Chapter 13 bankruptcy and taxi medallions

As many of you know, the representation of taxi medallion owners has become a sizeable portion of our practice.  This month, we’d like to discuss chapter 13 bankruptcy as a potential option for “underwater” taxi medallion owners (where the value of the taxi medallion securing the loan is less than the balance outstanding on the loan).

In contrast to a chapter 7 (liquidation) bankruptcy, a chapter 13 bankruptcy is intended to provide an adjustment of debts, and is best suited to individuals who want to keep property (such as a house and/or a taxi medallion) after their bankruptcy case is concluded.  However, chapter 13 cases are more complex than chapter 7 and less expensive and less complex than chapter 11 and come with some important limitations that potential debtors should be aware of:

1.     

1.  There is a limit on how much debt a chapter 13 debtor may have.  Under § 109(e) of the Bankruptcy Code, only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $394,725 and noncontingent, liquidated, secured debts of less than $1,184,200 may be a debtor under chapter 13.  These debt limits are adjusted every three years and will be adjusted again in April 2019. 
2. Most chapter 13 repayment plans are between three years and five years in length.  The length (or commitment period) of a chapter 13 plan depends on a potential debtor’s income and the amount of time needed to pay off the debts included in the plan.  Since BAPCPA was enacted in 2005, all debtors above the median income for their state and family size must complete a “means test” to determine their eligibility for bankruptcy.   Chapter 13 debtors need to complete two forms, the “Statement of Your Current Monthly Income and Calculation of Commitment Period” (to determine the debtor’s current monthly income and the length of the plan) and “Chapter 13 Calculation of Your Disposable Income.” (to determine how much disposable income the debtor has to make plan payments). 
3.  The proposed plan must be feasible.  Feasibility is a requirement for plan confirmation.  Section 1325(a)(6) of the Bankruptcy Code provides that "the court shall confirm a plan if ... the debtor will be able to make all payments under the plan and to comply with the plan."  In other words, can the debtor make all the proposed payments to creditors over the length of the plan?  This standard can usually be satisfied if the debtor has a regular source of income such as a job or benefit payments. 
4. The chapter 13 debtor must perform a “liquidation analysis” to ensure that creditors are treated fairly.  Section 1325(a)(4) of the Bankruptcy Code provides that the court shall confirm a plan if “the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.”  This is also known as the “best interests of creditors” test.  The proposed chapter 13 plan must pay unsecured creditors (i.e. credit card accounts and loans with no collateral) one dollar more than they would receive in chapter 7.
5. Finally, chapter 13 bankruptcy can also be used to transfer an underwater taxi medallion back to the bank that financed it and allow the debtor to keep his or her house and other property.

If the taxi medallion owner’s unsecured or secured debt exceed the limits discussed in item 1 above, then an out of court workout, settlement (negotiation with the creditor) or a chapter 7 bankruptcy case are other options.  For more information about chapter 13 and other ways to settle your debts AND keep your taxi medallion, please contact Jim Shenwick.