I bet most of my readers did not know that there is a government sponsored debt consolidation plan. In fact, when I meet with Minnesotans from all walks of life they are surprised to learn that there really is a government sponsored debt consolidation plan. Not only does it exist, it has been around for decades. Why then do most people not know it exists? In a nutshell, because people do not look any further if it involves the “b” word. I wish the government would not call this debt consolidation plan a chapter 13 bankruptcy. I wish they would instead call it what it is, a government sponsored debt consolidation plan. I first want to walk you through the nuts and bolts of a chapter 13 bankruptcy and how it works and then I want to walk you through a real “live” (as my 4 year old son used to say) example of a chapter 13 bankruptcy at work.
CHAPTER 13 BANKRUPTCY
Chapter 13 bankruptcy is a government sponsored and approved debt consolidation plan. If your income is good, and you have the ability to pay your creditors back something, you must do a chapter 13 bankruptcy.
We also put people who do not want to lose their nonexempt assets in a chapter 13 bankruptcy. Why? Because in a chapter 13 bankruptcy you do not lose any assets.
HOW LONG DOES A CHAPTER 13 BANKRUPTCY LAST?
Bankruptcy Code Section 1322(d)(1) provides that if debtor’s income is over the median income, the plan must be a 5 year plan. However, the code also says the plan can be no longer than 5 years too.If debtor’s income is below the median income for your family size, you can do a 3 year plan- but the code says the plan cannot be any less than 3 years in duration.
So, a chapter 13 plan can be 3-5 years but not longer than 5 years and not shorter than 3 years.
HOW MUCH DO I HAVE TO PAY AND WHO DETERMINES MY PAYMENT?
This is where an example is in order. Let’s say Paul and Toni make 65k a year and have 75k in credit card debt. They have 3 kids so their income is below the median income in Minnesota, which is $106,964.00 for a family of 5. Assume that Paul and Toni have no other debts and no major assets. They live in a home with a house payment of $1,200.00 per month and lead a normal lifestyle. We would first figure out what Paul and Toni have for reasonable and necessary expenses and we apply their disposable income to those expenses first.
And then we take a look again at the expenses and make sure we are including all of their expenses so we don’t forget any and leave them short at the end of the month. If what is left over is $300.00 per month, that is their payment!
Our proposed plan of payment would be $300.00 per month for 36 months. Now, you say wait a minute, that is not enough to pay 75k in credit card debt in full? That is the beauty of a chapter 13 bankruptcy. In most plans, repaying debts in full is not necessary. Here, Paul and Toni will pay $10,800.00 over 36 months and that is it. The balance of their debt, $64,200.00 gets wiped out or “discharged” in the bankruptcy, tax free!
The natural question becomes, why wouldn’t you do a chapter 13 bankruptcy vs. traditional debt consolidation where creditors typically get paid in full and any balance written off would be taxable to the debtor? We honestly don’t know why anyone does traditional debt consolidation when you have a government sponsored plan that is much better.
So, the payment you make back to creditors is determined by your lawyer and you putting together a proposed plan, subject to court approval, after carefully reviewing your needs first. Your expenses get paid first before any creditor receives any money. Your family comes first and your creditors get paid last. Isn’t that the way it is supposed to be?
WILL A CHAPTER 13 GET ME CAUGHT UP ON MY MORTGAGE?
Yes. One of the advantages of a chapter 13 is that we can pay mortgage arrears on the plan to get you caught up. So, when we file your case, your mortgage arrears up to the time you file the bankruptcy are put on the plan and you will make your first mortgage payment directly to the mortgage company for the month after we file your case.
As long as you stay current on your mortgage payment after your chapter 13 is filed, and as long as you make your chapter 13 payment will go in part to pay on your mortgage arrears, you will keep your house.
CAN I PAY CAR PAYMENT ARREARS ON THE PLAN?
Yes. Not only can you pay your car payment arrears on the plan, we can pay the entire car loan on the plan. You don’t lose your car at all- the money for the loan just comes from a chapter 13 trustee after you make your chapter 13 payments.
There are a couple of distinct advantages to paying car loans on the plan. First, we can “cram” down the interest rate on the loan. If the loan’s interest rate is 15% we can pay 5% on the plan. Second, we are sometimes able to pay the value of the vehicle and not the actual loan amount on the plan. For example, if you took a car loan out 3 years ago and you owe 20k on the loan but the vehicle is only worth 12k, we can pay the car on the plan at 12k at 5% interest and you get title to the vehicle when the plan is discharged. Actually, the bank “releases” their lien on the title to be technical with you.
CAN MY CREDITORS BUG ME WHILE I AM IN THE CHAPTER 13 PLAN?
No, your creditors cannot bug you while you are in the chapter 13 bankruptcy. The automatic stay provisions of the bankruptcy code contained in Bankruptcy Code Section 362 prevent creditors from taking any action to collect from you while you are in the chapter 13 bankruptcy. This includes no phone calls, no letters, no lawsuits, no garnishments or levies.
