Attorney recommends 13 even though income qualifies under 7... HELP!

[Teacherswife]

We had an hour and a half consult with an attorney today. Here's our situation- hubs is a teacher. I ran an in home childcare but am now on full bedrest and we anticipate 6-12 months minimum before we can bring my income back. Our income falls within the 180% poverty ratio. We have about $45k in unsecured debt. We have one car loan at $15k ($225/mo) other car is old van with 200k miles on it, paid off. Our mortgage is $192k, with a second of $25k (so about $217k total)... house on zillow is showing about $365K if we sold (the house does need some expensive updates). We are a family of NINE. We are current on all bills as of today. But we've lived paycheck to paycheck and relied on cc to get through. We looked at selling our home and paying off all debt, then renting for a couple of years-- not an option because rentals in our area for our family size are $2500/mo or more (and there is a lot of housing discrimination against large families, so we could end up homeless). That high of a rent payment would keep us right were are now financially- not able to survive on hubs income. We don't qualify for a refi for two more years because we had to do a short sale on the house hubs owned with his ex. We absolutely cannot lose our home-- so the attorney says we can't do a 7 because with the equity, the trustee would likely force the sale of our home... landing us worse off than if we sold the house ourselves. He recommends a 13 so we could keep our home. Herein lies our problem... he ran preliminary numbers and is estimating our payment would be about $600/mo (including the car payment). After I ran our budget... that would leave us about $700-800/mo for food, gas, medical, incidentals, school fees, etc... (with SEVEN kids). Just groceries/household (carefully planned) runs us about $1500 mo... our monthly out of pocket medical is about $550/mo a month right now (co pays for meds, childrens therapy, my OB care, etc...). I don't see how we could possibly make this work... the attorney pointed out the alternative is not being able to pay our debts and ending up losing our house and such anyway. I would love to hear some advice... If we qualified for a refi... this would all be a moot point. Our payment would only go up about $100/mo and everything would be paid off plus we could get the desperately needed HVAC system in the house. We have enough funds to make up for my income loss for 3, maybe 4 months and then we will be completely tapped out. If my income doesn't come back for a year... we will be screwed.

[justbroke]

There's no good advice because you have too much "unprotected" equity. If you lived in Florida, this would be a no brainer since we enjoy an "unlimited" homestead exemption (on our equity in our home). Texas has a similar protection. You have almost $150K in equity according to your own estimates, and only $33K is protected under Oregon bankruptcy exemptions.

Because, even with your exemptions, you have $100K in equity (at least), I estimate that you would need to pay $750/month (notwithstanding the Trustee's fee), unless that unsecured credit isn't really that high. (Note: I used the Chapter 7 liquidation test and it would show that you have $100K of equity which means you'd be in a 100% plan.)

Ouch.

You're certainly between a rock and a hard place. The fact is, you are living beyond your means. If you sold the home and pocketed $90K after commissions, you could payoff all your debt ($45K unsecured and $15K car). That would leave you with $30K and that won't last long.

You write that "after [you] ran [your] budget" you were left with a small amount. What do you mean by "your" budget? The one that the Means Test generated, or what you think your expenses should be? Did that include credit card payments (because they would be gone). Your car payment looks like it will be less (maybe the lawyer is going to do a cram down)?

You just don't have the means to support that family size with those expenses. I wish there was a magic pill.

[Teacherswife]

There's no good advice because you have too much "unprotected" equity. If you lived in Florida, this would be a no brainer since we enjoy an "unlimited" homestead exemption (on our equity in our home). Texas has a similar protection. You have almost $150K in equity according to your own estimates, and only $33K is protected under Oregon bankruptcy exemptions.
Because, even with your exemptions, you have $100K in equity (at least), I estimate that you would need to pay $750/month (notwithstanding the Trustee's fee), unless that unsecured credit isn't really that high. (Note: I used the Chapter 7 liquidation test and it would show that you have $100K of equity which means you'd be in a 100% plan.)
Ouch.
You're certainly between a rock and a hard place. The fact is, you are living beyond your means. If you sold the home and pocketed $90K after commissions, you could payoff all your debt ($45K unsecured and $15K car). That would leave you with $30K and that won't last long.
You write that "after [you] ran [your] budget" you were left with a small amount. What do you mean by "your" budget? The one that the Means Test generated, or what you think your expenses should be? Did that include credit card payments (because they would be gone). Your car payment looks like it will be less (maybe the lawyer is going to do a cram down)?
You just don't have the means to support that family size with those expenses. I wish there was a magic pill.

