Pre-filing indications that your Chapter 13 case will not be successful

Pre-filing indications that your Chapter 13 case will not be successful

The Southern District of Georgia, which includes Richmond, Columbia and Burke County among others, usually ranks near the top of the other federal districts in the percentage of Chapter 13 cases which are filed. There are certain circumstances in which a consumer seeking bankruptcy relief will be required to file a Chapter 13 bankruptcy case, either because of the amount of their income, or the filing of a previous bankruptcy case. There may be other circumstances where a consumer is seeking to prevent a foreclosure or repossession, and protect their assets.  Regardless of the circumstances, the significant experience of Leiden and Leiden has taught us that there are several factors which will prevent a Chapter 13 repayment plan from being successful.  In addition, the American Bankruptcy Institute Journal recently featured an article detailing many of the same factors that will lead to the dismissal or conversion of a Chapter 13 case within the first six months of filing.

The purpose of this article is not to discourage anyone who is seeking bankruptcy relief.  However, bankruptcy attorneys owe a duty to prospective clients to inform them about the risks and consequences of filing a Chapter 13 bankruptcy.  The immediate goal of filing a chapter 13 case is to protect the Debtor’s assets from repossession or seizure. Once the case is filed, the debtor must confirm a feasible Chapter 13 plan. Once the plan is confirmed, a debtor must make payments under the plan in order to secure a discharge, which means that the Chapter 13 case has arrived at a successful conclusion. Many high-risk plans will not get confirmed, and the few that bankruptcy courts confirm will not arrive at a successful conclusion. With that process in mind, this list identifies some of the common features of high – risk chapter 13 cases.

1) Filing Pro Se – the Bankruptcy Code does not require that a debtor be represented by an attorney.  However, the complexity of a Chapter 13 case, combined with the new forms and Chapter 13 plan that have gone into effect, makes it almost impossible for a Pro Se case to be confirmed, let alone discharged

2) Previous unsuccessful Chapter 13 case filings – if a debtor has had one or more Chapter 13 cases dismissed or converted within the five years prior to the filing of the instant case, the likelihood of success is greatly reduced. Additionally, the Bankruptcy Code now includes restrictions that can limit the protection given in bankruptcy cases that are filed within one year or less of a previous unsuccessful Chapter 13 case.

3) Failure to file income tax returns – the Bankruptcy Code requires that a debtor be up-to-date in their income tax filings. Failure to file all required tax returns can result in the immediate dismissal of a Chapter 13 case. Unfortunately, debtors who are able to catch up on their tax return filings usually wind up with a significant amount of income tax debt which exceeds their available income, and makes them unable to afford a Chapter 13 payment. 

4) Debtors who generate income from self-employment – while Chapter 13 is often referred to as a wage earner plan, it only requires that a debtor have a regular source of income. Consequently, an individual who is self-employed may still avail themselves of the relief afforded by a Chapter 13 case. However, the same inconsistency in self-employment income that usually created the initial financial distress, can also prevent a successful plan confirmation or Chapter 13 discharge. Additionally, self-employed debtors are tasked with additional responsibilities, such as filing monthly operating reports to show their income and expenses. Failure to timely and accurately file these reports can also prevent a case from being confirmed, or eventually discharged.

5) Post-filing mortgage payments – many consumers file Chapter 13 cases to prevent the foreclosure of their residence. However, debtors must make all the mortgage payments that come due following the filing of their case to maintain the protection of their home. With limited income, many high – risk debtors must choose between making the Chapter 13 payment or the mortgage payment. Failure to do either will usually result in either the dismissal of the case, loss of the home, or both.

In summary, both the bankruptcy attorney and prospective debtor must be realistic about the goal to be accomplished.  Our firm offers a free bankruptcy consultation for our clients in the Augusta area and surrounding Georgia counties, allowing us to counsel them regarding their bankruptcy options.  Sometimes the best course is a Chapter 7 bankruptcy, and in other circumstances a bankruptcy may not be advisable at all.