Cite as: Keith M. Lundin, Lundin On Chapter 13, § 7.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Chapter 13 (or any bankruptcy) should be a last resort. There is little pleasure to being a debtor or a claim holder in a bankruptcy case. Bankruptcy under any chapter has financial, psychological and social consequences, not always predictable, that should be avoided when reasonable nonbankruptcy alternatives are available. All debtors’ counsel have a professional responsibility to discuss nonbankruptcy alternatives before plunging a client into a Chapter 13 case. After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),1 some would say that consideration of nonbankruptcy alternatives for debt relief is a component of the “prepetition briefing” required for eligibility for any individual bankruptcy.2
Potential Chapter 13 debtors typically find a lawyer’s office when they are one step from financial Armageddon: There is a foreclosure sale of the debtor’s home the next day; the debtor’s only car was mysteriously repossessed in the dark of last night; a garnishment has reduced the debtor’s take-home pay below the ordinary requirements of food and rent. Instantaneous relief is expected, if not necessary.
Many times it is simpler for debtor’s counsel to file a bankruptcy petition, invoke the automatic stay and freeze the debtor’s circumstances for some future contemplation of remedies. But simpler is not always better for individuals with debt problems that can be solved with less drastic action than a bankruptcy filing.
It is sometimes possible to get control of the debtor’s finances without a bankruptcy petition. Chapter 13 is a model for the things that can be offered to creditors without filing. Well-informed claim holders will know their likely outcomes in a bankruptcy case—when you can actually find a person to talk to—and may be willing to negotiate toward that least favorable position.
Any potential Chapter 13 debtor with a home mortgage is entitled to some prebankruptcy discussion of the nonbankruptcy alternatives for dealing with mortgage holder(s) and/or servicer(s). Applying for a mortgage modification before filing a Chapter 13 case will make sense in some3 cases. Offering the mortgage holder or servicer, even on the eve of foreclosure, what the lienholder is likely to receive in a Chapter 13 case can produce a contractual settlement less expensive and less traumatic for the debtor.
A telephone offer to extend the car note on a fixed repayment schedule, with interest if necessary, can stop a repossession if the creditor is accurately informed of the potential for cramdown in a Chapter 13 case.4 A strategic surrender of some collateral can stop execution on other collateral, and even a trickle of payments over time with a commitment from the debtor can release a garnishment if the unsecured claim holder knows its fate in a Chapter 13 case. Debtor’s counsel must be willing to explain Chapter 13 to the uninformed claim holder.
There are for-profit and not-for-profit services and agencies that specialize in counseling financially troubled individuals. These organizations restructure debt by contractual and quasi-contractual arrangements with creditors. Some services are free; some charge a flat fee; some charge a percentage of the debt involved. Some are actually funded by the credit community from a portion of the debt payments. Where credit counseling services have become well known to the credit community, they can be a two-way referral resource for debtors’ counsel: a source of cases that won’t resolve by agreement; a place to send debtors who do not need bankruptcy relief.
For the potential Chapter 13 debtor, the use of an attorney to explore nonbankruptcy alternatives is limited by cost. In a perfect world, nonbankruptcy alternatives would be attempted in every case. In the real world, it makes economic sense for a debtor’s lawyer to attempt a nonbankruptcy solution in cases in which the financial distress is confined to a small group of claim holders that are easily identifiable and easily contacted. When financial distress emanates from a chorus of creditors geographically dispersed and of uncertain or no bankruptcy sophistication, the Chapter 13 alternative becomes immediately more attractive.
1 Pub. L. No. 109-8, 119 Stat. 23 (2005).
2 See 11 U.S.C. § 109(h), discussed in § 9.5 Consequences of Ineligibility: Jurisdiction; Automatic Stay; Strike, Dismiss or Excuse?, § 18.1 In General, § 19.1 What is a Briefing?, § 19.2 Timing of Briefing, § 19.3 Certificate from NBCCA: 11 U.S.C. § 521(b), § 20.1 In General, § 20.2 Timing, Procedure and Form for Certification of Exigent Circumstances, § 20.3 Which Circumstances Are Exigent and Which Exigent Circumstances Merit a Waiver?, § 20.4 Prepetition Request, § 20.5 Briefing after Temporary Exemption, § 21.1 In General, § 21.2 Timing, Procedure and Form, § 21.3 11 U.S.C. § 109(h)(2): Inadequate NBCCA Services and § 21.4 11 U.S.C. § 109(h)(4): Incapacity, Disability or Active Military Duty.
3 A Chapter 13 case can be a favorable platform from which to make a mortgage modification or mitigation proposal. See § 8.12 Home Mortgage Problems.
4 See § 75.1 In General: Modification Without § 506, § 75.2 Motor Vehicles and Any Other Thing of Value, § 75.3 Only PMSIs Need Apply, § 75.4 Acquired for Personal Use of Debtor, § 75.5 Surrender in Full Satisfaction? and § 75.6 Procedure and Miscellaneous Hanging-Sentence Issues for changes made by BAPCPA to a debtor’s ability to modify secured loans, in particular vehicles purchased for personal use within 910 days of filing bankruptcy.