Why Is My Chapter 13 Plan Lasting Longer Than Expected?
The Chapter 13 Plan provides the manner in which each of your creditors will be treated and how much they will be paid. When your Chapter 13 case is first filed, your Bankruptcy Attorney drafts a Chapter 13 Plan which estimates the amount of debts you owe and the number of months your Chapter Plan will last. Unless you are paying back 100% of your debts, your case can't last less than 36 months or go longer than 60 months. Moreover, if you are Above Median Income, at the time your Chapter 13 Case is filed, your Plan must last 60 months unless your debts are paid in full.
Unfortunately, the are numerous variables involved with many types of debts as well as the costs of administering your Chapter 13 case. Based on these variables your Plan may complete earlier than expected or it may run longer than expected. Among the most common reasons Chapter 13 Plans run longer than expected are (1) Mortgage Payment Changes, (2) Trustee Fee Increases, (3) Missed Chapter 13 Plan Payments, (4) Attorney Fees for unanticipated Post-Petition legal work and (5) Claims that are larger than expected or were not listed on your Bankruptcy Schedules.
1. Mortgage Payment Changes:
Far and away the most common reason Chapter 13 Plans run longer than expected is because of Mortgage Payment Changes. A Notice of Mortgage Payment Change is filed with the Bankruptcy Court by your Mortgage Lender and states that your monthly Mortgage Payment has changed. This is usually due to a variable interest rate that has adjusted or because there has been a change in the amount of your escrow expenses.
Adjustable Rate Mortgage Loans have rates that adjust along with the changes in interest rates in general, An interest rate change is very straightforward and easy to understand. The interest rate on mortgages is often pegged to a commonly know benchmark rate such as the Prime Rate or, more commonly, the London Inter-Bank Offered Rate (LIBOR) plus a risk factor. For example, a mortgage might have a stated interest rate of the 1 Year LIBOR rate plus 3%. So, if the 1 Year LIBOR rate is 3% when you take out your mortgage, your effective interest rate at that time is 6% (i.e. 3% plus the LIBBOR Rate of 3%). Adjustable Rate Mortgages have adjustment dates at which time your interest rate is adjusted to the current benchmark rate. So, assuming the same facts as above except the LIBOR rate has gone up to 4% on the Adjustment Date, your effective interest rate would become 7% on the Adjustment Date. When interest rates go up, the amount of interest you pay goes up and, in order for the loan to be paid off on time, your payment must go up accordingly.
Ordinarily, your Chapter 13 Plan does not anticipate or account for these Mortgage Payment Changes because it is impossible to predict what the benchmark interest rate will be on any give Adjustment Date. Therefore, if your Interest Rate adjusts upward in a significant way, it could add hundreds of dollars to you mortgage payment. If you are paying your mortgage directly, it won't effect the length of your Plan but you will have to start paying the higher mortgage payment yourself. If on the other hand, the Trustee is paying your mortgage as a conduit through your Chapter 13 Plan, she must start paying the high mortgage payment and will have less money to pay your other creditors. This leads to a shortfall that lengthens the duration of your Chapter 13 Plan.
The significance of the Mortgage Payment Change will determine how drastically your Chapter 13 Plan is effected. Large Mortgage Payment changes can add many months to your Plan and may even force the Chapter 13 Plan to project beyond 60 months which is not permitted by the Bankruptcy Code. If that happens, the Chapter 13 Trustee will usually make you amend your Chapter 13 Plan and increase your payment to a level sufficient to bring the Plan back within the 60-month limitation. Other Mortgage Payment Changes may be less significant and only add small amounts of time to your Chapter 13 Plan.
If you receive a Notice of Mortgage Payment Change and you are paying your Mortgage yourself, you should start paying the higher amount on the effective date set forth in the Notice of Mortgage Payment Change. If you can't afford the new, higher mortgage payment, you should contact your Bankruptcy Lawyer to determine if your Chapter 13 Plan payment can be lowered. If your Mortgage Payment is being made by your Chapter 13 Trustee, you should contact your Bankruptcy Lawyer to make certain it does make your Chapter 13 Plan project beyond the 60-month limit and, if it does, amend your Plan to increase your Plan payment.
2. Chapter 13 Trustee Fee Increases:
The Chapter 13 Trustee is paid a monthly fee for administering your Chapter 13 Plan. This Trustee Fee is paid as a percentage of your monthly Chapter 13 Plan payment. The fee is usually between 4% and 6% of the monthly Chapter 13 Plan payment and varies from district to district. For example, if your Chapter 13 Trustee charges a 5% fee and your Plan payment is $100.00, the Trustee will get $5.00 for each Chapter 13 Plan payment you make.
Although increases in the Chapter 13 Trustee Fee is usually minimal it can, nevertheless, cause your Plan payment to increase and, in turn, cause your Chapter 13 Plan to run longer than expected. This is especially true in cases where the Chapter 13 Plan payment is small and any changes in the Trustee is large relative to the amount of the Payment. It can also have a major impact on a Plan that is already at or near the 60-month Chapter 13 Plan limit and, in those cases, can necessitate a Modification of your Chapter 13 Plan to increase the Chapter 13 Plan Payment.
