Considering Chapter 13

[jdji]

My wife and I are considering chapter 13 bankruptcy and we are looking for as much information as possible before moving forward.

There are a few relevant issues that I have questions/concerns about:

1. Our income is currently at just above 70,000 a year combined. We both work full-time and we own 2 and 1/2 rental homes (one with a full mortgage that we barely cover with collected rent, another we own free and clear, but is in a poor part of town and which hasn't been paying us for approx 4 months. The 1/2 ownership rental pays just over $300 per month.

2. Our debt is at about $70,000 and includes 40,000 owed on an equity line of credit, 13,000 on various credit cards, 10,000 on a home improvement scam (solar water heater) and 5000.00 in medical bills. We also have about 2000.00 in debt on store based credit (home depot, best buy, etc). We are also facing a possible judgment against us that may be near 10,000 (it was civil case related to landlord tenant issues where our landlord kept our deposit and extorted us for 3000.00 extra- we lost initial judgment but have lawyered up and filed an appeal).

3. We owe approx 100,000 on one of our rentals (we have no equity in this home). We are open to losing this home if necessary.

4. I have school loans totaling 45,000, however, they are currently in deferred. I am on a leave from school and will be expected to pay approx 500.00 a month at month six of my leave ( I am taking one year off). I am expecting to have to pay for approx six months until I go back and receive additional deferment.

5. I will be going on internship in approx a year and a half, and we expect a significant decrease in income during this year (will likely have to move out of state- unsure job situation for my wife and I)

6. My wife and I seem to make a good amount of income in relation to our expenses, however, we are always broke and struggling with financial stressors that continue to arise unexpectedly (med bills, car repairs, rental expenses, etc). On paper we have a decent debt/income ration, however, we keep falling behind. We have no savings whatsoever.

From my own research, we failed the means test and do not qualify for a Chapter 7. While looking at Chapter 13, I noticed that our "disposable income" is pretty darn high, at least on initial review. I am concerned about the expected changes in income that will be coming up (a 50-60% decrease in income for at least a year).

So my questions for those who have waded this far include:

How is a home equity line of credit addressed in a chapter 13?
What happens to our mortgaged home (this is what the equity line is attached to as well)?
What happens to our owned and half owned homes?
Might debt consolidation be more appropriate? I have heard horror stories and am concerned about being scammed.
How much "baby-sitting" will we endure if we file 13, what happens with our changing income?

Any other insights or advice is very welcome.

Thanks in advance.

[LadyInTheRed]

Welcome to BKForum!

Start making appointments for free consultations with bankruptcy attorneys. Your case is not simple, so you should consult with several attorneys and make sure you find one that is experienced and competent.

Is it possible that more than half your debt is due to your rental properties? If so, you may be able file a non-consumer Chap 7 without having to pass the means test. Ask attorneys about that in your consultations.

Now for your specific questions:

How is a home equity line of credit addressed in a chapter 13?

It's a secured loan and treated like any other secured loan. A HELOC is simply a type of mortgage. If the property that secures the HELOC is worth less than the balance on the first mortgage, you can strip the HELOC in a Chap 13 and it will be paid as unsecured debt.

What happens to our mortgaged home (this is what the equity line is attached to as well)?

You can keep it if you can afford to keep it. If there is equity in the home that exceeds the homestead exemption in your state, your plan needs to pay to unsecured creditors at least an amount equal to the non-exempt equity. This is often referred to as the Chap 7 liquidation test. A Chap 13 plan must pay unsecured creditors at least what they would receive if you filed Chap 7 and your non-exempt assets were liquidated. Also, if you are behind on your mortgage, your plan has to pay the arrears in full.

If you don't want to keep your home, you stop making mortgage payments, surrender it in your BK and live there for free until the bank forecloses.

What happens to our owned and half owned homes?

It depends on whether there is non-exempt equity in which case the Chap 7 liquidation test applies. If you can't pay enough to your plan to cover non-exempt equity, you would have to sell your interest in some asset to satisfy the liquidation test. You may also be able to surrender non-exempt assets to the trustee, but I'm not certain if that is an option in a 13. Besides, you are likely to work to get a better price than the trustee. If the rentals are not paying for themselves, you will probably have to surrender them in your BK. Your Chap 13 budget will not allow you to sink money into the properties.

Might debt consolidation be more appropriate? I have heard horror stories and am concerned about being scammed.

Debt consolidation is not likely to be a better option. Many BKforum members tried that route only to later regret not filing BK sooner. But, you may want to consult with a reputable company and see what they can do. Just be sure you understand any proposal they make and what the risks are.

How much "baby-sitting" will we endure if we file 13, what happens with our changing income?

It depends on your trustee. Most common is that you have to send your annual tax returns to the trustee. Some trustees don't even require that. You may have to report increases in income, especially if they are over 10% and that could result in a higher plan payment if you don't also have increased expenses. But, in some districts you don't even have to report income increases. If your income decreases and you can't make your plan payment, you would file a petition to modify your plan or convert to a 7.

I've been in a Chap 13 for over 2 years. I have had 3 increases in income and 4 bonuses. I report them to my attorney every time and he says "Congratulations. Keep making your plan payment." I don't have to send copies of my tax returns or any other info to the trustee. I hear from my trustee once a year when she sends out an annual accounting of payments she has received and what she has disbursed to creditors. I make my monthly plan payment and live my life as I always have, except I no longer use credit cards and I am not struggling to make credit card payments every month.