surprised by attorneys advice

[jdcat]

I met with an attorney this morning expecting to be told that we should do a chapter 7. I've had 4 other attorneys tell me to go with a 7. This particular attorney though suggested that we go for a 13. His reasons were...

1) we could file sooner (which would be a plus in our eyes to avoid the stress from creditors)

2) our attorneys fees would be included in the plan so we wouldn't have to worry about that "bill"

and


3) we could include our cars in the plan and pay only what's left on our car loans ( under $7000 ) over a three year period thus freeing up cash that we need for living expenses now.

He said our mortgage would be paid inside the plan because the trustees in our district decided some time back that it's better that the trustee pay the mortgage each month so the debtor cannot fall behind in payments.

I didn't think we could do a 13. Not because we didn't want to but just because I didn't think we'd have the money for it. Our car payments would go from $625 a month combined to $188 a month for 3 years and the $437 left over each month can easily be absorbed by expenses that we cannot afford right now. This would be very good for us.

We would only be paying our mortgage, two car payments, attorney and trustee payments in the plan.

Our two 401k loans would be paid off in March and November of 2011 and then our plan payment would apparently change to include payments to our unsecured creditors at that time.

I'm having a hard time finding any reason to not like this approach. The attorney also advised that if something happens in the meantime, like a loss of income, we could convert to a 7. Is converting really that easy? I thought a conversion to a 7 would be granted only in extreme cases? Or am I confusing that with a *dismissal* of a 13? Also, how do attorney fees then get handled with a conversion? So many questions that I didn't ask because I was to surprised to think clearly!

I honestly didn't think we could go with a 13 and am now kicking myself for not studying up on it more. I've only been reading up on chapter 7's.

Is it really possible to have a 13 plan with payments only going toward our mortgage and cars for the first half of the 3 year period? And the trustee and attorney of course. And we aren't even behind on our mortgage and car payments! I thought we would have to be behind in payments????

The attorney also said our trustee would let us keep our tax return in an amount equal to the child tax credit! We have 3 kids!

I am so liking this! But like I said I know nothing about 13's. Can you all tell me what you think about this? I'd really appreciate it!

One last thing. Isn't there a difference in how long a 13 stays on your credit report as opposed to a 7? Isn't it much shorter? I really don't care about that part, I'm just curious.

TIA!

[BKman]

I have read that the normal time for both is 7 to 10 years. Sometimes the 13 is off in 7 years. I'm going with a 13 now to stop the stress and start moving forward. If at some point in the future I have to, I will convert to a 7. From what I can tell it can be very hard to save money in a chapter 13. My house is not part of the BK and I will make the payments myself.

Doing the math it looks to me like the time it takes the BK to get off your credit starts at your discharge.

Chapter 7: 3 - 6 months to discharge off in 7 to 10 years (7 to 10 years)
Chapter 13: 3 to 5 years to discharge off in 7 years? (10 to 12 years)

I'm sure others know more than me.

[lrprn]

1) we could file sooner (which would be a plus in our eyes to avoid the stress from creditors)

So living with your finances controlled by your trustee for five years is preferable to a few months of ignoring phone calls and letters?

2) our attorneys fees would be included in the plan so we wouldn't have to worry about that "bill"

True, and the retainer fee for a 13 will be about twice to three times as much as the retainer for a 7. The lawyer does stand to gain more financially if you file a 13 rather than a 7.

3) we could include our cars in the plan and pay only what's left on our car loans ( under $7000 ) over a three year period thus freeing up cash that we need for living expenses now.

True again. However, you can free up cash within 3-4 months by completely discharging all your unsecured debt in a 7 to put towards paying off your cars. Again, you are looking at an advantage that could be achieved in a much shorter time by filing a 7 rather than a 13.

He said our mortgage would be paid inside the plan because the trustees in our district decided some time back that it's better that the trustee pay the mortgage each month so the debtor cannot fall behind in payments.

Yes, and your trustee will gain the % of your district's administration fee for paying your mortgage for the next 3-5 years - something you can do yourself for free. In other words, let's say your mortgage payment is $1000 and your district's trustee admin fee is 10% - your trustee will get $100/month extra (and you will pay $100/month extra in your monthly Ch 13 payment over the life of your plan) for paying your $1000/month mortgage payment. Doesn't sound like such a great deal to me.

I didn't think we could do a 13. Not because we didn't want to but just because I didn't think we'd have the money for it.

