By Columbia-Lexington bankruptcy attorney Lex Rogerson
One of the most important stages of a chapter 13 bankruptcy case, the confirmation hearing determines whether the court will give you a chance to reorganize your debts.
So you’ve decided to file bankruptcy and concluded that chapter 13 is the best approach for you. All the schedules and statements have just been filed. Now you get a notice with a bunch of dates on it. In a little over two months, it says, there’s a confirmation hearing. What’s that about?
Why is the bankruptcy plan important?
All bankruptcy reorganizations, whether chapter 9, chapter 11, chapter 12, or chapter 13, require a plan that shows how debts will be treated. Because we primarily represent consumers in bankruptcy, we’ll focus here on chapter 13.
The plan is the central piece of the puzzle in a chapter 13 case, determining what creditors will receive and how much the debtor must pay. At the confirmation hearing, the court decides whether the plan meets the legal requirements to be approved. Although payments to the chapter 13 trustee must begin before the plan is confirmed, the trustee only begins disbursing funds on confirmation.
What decides whether the court confirms or rejects the plan?
Section 1322 of the Bankruptcy Code says what a plan must do and what it may do. Section 1325 specifies the requirements for confirmation. The bankruptcy court looks at both sections in confirming a plan.
These provisions are complicated, but confirmation usually boils down to a few recurring questions:
- If the debtor is behind on his mortgage, does the plan cover the entire arrearage?
- Does the plan pay secured debts in full, with interest, if the debtor wants to keep the collateral?
- Does the plan fully pay any priority debts, including past due taxes or domestic support obligations?
- Does the plan pay the required amount to unsecured creditors?
The amount to unsecured creditors (major credit cards, medical bills, signature loans, etc.) is probably the most common issue. In most cases, the debtor does not have to pay these debts in full. But their treatment must meet two tests. First, these creditors, as a group, must receive at least as much as they would have if the debtor had filed chapter 7. In other words, the debtor must pay the net value of any non-exempt assets. Second, debtors must pay all their disposable income into the plan — all they can afford to pay, considering their projected income and reasonable living expenses.
What needs to be done as the hearing approaches?
The recommendation of the trustee is extremely important in getting a plan confirmed. The lead-up to the confirmation hearing almost always involves communication with the trustee.
Like most experienced bankruptcy lawyers, we review every case fully beginning about two weeks before the confirmation hearing. In about half of the cases, the plan must be amended. This can result from creditors filing claims higher than expected, from unexpected claims being filed, or from trustee objections.
Amended plans can result in confirmation being delayed. But courts generally do not want to delay long, because creditors are not paid until the plan is confirmed.
Will you have to attend the confirmation hearing?
Probably not, at least in the District of South Carolina. Usually the trustee and the debtor’s attorney will have worked out the result of the confirmation hearing in advance. In those cases, the hearing is nothing more than the court receiving the trustee’s recommendation or the parties’ agreement. Sometimes, however, unresolved issues remain with the trustee, or with a creditor, requiring a contested hearing. In that fairly uncommon situation, the debtor usually must attend and testify.
Why is confirmation important?
If the debtor cannot get a plan confirmed, he cannot accomplish the purposes of the chapter 13 filing. This may mean he cannot cure the delinquent payments on a mortgage, or can’t pay off his taxes over five years, or can’t get a discharge of unsecured debts.
On the other hand, if the plan is confirmed, that decision is binding on creditors. The plan, and not the original financing agreement, determines what the creditor gets and when. And once the plan is confirmed, neither the debtor nor the trustee nor any creditor can challenge any of its provisions without showing a substantial change of circumstances.