Chapter 13 Cash,Income or Asset Changes

[hjk4300]

Chapter 13 Questions:

We have 2 income sources. One is my W2 wage-earning position. The second is a very small family business.

Our “problem” is that the small family business has suffered a catastrophic loss of revenue in May 2010, and we can no longer meet our financial obligations. We are considering Chapter 13 bankruptcy.

Our unsecured debt is $42,000.

A typical Chapter 13 worksheet shows excess income which would allow a $400/month payment to creditors. Over 5 years, this would equal $24,000. The debt reduction would be $18,000, if the plan was approved.

In our case, the same worksheet indicates we can continue to operate a small family business, as well as keep a small boat we own.

Assume the plan is approved. Here are some questions:

1. Our quest would now be to pay of the plan early. Is this allowed?? Or, since we could pay it off early, does that mean they will just take more money that the originally planned $24,000?

2. We could sell the family business, once in Chapter 13, for a sum of $12,000. How would the trustee handle this? Refer to question 1. We could give him the money, but our income would be reduced.

3. We could sell the boat for a sum of $12,000. Is that our money, since the boat was exempted in the agreement, or does it belong to the trustee/creditors? Refer to question 1.

4. Biggest question:
Our mortgage holder (BAC) says they are unable to help us with any existing programs. So once in Chapter 13, we will stop paying mortgage. If the trustee knew this – how would they treat the money?

Truth is we would want to apply it to the trustee’s debt. But would that mean (refer again to question 1) that the plan amount is affected?
HK

[justbroke]

1. Our quest would now be to pay of the plan early. Is this allowed?? Or, since we could pay it off early, does that mean they will just take more money that the originally planned $24,000?

It would cost 100% of the allowed unsecured claims, plus the administrative expenses in the plan.

2. We could sell the family business, once in Chapter 13, for a sum of $12,000. How would the trustee handle this? Refer to question 1. We could give him the money, but our income would be reduced.

You cannot sell any asset without the permission of the Trustee. You would need to turnover any proceeds to the Trustee and that would go to the unsecured creditors. If you did this, your plan base would then be $36,000 ($24,000 + $12,000).

3. We could sell the boat for a sum of $12,000. Is that our money, since the boat was exempted in the agreement, or does it belong to the trustee/creditors? Refer to question 1.

Yes, it would be your money, but you should make sure the Trustee understands that you are doing this. If you're trying to pay off early, remember, you'll need to pay 100% of allowed unsecured claims.

4. Our mortgage holder (BAC) says they are unable to help us with any existing programs. So once in Chapter 13, we will stop paying mortgage. If the trustee knew this – how would they treat the money? Truth is we would want to apply it to the trustee’s debt. But would that mean (refer again to question 1) that the plan amount is affected?

The money would go back into the plan, but you would be allowed a Rent and Non-Rent expense in order to have somewhere to live. IF you have two mortgages on the property, you may be able to do a lien strip and stay in the home!

[hjk4300]

Very clear, thank you.

We're too old for this (60). If we close the family business, we can look at Chapter 7. But due to our age, basically, if we lose our current, though sadly upside-down home, I doubt we shall ever own another. It's hard to decide what to do. Re: the lien-strip, the 130k second is still secured - by just $10k.

If a close relative of yours had these considerations (I know they are very briefly described here) - what would your feelings be? I'm just interested in your opinion, and not seeking legal advice from you.

[justbroke]

I'd re-value the home. A professional appraisal (about $250-$299) should tell you exactly what it's worth. I don't know what you're going by, but since the thought is that it is about $10K over the "balance" on the first mortgage, then that's pretty close. Close enough to take a closer look.

I'm guessing that you are over-the-median income, since you talk about a 5 year Chapter 13 plan. There's much more that goes into a plan than maybe what you have discovered through using the on-line tools, but I'm unsure how thorough you have gone through your allowed expenses. Take every expense that you can, including business expenses (up to the amount of business earnings).

If your disposable income is at $400/month, I think you can get that down. You can start or increase your contributions to a retirement plan! Since you are rapidly approaching retirement age, you are allowed to even put more into it. I could easily see you putting another $300/month towards requirement and qualifying for Chapter 7. Even if the Trustee complains about the amount, there is an exception for those over 55 years old!

Additionally, the home is going to be a concern. If the 2nd mortgage is a HELOC of some sort, you might be able to negotiate a payoff with them after your case is discharged in a Chapter 7. You "might" be able to settle and get the satisfaction of mortgage for only 10% of what you owe. It could be worth a shot, but in the long run, being $120K underwater is not a good thing... unless it's a $1,000,000 (million dollar) home.