"Budget" is- mortgage payment (1st and 2nd), utilities, phone, insurance, trustee/13 payment ($3300 minimum out of $4200 income)... Our monthly medical is about $550 right now (co pays, prescriptions, ortho). This doesn't include any clothing (7 kids... someone always needs something), school fees, job related fees (hubs is a teacher- he pays out of pocket for a lot)... definitely no entertainment. We aren't a frivolous family-- but it costs a lot to take care of a big crew... and hubs had a lot of debt from previous marriage and my ex is $36k behind in child support. So we are in a bad spot. Our utilities alone run about $700/mo... we don't have cable or unnecessary items... those have never been part of our budget. I just don't see how we can make this work on $4200/mo... My income was basically all tax deductible, so it covered food/gas/incidentals...but was still tight- however we fared much better than if I worked outside the home. We don't appear to qualify for any assistance to patch us through until I can work again because we are right on the border... that could change slightly when baby arrives, but that's still (hopefully) months away.

We are looking at selling our house because we could pay everything off... but the fear is the rental market. There just isn't anything out there-- we live in a VERY expensive area. A rental for our family (assuming we could find someone to rent to a family of 9) is $2500--4000/mo. There's no way that works with a $4200/mo income. So even if we sell, we end up in a bad financial position. Moving to a lower cost of living area isn't an option because terms of divorce require we stay the the same town until kids graduate HS. In an ideal situation we could refinance-- but that is not an option for two more years... if it were that's what we would do right now and just pay everything off-- our payment would go up from $1300 to about $1400... which is very realistic. We only have our mortgage of $1300 (plus a 2nd at $300) and one car at $225... other than the consumer debt from previous marriage. We can afford our house and vehicle... we just can't feed the kids and pay the creditors.

[LadyInTheRed]

We can afford our house and vehicle... we just can't feed the kids and pay the creditors.

Without the unsecured creditors, could you feed the kids? If not, you can't afford the house and car.

Zillow is not a realiable way to value your house. I suggest getting a broker's opinion of value or two.

Also, explore the possiblity of a step payment in a Chap 13 where you start with a lower payment and increase it when you will have more income. Also, if you are still paying your unsecured creditors, you coud keep doing what you have been until you can't, then stop paying unsecured creditors and wait until somebody sues you to file. Maybe by that time you can go back to work.

[justbroke]

I echo LadyInTheRed. You may just need to ride this out and hopefully return to work (re-open your licensed daycare facility) either right before or right after filing.

I'm a bit nosy, but are all the children under the age of majority? I lived with a family of 6 children. We were a family of 8. They say it's "cheaper by the dozen" but whoever said that must have been thinking of donuts, and not children. You're a trooper!

[Hopeinsight2]

I'm sorry you are having so much trouble with your finances. If you are still paying your creditors, I definitely agree you should either stop and hope no one will sue you until you can file, or sell your house and pay everything off. We had to stop paying ours and it's scary at first, but not so bad once you get used to it. Where we live, there's a court site for our county where I can double check that we aren't being sued. How much is the homestead exemption where you live? I will be praying for you and your family.

[despritfreya]

Ok, I need to chime in here. Admittedly I have not read every word of every post. From what I have read:

1. OP has $117,000.00 of non exempt equity in the home;
2. OP owes $45,000.00 in unsecured (typically dischargeable) debt;
3. OP cannot do a Chapter 7 as OP would lose the home but all creditors would be paid in full and OP would get $33,000.00 for the homestead exemption;
4. Attny correctly advises that if OP does a bk it must be a Chapter 13; and
5. OP has thought about selling the home to pay all creditors but is worried about the cost of a rental, which may be higher than the two mortgage payments.

I did not catch whether or not OP attempted to refi the home to pull out equity, thus paying off all creditors and consolidating the 1st and 2nd into one payment. This should be seriously considered in lieu of filing a bk as interest will continue to be deductible and the larger loan probably will not result in a drastic increase in the current monthly payments combined since the new loan will be amortized over a 30 to 40 year period.

As to the Chapter 13, OP will have to provide for 100% of all "allowed" claims which may or MAY NOT be the full $45,000.00. Remember, creditors have to TIMELY file claims. One or two or maybe even more may not file TIMELY claims. Failure to file a timely claim means the creditor does not get paid, thus, until the claims bar date passes, OP (and the attny) will not know the final dollar amount needed to fund a 100% plan.

In addition, the Chapter 13 Plan DOES NOT have to be straight monthly payments. Since there is a ton of equity in the home, the Plan could provide for a lower monthly payment with a balloon payment down the road. If OP religiously makes payments over a two year (or more) period both on the mortgages and the Plan, OP could simply seek to refi the home at some point and pay off the balance of the "allowed" claims. Set the balloon payment due date nor further out than the 36th month just in case you run into a pickle with refinancing and need to modify the Plan to provide for the balance owed in monthly installments with an extension of the Plan to 60 months.

Just some thoughts.

Des.

[159515951]

I did not catch whether or not OP attempted to refi the home to pull out equity, thus paying off all creditors and consolidating the 1st and 2nd into one payment.

This. Why not refinance if you have that much equity?