases where the home is deemed excessive, the Chapter 13 Trustee's only recourse is to seek denial of confirmation (not liquidation).
It happens. I was prepared for it to happen.
The code specifically doesn't permit a Chapter 13 Trustee to sell property that a debtor is keeping. Now, what the Chapter 13 Trustee could do is tell the debtor that they don't think the debtor is contributing "enough" to the plan and that it needs be a XX% plan -- typically 100% -- to accommodate the equity. If a debtor can't afford to pay 100% through earned income, then the Chapter 13 Trustee could object to confirmation and suggest that the debtor sell or refinance the home to pay 100% to the unsecured pool. This could still go before the judge to fight, but if the equity suggests a 100% plan there's not much a debtor could do to stay in a Chapter 13. (There is a lot of caselaw with respect to the Trustee suggesting the sale of the property in these types of cases... but specifically only denying confirmation if the debtor doesn't propose a feasible 100% plan.)
It's all about the Chapter 13 Reorganization Plan. Some debtors will put forth a plan where they do a lump sum near the end to get around the feasibility issue (not enough income to support the plan to pay 100%). I do not know the rate at which such plans are suggested or approved. I do know that it is a strategy (one that I looked at when I thought I might be in a 100% plan because I kept investment property).
(My biggest pet peeve with debtor attorneys and Chapter 13 Trustees is when, in a 100% plan, they suggest the debtor commit "all disposable" income to the plan, as if it's required by the code. Sure, it makes the Chapter 13 Trustee happy, but I make the Trustee happy by paying on time and staying in plan! My Trustee was making $700/month from me, and all they did was to send out 5 checks a month.)
These are only my suggestions for dealing with this potential issue with unprotected equity in a Chapter 13. Debtor attorneys and the Chapter 13 Trustee may say many things that are not required by the code, but are designed to get the Trustee to accept the Chapter 13 Plan without a fight. If the attorney is suggesting that a debtor liquidate their home and payoff their creditors, they may just be looking at the debtor's best interests overall should the debtor really need the Chapter 13.
Personally, I would want to keep my home and I would fight... just as you did.
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