When Chapter 13 Debtors Run Amok

troubled Chapter 13

We’ve had a string of them….

[Hint: in a small practice, a “string” means “three. ” ]

But three clients in the past month with confirmed Chapter 13 plans have contracted to sell their homes without mentioning it to us, their attorneys.

The degree of chaos varied:  inadequate time to get approval of the sale from the trustee within the contractual closing date;  mortgage stripping issues when the plan is paid off early; and taxing authorities who decided to claim the post petition appreciation.

But the bigger problem is clear:  operating successfully in Chapter 13 requires debtors to absorb a bunch of information about how bankruptcy works.

  • What can they, and can’t they, do without prior consent?
  • What does the vesting option mean in the real world?
  • What are their disclosure obligations?

When is the best time to learn?

When we first meet prospective debtors, we’re dealing with people experiencing stress, shame, and overload.

Clients are overwhelmed with the information they must process on bankruptcy choices, procedure, and consequences.

When the case is confirmed, and all the client has to do (they think) is make the plan payments, they relax and tune out.

Yet we find clients borrowing money without the trustee’s consent; signing car contracts without considering their Chapter 13 plan; and selling stock to make ends meet.

If the only issue is covering our behinds, as professionals, we can write all the do’s and don’ts down, hand the client the tome, and get a receipt for its delivery.

That solves my problem, but isn’t likely to assure that the client reads, absorbs and recalls the admonitions when an issue arises a couple of years down the road.  The client who screws up is unlikely to be comforted by the fact I clearly told him what the rules were.

And the client who is injured by transgressing is likely to be resentful, at best, and vocal at worst, about the quality of the representation that he got.

Let’s trade fixes

What I learned from this string of fiascoes is that I need to deliver the “living in Chapter 13” commandments, in writing, after confirmation of the plan.  That doesn’t assure they get read or followed, but it ups the odds.

I can see a web page on the firm’s site, reciting the rules.

Maybe an instruction in our Chapter 13 representation agreement should reinforce the “ask first” directive.

How do you deliver this kind of information to clients?  What works better than others?

I’ve shared my train wrecks- it’s your turn to share solutions.

Image courtesy of Flickr and Shoji.k


  1. J. kaufman says

    The idea of my blog is, I think, similar to one of your blogs…its a place of resources for clients and prospective clients to learn the rules and the do’s and don’ts…..though it has taken me some time to develop it….I hardly write any posts…maybe 7 in 2 years….but that is the idea of my blog. I think it could act as a guide as well.

    One thing I do is I give my clients a copy of the bankruptcy basics, provided by the US Courts – so they have that impartial reference. I also might give them an Excel Spreadsheet to help keep track of their budget – it mimics the Schedule J’s categories – I’m sure its hardly used (you can lead a horse to water….). But I don’t have a “living in a chapter 13 world” guide as you suggest. One thing I would certainly put in there is: don’t get married without a prenuptial agreement. 🙂

    The “fiascos” to which you refer may not necessarily be fiascos at all….well, I’ll agree that selling the house may certainly be a fiasco. Though, I was just writing to a client earlier today that borrowing money without the trustee’s consent is not prohibited by the code, a local rule, or by the confirmation order. If they can afford to service the debt, I see no issue with it (they also only have 6 months left of their plan). Are you aware of any statute or rule that prohibits chapter 13 debtors from borrowing money? Section 1305 only limits which post-petition claims can be paid from the plan; it is not a limitation on what the debtor can borrow.

    Also, if the debtor selected that property of the estate would be re-vested in the debtor upon confirmation of the plan, then why can’ the debtor sell his stock?

    It might be important that the guide states not only the attorney’s take on living in a chapter 13 world, but also gives insight on the chapter 13 trustee’s take on it. Because even though the attorney might think Trustee is wrong on a particular subject, the debtor might think its just easier, and therefore a smoother ride, to go along with what the trustee wants.

  2. I did a video of bankruptcy basics to give clients. It’s not perfect but I find they absorb the information better than handouts or personal warnings. Modern society hardwires people to listen to the TV.

    • Cathy Moran, Esq. says

      We all need to be highly conscious that some people learn by listening, others by reading, some only when slapped in the face. Use every channel to deliver your message.