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.
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?
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.
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.
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.
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.
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.
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.
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.