3. Missed Chapter 13 Plan Payments:
If you miss Chapter 13 Plan payments, your Plan is usually going to have to run longer than expected to catch up the delinquency. Of course, you may not get the opportunity to make up the Plan payment if the Chapter 13 Trustee files a Motion to Dismiss your case for non-payment. It is imperative to make your Plan payments in a timely manner. Such payments are required to fund your Plan and are mandated by the Bankruptcy Code. If you must miss a payment, you should contact your Bankruptcy Attorney immediately to determine if he can file a Motion to Suspend Plan payments to avoid the Trustee filing a Motion to Dismiss. If your mortgage is being paid by the Trustee, you may be unable to suspend payments and it could lead to the dismissal of your case.
4. Attorney Fees for Post-Petition Legal Work:
Most Bankruptcy Courts set Standard Attorney Fees for Chapter 13 Cases. In the Souther District of Ohio, the Standard Attorney Fee in Chapter 13 Cases is currently $3,700.00. Although this may sound high to some people, the amount of work to put together a Chapter 13 case is voluminous and can be very complex and time consuming.
The Standard Attorney Fees in Chapter 13 cases covers all of the work required to be performed in a run of the mill Chapter 13 Case. It does not, however, cover unexpected or complex legal actions that must be taken in certain cases. For example, Chapter 13 cases involving complex tax issues or business cases may require additional work not covered by the Standard Attorney Fees. In such cases, your Bankruptcy Attorney will itemize his fees, which are billed hourly, and submit the bill for his services to the Bankruptcy Court for payment by the Chapter 13 Trustee through your Chapter 13 Plan.
In addition, Bankruptcy Attorneys will charge you for unexpected work that may arise during your Chapter 13 Case. The unexpected work may include Motion to Suspend Chapter 13 Plan payments if you need to miss Plan payments, Motions to Modify your Chapter 13 Plan if your income changes or the Plan is projecting beyond the 60-month limit or any other unexpected development that requires your Bankruptcy Attorney's involvement.
Although you are not required to pay your Bankruptcy Attorney for these additional fees directly, the Chapter 13 Trustee is required to pay the additional attorney fees with the money she receives from your Plan payments. Additional Attorney Fees mean your Chapter 13 Plan will last longer than originally anticipated.
5. Unexpected Claim Or Claims That Are Larger Than Expected:
Another problem that frequently arises and may cause your Chapter 13 Plan to last longer than expected are Unexpected Claims and Claims that come in significantly higher than expected. It is impossible to get the amounts of claims exactly right and many times the estimates Bankruptcy Attorneys must use are significantly off the mark. This is especially true in the area of mortgage arrearage claims and tax claims.
Mortgage arrearage claims in Ohio consist of the mortgage payments you missed as well as late fees, escrow shortages and foreclosure costs. Bankruptcy Attorneys are usually forced to rely on the monthly mortgage statement you provide at the commencement of your case. However, these monthly mortgage statements frequently don't include many of the costs that are recoverable in you bankruptcy case. For example, court costs from a protracted foreclosure can be significant but usually aren't listed on your mortgage account statement. Likewise, a mortgage lender may have been forced to pay for homeowners insurance or real estate taxes if you failed to pay them and those expenses frequently are not listed on your mortgage statement.
While your Bankruptcy Attorney may be able to anticipate some of the foreclosure costs the must still utilize an estimate which may be wrong. As a result, when the mortgage proof of claim is filed with the Bankruptcy Court it can be significantly higher than the estimate included in your Chapter 13 Plan. The higher arrearage claim will force your Chapter 13 Plan to run longer than originally estimated.
Tax Claims are another area that frequently cause Chapter 13 Plans to run longer than originally anticipated. The Bankruptcy Laws pertaining to Tax Claims are extremely complex and your Bankruptcy Lawyer is forced to make judgment calls when estimating and classifying your Tax Claims for purposes of articulating your Chapter 13 Plan. As with all judgment calls, they are some time wrong. Moreover, the IRS can assess taxes even after your case is filed which may give rise to an increase in the amount of taxes you owe. Higher tax claims means your case is going to run longer than expected.
Another area that complicates Chapter 13 cases are claims filed by creditors that weren't listed on your Chapter 13 Schedules. Many people have so many debts they can't remember them all. Other people may have medical bills and other debts of which they weren't even aware. This is ofter the case when the Debtor has undergone major medical treatment and are unaware of all the bills that were accrued from the multitude of doctors and other medical care providers who they never met face to face.
Even if a creditor isn't listed on your Bankruptcy Schedules, they are still entitled to file a proof of claim and many creditors monitor Bankruptcy Case Filings and file their claims even though they didn't receive direct notice from the Bankruptcy Court that your case had been filed. These claims can frequently force your Plan to run siginifantly longer than originally projected. Usually, such claims are unsecured and your Plan can be modified to reduce the dividend to unsecured creditors and bring your case back to the duration originally contemplated. If, on the other hand, you are already paying the minimum 1% to unsecured creditors that most Court's allow, your Plan could run significantly longer than you expected.
If you are suffering with financial problems, please call (513) 528-0200 or send an email to Info@CincinnatiBankruptcy.com. You can also contact us with through our website by clicking here.
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