Chapter 13 questions

[angmos63]

Hello, my husband and I will be filing chapter 13 in February. Here’s a bit of our situation. All of our debt is unsecured credit cards and personal loans only. Car and mortgage is current. We make 110k together and have about 75k in unsecured debt. I know we are a good candidate for 7 but unfortunately, we filed 7 - 5 years ago and have to wait 8. I am so terrified to file 13. We have 3 kids and barely make it now. One atty we met with stated we will have to pay 100% back. I have no idea how we will survive. Here’s my questions:
will we be able to keep our tax refund? If not, are we able to negotiate?
can we be discharged sooner than 5 years?
Any advice will help. Thank you.

[StuckinaRut]

You can discharge earlier than 5 years, if all of your claims will be paid earlier. In fact, we are in a 100% plan and our last payment will be in April, which is 8 months early due to a couple of creditors not filing claims. We also weren't required to hand over tax refunds (not that there were any).

[angmos63]

Thank you for responding! Does the trustee really watch your every move like they say? I’m just worried because they say most cases fail. Can you tell me - are you able to go on family trips or are we going to be completely deprived? Thank you.

[flashoflight]

The chapter 13 failure numbers are often skewed by pro se filers and foreclosure prevention companies who did it only to temporarily stop a foreclosure. They had no intention of actually getting through to discharge.

[StuckinaRut]

I haven't heard a peep from the trustee, except for receiving my yearly status letter & a letter advising me to send a copy of my tax returns every year. We still go on vacations & are in a stronger financial position than we were prior to filing. We did have speed bumps (heat pump went out in year 2, hot water heater died in year 3, and wife's car engine blew in this year). Fortunately, these all occurred after I received my yearly bonus, so we had the money to pay outright. However, my attorney told me that if I needed to skip payments, it shouldn't be an issue, since we are 100% and most likely finishing early.

[justbroke]

The chapter 13 failure numbers are often skewed by pro se filers and foreclosure prevention companies who did it only to temporarily stop a foreclosure. They had no intention of actually getting through to discharge.

In 2008 through about 2012, they may have been skewed a little (but not so much by Pro Se filers). Chapter 13 debtors have simply can't or refused to budget.

Then, life happens.

Today, 48% of Chapter 13 cases make it to discharge. Of the 52% that are dismissed, over 84,000 (or 51% of those cases representing 25% of all cases) are dismissed due to failure to pay. So 25% are failure to pay, and the others (27%) are likely voluntarily dismissals.

The problem is that many debtors want to save their home. The fact is that many simply cannot afford the home or cannot afford paying the arrears plus the ongoing mortgage through the Chapter 13. Still, others are due to loss of income from which they can't recover. The small number of those that use it as leverage to foreclosure has shrunk since the housing crisis of 2008-2012.

(These numbers are based on the 2017 Case Statistics from the United States Courts.)

[angmos63]

I haven't heard a peep from the trustee, except for receiving my yearly status letter & a letter advising me to send a copy of my tax returns every year. We still go on vacations & are in a stronger financial position than we were prior to filing. We did have speed bumps (heat pump went out in year 2, hot water heater died in year 3, and wife's car engine blew in this year). Fortunately, these all occurred after I received my yearly bonus, so we had the money to pay outright. However, my attorney told me that if I needed to skip payments, it shouldn't be an issue, since we are 100% and most likely finishing early.

Thank you for your response! Would it be possible to get a home equity loan during ch 13 - And then pay the 13 off sooner than 5 years? Also, would you say the 100% plan is best? Because attys are basically forcing us into 100% - however, our payments would be sky high. No idea how we could do that with 3 kids for 5 years.

[StuckinaRut]

I don't have an answer for you. I would recommend you meet with other attorneys before you file, as they may have a different view.

[switch625]

I would consult a few more attorneys. Keep in mind that your Ch 13 payment is triangulation between 1) income 2) expenses and 3) non-exempt assets that you would have if you filed a Ch 7(after declaring what assets are exempt and their dollar amount). It may not be 100% payment after all. In addition, not all creditors file claims on the debt you list in your petition. However, that's not a guarantee and you wont know until you reach the bar date (deadline) for claims filing.

If you are told you need to pay 100% ask them why. Have the attorneys show you their calculations.

bI don't believe you would be able to do a HELOC during a Ch 13. You would need trustee approval for any loan during your 13. If you gotta do a HELOC, Better to do that before you file BK and avoid the BK altogether if you can?

[justbroke]

Thank you for your response! Would it be possible to get a home equity loan during ch 13 - And then pay the 13 off sooner than 5 years? Also, would you say the 100% plan is best? Because attys are basically forcing us into 100% - however, our payments would be sky high. No idea how we could do that with 3 kids for 5 years.

Before I answer, let me back up a little bit. If you have enough equity in your home to payoff all your creditors, that is the precise reason that a debt would be in a 100% plan despite not having the income to pay 100%. Typically, those plans include step payments and or a lump sum at the end which depends on refinancing the home (or pulling out the quity). People have refinanced their home or done other things to payoff a Chapter 13 sooner. It is a strategy that has been used in the past.

The question becomes why not have negotiated with creditors and did the HELOC prior to filing? With negotiation, even if some won't negotiate, you'd probably save a good amount (25%, 35%, 45%... more?). If you go the Chapter 13 route, then paying 100% is actually paying 100% (dollar for dollar on the claims).

Bankruptcy planning can be important for debtors with significant equity because they are likely to end up in a 100% Chapter 13 Plan. Given that, and if they maintained their credit, it may be a better strategy to NOT FILE and just to obtain a HELOC and payoff the creditors. A 5%-9% HELOC loan is likely better than credit cards at 19%-26%.