If you don't have real disposable income - just manufactured disposable income by a lawyer manufacturing it by tweaking your Means TEst and Schedules - then you better have a REALLY good reason for filing a 13 rather than a 7. Typically this might be stripping a second mortgage from a house that is way underwater or something similar. So far you haven't shared a single compelling reason to file a 13 rather than a 7.

Is converting really that easy? I thought a conversion to a 7 would be granted only in extreme cases?

Oh, you can convert a 13 to a 7 if long-lasting, permanent changes happen in your income or expenses. However, keep in mind that the conversion may cost you additional money in attorney fees, though.

Is it really possible to have a 13 plan with payments only going toward our mortgage and cars for the first half of the 3 year period? And the trustee and attorney of course.

Yes, it's possible. However, in a 13 you are going to pay back some portion of what you owe your unsecured creditors. If you file a 7, your unsecured creditors will get nothing. That money will go into your pockets instead.

And we aren't even behind on our mortgage and car payments! I thought we would have to be behind in payments????

Nope, not true. Keep in mind that Ch 13 is filed for people who have too much disposable income to file a 7 or have incredibly compelling personal reasons that require them to file a 13 over a 7. Again, you haven't shared anything that normally fits in either category.

The attorney also said our trustee would let us keep our tax return in an amount equal to the child tax credit! We have 3 kids!

So what? If you file a 7 at the right time of the year, you can keep your tax return too, no questions asked.

One last thing. Isn't there a difference in how long a 13 stays on your credit report as opposed to a 7? Isn't it much shorter? I really don't care about that part, I'm just curious.

Typically a Ch 13 drops off a filer's credit report after seven years. However, you are right to not care about this. You should file bankruptcy because it's the best financial decision to make for you and your family in the long run. It's a major bullet to fire into your financial future - it's not to be done lightly.

If you can file a 7 and retain the assets you hope to keep, then 98% of the time filing Ch 7 is the right thing to do. Don't be distracted by the thought that Ch 13 is an easier way out than Ch 7 - trust me, it's not. The majority of us who had to file Ch 13 would have filed Ch 7 in a heartbeat if we could have.

[Flamingo]

I have read that the normal time for both is 7 to 10 years. Sometimes the 13 is off in 7 years. I'm going with a 13 now to stop the stress and start moving forward. If at some point in the future I have to, I will convert to a 7. From what I can tell it can be very hard to save money in a chapter 13. My house is not part of the BK and I will make the payments myself.

Doing the math it looks to me like the time it takes the BK to get off your credit starts at your discharge.

Chapter 7: 3 - 6 months to discharge off in 7 to 10 years (7 to 10 years)
Chapter 13: 3 to 5 years to discharge off in 7 years? (10 to 12 years)
I'm sure others know more than me.

Chapter 7: off your credit reports 10 years after filing date
Chapter 13: off your credit reports 7 years after filing date

[jdcat]

I have read that the normal time for both is 7 to 10 years. Sometimes the 13 is off in 7 years. I'm going with a 13 now to stop the stress and start moving forward. If at some point in the future I have to, I will convert to a 7. From what I can tell it can be very hard to save money in a chapter 13. My house is not part of the BK and I will make the payments myself.

Doing the math it looks to me like the time it takes the BK to get off your credit starts at your discharge.

Chapter 7: 3 - 6 months to discharge off in 7 to 10 years (7 to 10 years)
Chapter 13: 3 to 5 years to discharge off in 7 years? (10 to 12 years)

I'm sure others know more than me.

It does sound like it would be hard to doing any saving in a 13. Going with a 13 seems like it would be a rough road to go. You can't do a 7?

[BKman]

My income over the past 6 months puts me over the limit for my state by a few hundered. I also (some how) have about $300 free each month. I'm self employed so my income is all over the place. December was good to me but if over the next 6 to 9 months things don't get better I will see about converting to a 7. My attorney says that it's not that hard, I just have to be under the income limit. If I had a normal job with the same pay each month I would think about staying in a 13 but I heard being self employed and in a 13 is VERY HARD to do because you get paid one month and not the next. I would much rather do a chapter 7 and be done with this.

[BnkrptcyLwyr]

There can be very legitimate reasons to do a 13 instead of a 7, even if you qualify for a 7.

It's possible that even after discharging credit cards, that your necessary expenses still exceed your income. This would mean that you went from really negative, to only slightly negative every month on your budget.

At that point, when your expenses still exceed income, you will be putting yourself right back into a bad position - you don't have enough income to meet just the basic, necessary expenses.