In short, while you are in the chapter 13 bankruptcy, there is peace in the valley.
WHAT IF I LOSE MY JOB OR I CAN’T MAKE MY CHAPTER 13 PAYMENT?
The beauty of chapter 13 plans is that they are not like loan, with fixed terms that are hard to change if not impossible. A chapter 13 plan can be modified during the plan if your income goes down or if you sustain one time large unexpected expenses.
Clients do not want to start a plan and risk failing by stumbling throughout the plan. Knowing that a plan can be modified goes a long way toward alleviating those concerns. Most plans go the entire length of the plan without a single modification. Some plans require multiple modifications in 5 years. Both plan debtors will get a discharge- and that is what is important. That you get relief from your debts in the end.
A REAL LIVE STORY OF A TYPICAL MINNESOTA COUPLE IN A CHAPTER 13
Tim and Lynn have been married for 31 years. They live in Coon Rapids, Minnesota. They have 3 children ages 14, 17, and 22. All three kids live at home and all three kids have really expensive hobbies/sports. Lynn recently lost her job as an LPN and Tim works as an electrical engineer.When Lynn was working they had a combined income of around 150k per year. They lived in a house with a first mortgage of 300k and a second mortgage with 100k. The value of their home is 380k. Both Tim and Lynn are 53 years old. They have in the past liquidated 401k’s and refinanced their home multiple times to pay off credit card debt.
They now have 50k in credit card debt and from the look on Tim’s face he has had enough with financing an expensive lifestyle by refinancing and liquidating pensions. He was tired and I could tell it. Lynn, on the other hand, liked their home a lot and enjoyed their lifestyle and didn’t want it to change. Each of their children’s sports fees and equipment etc cost $400.00 per month. Their cars were older and paid off but between the mortgage payments of 3k a month, children’s activities of $1,200.00 a month, and credit card payments of 3k a month, there was simply no money left. They barely hung on when Lynn was working full time but now that she lost her job and her income was reduced to temporary unemployment of 2k a month, they were now scrambling to find help.
First, they called Lutheran Social Services. LSS told them they needed to file a bankruptcy and that they could not help them, there was simply no money left over. Next, they called a private debt consolidation company. The company told them there was nothing they could do for them since there was no money left over.
That is when they called us. Tim was at his breaking point with stress- Lynn was not. We discussed all of their choices in detail- but what it really came down to was two important decisions they needed to make:
1) SHOULD THEY FILE A CHAPTER 13 BANKRUPTCY AND GET THEIR LIFE BACK?
When I explained a chapter 13 bankruptcy to Tim and Lynn, they were very receptive. I told them how it was a government sponsored debt consolidation plan. The plan would require that Tim and Lynn only pay what they can afford to pay AFTER they paid their monthly expenses.
Right now, their monthly credit card payment are 3k. That was stressing both Tim and Lynn out. In a chapter 13 bankruptcy though, if Tim and Lynn paid their monthly expenses first, and only had $250.00 a month left over, that would be their payment for 60 months. You say, wait a minute, if they pay $250.00 a month for 60 months, they will only pay 15k. What happens to the balance of their debt, what happens to the remaining 35k in debt?
At the end of the 60 month plan, Tim and Lynn will receive a chapter 13 discharge. The remaining 35k in debt gets wiped out, forever, tax free!
Why would anyone do traditional debt consolidation after what we just said? We wonder ourselves.
2) SHOULD TIM AND LYNN MAKE A CHANGE IN LIFESTYLES?
Tim and Lynn are both 53 years young. We see this all the time. Couples make really good money but have none. The truth is living an expensive lifestyle is financially stressful. Tim and Lynn will admit they have lived really well but at what price? They have constantly refinanced their home and liquidated 401k’s to pay for that lifestyle.
Now, they have 50k in credit card debt and one spouse looks like he has been ran over by a Mack truck. Would it make a difference to Tim and Lynn if they cut their mortgage payment by half? Sure it would.
Would it make a difference to Tim and Lynn if the kid’s expenses were cut in half? Yes!
I think as parents we always think our kids need more and more. The reality is what children want more than anything is parents that are not stressed out all the time. Children are like parents to some degree- they know when mom and dad are not feeling quite right.
Personally, if you give me a choice between being financially stressed out but living an excessive lifestyle, or not being financially stressed out and living a really simple non-expensive lifestyle, I would take the latter any day.
THE CONCLUSION TO TIM AND LYNN’S STORY
Tim and Lynn needed time to sort out who they are and where they are going. They needed to think about their core values and what it is they really want in the next phase of their life. Two of their children will be moving out soon. They will be left with their 14 year old daughter, who in 4 years, will be off to college too.
When they thought about what they wanted and where they wanted to be in a few years, they decided to downsize and lower their standard of living. That allowed Lynn to work part time and for Tim to work less overtime.
They filed a chapter 13 bankruptcy and are making payments of $250.00 a month for 60 months. The stress on Tim’s face is now gone. They have their lives back again. Most importantly, they are now pursuing what they want instead of what they thought they wanted.