[angmos63]

Before I answer, let me back up a little bit. If you have enough equity in your home to payoff all your creditors, that is the precise reason that a debt would be in a 100% plan despite not having the income to pay 100%. Typically, those plans include step payments and or a lump sum at the end which depends on refinancing the home (or pulling out the quity). People have refinanced their home or done other things to payoff a Chapter 13 sooner. It is a strategy that has been used in the past.

The question becomes why not have negotiated with creditors and did the HELOC prior to filing? With negotiation, even if some won't negotiate, you'd probably save a good amount (25%, 35%, 45%... more?). If you go the Chapter 13 route, then paying 100% is actually paying 100% (dollar for dollar on the claims).

Bankruptcy planning can be important for debtors with significant equity because they are likely to end up in a 100% Chapter 13 Plan. Given that, and if they maintained their credit, it may be a better strategy to NOT FILE and just to obtain a HELOC and payoff the creditors. A 5%-9% HELOC loan is likely better than credit cards at 19%-26%.

Unfortunately, we are in too deep with creditors. With us behind on at least 5 months of payments - there is no way we can catch up. As far as HELOC - I know that is based off of credit scores, and right about now, my credit is shot! We feel ch 13 is the only way out now. Is it possible to take out equity with low score? Thanks.

[womanonfire]

I have 20 personal credit cards. I was able to negotiate 0% interest on nine of the cards, a flat fee on Amex, 9.99% for a year on Discover, and 10% on a Citi card. They will close the cards and it will negatively affect your credit. I called and asked for hardship department. Take control of it and pay what you can afford. I told them that I was trying to avoid bankruptcy which is the truth! Oh and they also stopped calling. I spoke to some of the nicest people.

At the end of the day, do what you can. It's only money. ((shrug))

[NoMoney30]

You MAY find something to take that equity out but it will most likely be a really crappy deal. The interest rate would probably be high and you may find yourself in yet the same situation 6-12 months down the road. I delayed the inevitable for like 3 years before filing for 13. I refinanced my house like 3 times and TRIED to pay some stuff off but my balances were so high, that it was hard to make a dent with the required minimums. For one credit card that I owed like 30k+ on, I had all my utility bills being charged there that were part of my monthly budget anyways and I would just pay the utility bill amounts to the card which covered the like 450 min payment but then the interest on the card was like 250 per mo (even at an 8% interest rate)...so I was technically paying the card but the balance kept going up every month.

The problem with doing a 13 and having lots of equity in your home is they may want you to sell it to help pay the debts. I got scared at first when I started my 13 because before I even got to the trustee my lawyer was like ooooo you have equity in your house... had to show proof we tried to sell it for over a year and it really wasn't worth the amount he saw on zillow or whatever it was.

So, saying that... it might be better to even find a crappy HELOC... but I think you would have to age it awhile. If you get it and then like immediately file, that would look like fraud.

[justbroke]

Unfortunately, we are in too deep with creditors. With us behind on at least 5 months of payments - there is no way we can catch up. As far as HELOC - I know that is based off of credit scores, and right about now, my credit is shot! We feel ch 13 is the only way out now. Is it possible to take out equity with low score? Thanks.

If you are behind and your scores are low, you are correct. The only way to save the property is a Chapter 13. There are still good things about a Chapter 13 when you have the equity to pay 100%. First, you keep interest in check (no additional interest). Second, you keep the creditors at bay! Third, you avoid paying income taxes on forgiven or settled debt. And, finally, you have finality at discharge.

I asked the question about the settlement over bankruptcy because it is possible if the debtor is in otherwise good financial shape to obtain a cash-out refinance on their home.

[justbroke]

The problem with doing a 13 and having lots of equity in your home is they may want you to sell it to help pay the debts. I got scared at first when I started my 13 because before I even got to the trustee my lawyer was like ooooo you have equity in your house... had to show proof we tried to sell it for over a year and it really wasn't worth the amount he saw on zillow or whatever it was.

The problem with equity in a Chapter 13 is not that the Trustee can go after it. A Chapter 13 is specifically designed to keep any property that you want. This is caused by the so-called "best interest of creditor's test" (a/k/a the Chapter 7 liquidation test). This means that the debtor, in a Chapter 13, must pay "at least the amount" that the unsecured creditors would have received in a hypothetical Chapter 7. The translation: lots of unprotected equity in a home (in Chapter 13) can be a bad thing for the debtor

The real issues are these; a.) does this put the debtor in a 100% plan, b.) can the debtor afford a 100% plan, and c.) is a balloon payment dependency really infeasible if the debtor requires a sale/refinance at the end.

For example, you are a family of 4, under the median income and make $60,000/year or $5,000/month. You have $120K in unsecured debt. You have a home with $120K in equity. You file Chapter 13 because you're behind on your $2,000/month mortgage by 6 months. Your plan would be infeasible. You cannot afford the required monthly payment of $2,000 in DMI to fund a 100% plan over 5 years. That's because you still have to pay $2,000 for your ongoing mortgage, plus $200/month in arrears or $2,200. You then have to pay $2,000/month to the unsecured creditors. You're already at $4,200/month before accounting for anything else such as feeding and clothing your family, paying for a car(s) and maintenance, or even income taxes.

That's the real issue with unprotected equity in a Chapter 13.

[NoMoney30]

Well that’s all well and good but they wanted me to sell my house to pay the debt when they thought I had a lot of equity. Once I proved I didn’t, I got to keep my house. I wasn’t behind on payments or anything... so I dunno if that makes a difference. But I can only say my recent experience and it is a fact that they wanted to liquidate my house.