In such a situation, it's good to consider a Chapter 13 because in a 13, we can rework car payments, strip second mortgages, reduce interest rates, etc. This may move you from a negative to a positive position, meaning that your income can now meet your expenses. Yes, it will also free up money for unsecured creditors, but that's not the worst thing in the world if it means you'll be able to afford your payments.

I had a client in the exact same situation. He was about minus $200 on his budget every month. But by reamortizing the car payment and stripping the second mortgage, he was able to afford a chapter 13 payment of something like $500/month (which also included the car payment). If he would've filed a Chapter 7, he would be negative 200 per month ... which would have slowly put him right back in the position he was before filing.

So yes, it does make sense to do a Chapter 13 over a Chapter 7. Sometimes, you are worse off doing a 7 instead of a 13.

[BKman]

As an attorney do you think its better sometimes if self employed & a stay at home parent to convert to a 7 to free up the payment?

[jdcat]

lrprn thanks for taking time to read my post.

True, and the retainer fee for a 13 will be about twice to three times as much as the retainer for a 7. The lawyer does stand to gain more financially if you file a 13 rather than a 7.

My husband and I talked about this when he got home from work and that's something we assumed would be true.

True again. However, you can free up cash within 3-4 months by completely discharging all your unsecured debt in a 7 to put to wards paying off your cars. Again, you are looking at an advantage that could be achieved in a much shorter time by filing a 7 rather than a 13.

Not so for us unfortunately. We aren't paying our unsecureds right now because we don't have the money to do so. That is one thing about the 13 that really appealed to me. By including our cars we'd have extra money to live on each month, and that is our main issue right now. We are truly broke and need help right now. It's hard to ignore that part.

Yes, and your trustee will gain the % of your district's administration fee for paying your mortgage for the next 3-5 years - something you can do yourself for free. In other words, let's say your mortgage payment is $1000 and your district's trustee admin fee is 10% - your trustee will get $100/month extra (and you will pay $100/month extra in your monthly Ch 13 payment over the life of your plan) for paying your $1000/month mortgage payment. Doesn't sound like such a great deal to me.

That would be the crappy part if we were to do this. I guess mortgages have to be paid through the 13 in our district though. It doesn't sound like a great idea for us in the sense that the trustees fee would then cut into the money we'd be saving by including our cars, but we'd have no choice in that matter.

If you don't have real disposable income - just manufactured disposable income by a lawyer manufacturing it by tweaking your Means TEst and Schedules - then you better have a REALLY good reason for filing a 13 rather than a 7. Typically this might be stripping a second mortgage from a house that is way underwater or something similar. So far you haven't shared a single compelling reason to file a 13 rather than a 7.

We don't have real disposable income right now, but in the not to distant future we will. Which is something that has been keeping me up at night as far as a 7 goes.

We've been planning to file a 7 in March. Three months later one of our cars will be paid off at $409 a month. Nine months later a 401k loan will be paid off at $300 a month. Six months after that our second car will be paid off at $215 a month and six months after that our second 401k loan will be paid off at $170 a month. That's over a thousand dollars of cash monthly that will be freed up not to long after filing and I've been very worried that this will be an issue for us. Plus I'll be back to work shortly after discharge (I've taken some time off work till June/July for an ongoing medical issue), so that will be another $600 a month we'll be bringing home. We can absord some of that with living expenses but not all of it and I'm feeling pretty positive the trustee will see all this cash in our near future and possibly throw a major fit.

That is why this idea of a 13 was appealling to me. I have this fear that we would be dismissed in a 7 for totality of circumstance. I don't know how far into the future trustees look for extra DMI, but if they look closely at us they will see lots coming.

[jdcat]

My income over the past 6 months puts me over the limit for my state by a few hundered. I also (some how) have about $300 free each month. I'm self employed so my income is all over the place. December was good to me but if over the next 6 to 9 months things don't get better I will see about converting to a 7. My attorney says that it's not that hard, I just have to be under the income limit. If I had a normal job with the same pay each month I would think about staying in a 13 but I heard being self employed and in a 13 is VERY HARD to do because you get paid one month and not the next. I would much rather do a chapter 7 and be done with this.

I agree with the wanting to do a 7 and just be done with it. That's what we'd like to shoot for but I think we have an issue that may be a problem. See my above post.

I don't see how one could stay in a 13 with unpredictable income. You might do ok one month but then the next have nothing to live on. Is your December income the only thing that's putting you into a 13?

[jdcat]

There can be very legitimate reasons to do a 13 instead of a 7, even if you qualify for a 7.

It's possible that even after discharging credit cards, that your necessary expenses still exceed your income. This would mean that you went from really negative, to only slightly negative every month on your budget.

