FROM THE LEGAL PAD
When is a Bankruptcy not a Bankruptcy?
When it is a Wage Earner Plan!*
When someone says that they
have been to Bankruptcy Court, one immediately thinks of a Chapter 7 "straight"
bankruptcy proceeding. However, the United States Bankruptcy Code
also provides an alternative to straight bankruptcy for individuals and
small non-corporate businesses in Chapter 13 of the Code.
Chapter 13 of the Bankruptcy Code
provides for a filing under it which is commonly referred to as a "wage
earner" plan. The wage earner plan allows a debtor to seek the protection
of the Bankruptcy Court and also provide for the payment of all or most
of the debt which the debtor has incurred. It is primarily designed
for those debtors who have gotten behind on debt payments, but have a regular
income at a level sufficient to meet living expenses with something left
over to apply
to debts, but not enough to pay the regular payment to all of the creditors,
or to catch up those payments on which the debtor may have gotten behind
for some reason. To seek this type of relief the debtor must be an
individual or married couple, one of which has a regular income which may
be derived from wages, commissions, retirement or even unemployment benefits
so long as it is regularly received.
For a plan to be accepted by the Court it
must be practical and presented in "good faith". To insure that the
plan is practical the debtor(s) must present a monthly budget to show that
he or she or they can pay their regular living expenses and still have
enough funds left over to make regular payments into the plan. The
plan can provide for the payment of 100 cents on the dollar to be paid
on the debts, or, if not enough funds are available after meeting living
expenses, for a lesser percentage on the debt.
The "wage earner" payments are
generally paid in accordance with how the debtor receives his funds, i.e.,
weekly, semi-monthly, monthly, etc. The payments are made to a Trustee
who is appointed by the Court. The standing Chapter 13 Trustee in
this district (Middle District of Georgia, Macon Division) is Ms. Camille
Hope who has a staff and a room full of computers to aid her in the distribution
of the money according to the plan of the debtor which has been "confirmed"
by the Bankruptcy Court. A percentage of the amount to be paid through
the office of the Trustee, currently eight percent, is added to cover the
cost of administration of the plan. Once a plan has been completed
then the debtor receives a "discharge" of those debts listed, even those
which were not paid because the creditor did not file a claim with the
Court.
The same protection available
under Chapter 7 "straight" bankruptcy is also available under Chapter 13
upon filing a wage earner petition such as the immediate stay of collections
by creditors
either personally or through Court proceedings such as suits, levies
and garnishments. There are different classes of creditors under
Chapter 13 who are treated differently under a plan such as "secured" creditors
(e.g., the bank which financed an automobile and holds a security interest
in the automobile) are entitled to preferential treatment over unsecured
creditors (e.g., a loan company who gave you a signature loan). Further,
first mortgage payments can't be made through a plan,
although the filing of a plan to stop a foreclosure by providing for
the payment of back payments through the plan to cure a default is a legitimate
purpose under the Code, so long as the debtor is able to make his current
first mortgage payments outside of the plan.
Clients often ask me which proceeding,
either straight or wage earner bankruptcy, will be least harmful to their
credit. In my opinion, one will be about as harmful as the other.
I remind them that they are in my office because they generally are at
the point where their credit is already beyond redeeming, and they are
just seeking to be able to sleep at night or not be frightened to answer
the telephone at home or at work. A proceeding under the Bankruptcy
Code will get the creditors
off of their "back", but can do little to regain a good credit rating,
except to provide a fresh start. However, I have seen people go through
a straight or wage earner bankruptcy and later regain their credit to,
at least, some extent.
Once again, I must remind the
reader that this article is a very simplified discussion of the provisions
covering "wage earner" plans, and there are exceptions to the "rules" I
have set forth above. If a reader is ever involved in the Bankruptcy
Court as a debtor or as a creditor, or
thinks that they will be or should be so involved, legal counsel from
a qualified attorney who is familiar with Bankruptcy law should be sought.
(copyright, 1987, Homer M. Scarborough, Jr.)
* The opinions expressed in From the
Legal Pad are based on the laws of Georgia in force at the time of
the Copyright notice, and are not intended in any way to replace the neccessity
and need of conferring with a private attorney as to the laws existing
in your State and jurisdication. Further, each situation is unique
and the opinions herein are are general.
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