At that point, when your expenses still exceed income, you will be putting yourself right back into a bad position - you don't have enough income to meet just the basic, necessary expenses.

In such a situation, it's good to consider a Chapter 13 because in a 13, we can rework car payments, strip second mortgages, reduce interest rates, etc. This may move you from a negative to a positive position, meaning that your income can now meet your expenses. Yes, it will also free up money for unsecured creditors, but that's not the worst thing in the world if it means you'll be able to afford your payments.

I had a client in the exact same situation. He was about minus $200 on his budget every month. But by reamortizing the car payment and stripping the second mortgage, he was able to afford a chapter 13 payment of something like $500/month (which also included the car payment). If he would've filed a Chapter 7, he would be negative 200 per month ... which would have slowly put him right back in the position he was before filing.

So yes, it does make sense to do a Chapter 13 over a Chapter 7. Sometimes, you are worse off doing a 7 instead of a 13.

I think what you've said applies to us BnkrptcyLwyr. We are short, for now at least. Being that we are short now a 13 could help us. And it wouldn't be the worst thing paying back some of what we owe.

I'd rather do a 7 and be able to keep the cash that will be available to us in the near future (see my post above), but I'm not sure that is possible. I would love to know how a case like ours is viewed by trustees. I'm very worried that filing a 7 would be seen as us trying to avoid paying our creditors because we are fully conscious of the money that we will have in the not to distant future. Filing a 13 would avoid us being accused of trying to get away with something that we aren't trying to get away with.

[BKman]

My wife cashed out some stocks in September that pushed her average up by $750 a month. If we didn't have that then a 7 would work out great. The look back was from June to November. I would have to wait until April to clear out her September stocks but then my December would put us back up even more. I know some people have said they went 6 months to almost a year without paying thier CC's but I don't want to take the risk. I think its best to get the ball moving and if by July my income is still down then hers should be normal and we should be able to convert to a 7. My risk will be my car (paid off) and her stocks ($3000). They may want them or ask us to pay to keep them.

[BnkrptcyLwyr]

My wife cashed out some stocks in September that pushed her average up by $750 a month. If we didn't have that then a 7 would work out great. The look back was from June to November. I would have to wait until April to clear out her September stocks but then my December would put us back up even more. I know some people have said they went 6 months to almost a year without paying thier CC's but I don't want to take the risk. I think its best to get the ball moving and if by July my income is still down then hers should be normal and we should be able to convert to a 7. My risk will be my car (paid off) and her stocks ($3000). They may want them or ask us to pay to keep them.

Just because your wife cashed out some stocks doesn't mean that you couldn't have deducted that right back out again as a "special circumstance" for the purposes of the means test. It's akin to a one time bonus, and I always subtract such income right back out again, with no hassle from the US Trustees.

[pcn]

We don't have real disposable income right now, but in the not to distant future we will. Which is something that has been keeping me up at night as far as a 7 goes.

We've been planning to file a 7 in March. Three months later one of our cars will be paid off at $409 a month. Nine months later a 401k loan will be paid off at $300 a month. Six months after that our second car will be paid off at $215 a month and six months after that our second 401k loan will be paid off at $170 a month. That's over a thousand dollars of cash monthly that will be freed up not to long after filing and I've been very worried that this will be an issue for us. Plus I'll be back to work shortly after discharge (I've taken some time off work till June/July for an ongoing medical issue), so that will be another $600 a month we'll be bringing home. We can absord some of that with living expenses but not all of it and I'm feeling pretty positive the trustee will see all this cash in our near future and possibly throw a major fit.

That is why this idea of a 13 was appealling to me. I have this fear that we would be dismissed in a 7 for totality of circumstance. I don't know how far into the future trustees look for extra DMI, but if they look closely at us they will see lots coming.

The above sounds like all the more reasons to file 7 - in the near future after discharge you will be in all the better financial position. I'm interested to hear from the experts why you couldn't do a 7, or why a 13 would be better. As to the extra income from going back to work, I would think that wouldn't be a consideration since that future income is not guaranteed.

[jdcat]

I want to file a 7 but am trying to remain open to any possible outcomes. The reason I took this attorneys advice seriously is because he's been doing this for over 40 years. I'm going to call him and ask him to go over this with me again to try get some clarity on this future income we have coming in.

If we can file a 7 despite the future available cash we'll file a 7 in a heartbeat. I'm just reallllly nervous. I remember reading about a case somewhere where a man's case was dismissed because of 401k loans and their impending payoff date being not long after discharge.