Justbroke's Chapter 13 Rant

[justbroke]

I'm starting to believe, after the last 6 years looking at this, and having been in a Chapter 13 for almost 2 years (discharged as a Chapter 7), that some attorneys and debtors enter Chapter 13 plans that really aren't feasible.

Sure, on paper it looks like you add up income, subtract expense, and come up with a disposable monthly income (DMI), but that number is static, while life is dynamic. If the Chapter 13 Plan of Reorganization is not done correctly or the debtor and attorney have forgotten expenses, the debtor ends up with absolutely NOTHING at the end of each month. You can easily do the math as to why this happens: the debtor surrenders all the disposable income, so the debtor has whatever the expense amount from the Means Test (and/or Schedule I/J), with any unforeseen expense wreaking havoc.

In any given month, if any single expense increases and all else remains constant, BOOM, you are already in trouble.

This is why the expense calculation is the single most important part of planning a Chapter 13 and coming up with the Chapter 13 Plan! You miss one expense on the Means and Schedule I/J and you now are struggling. There should be room and cushion in those numbers. When creating your plan, you should not be penny pinching! (Note: I explain my penny pinching concept later. There are some areas where you could do this and certain areas you should never do this, in my opinion.) If the IRS allows $1,400 a month for food and you think your family of 5 doesn't need that much... you just hurt yourself by putting $900/month on your Schedule J! If the price of Milk goes up (seems constant) or other product prices increase, you have severely affected the ability to feed your family. (Not to mention other indirect costs like gasoline, which is going up again.)

In a Chapter 13, every budget item is dependent on the other budget items! What do I mean by that? If you have $200/month for gasoline, and gasoline goes up and you're now paying $250 a month... where does that extra $50 come from? If your food budget is already "tight", milk went up, you're overspending on food (that $900/month we mentioned above), where is the money? Now you need four new tires on your car and have already been robbing Peter to pay Paul... where does that money come from?

Penny pinching should be done properly. The Schedule I/J in a Chapter 13 is not the time to go really cheap! Sure, some belt tightening may be prudent in some categories, but not on life essentials. For example, taking your entertainment amount and tightening is fine, but taking your food allowance is not, to me. That's my theory and I'm sticking to it. Some attorneys actually insist that you do belt-tightening on all the expenses! How in the world would anyone survive a Chapter 13 that way?

Of course, sometimes this is not the Plan but more a Debtor issue. There are debtors that refuse to or are incapable of budgeting. If you can't do this (budget) then you are doomed to fail. A perfect example relates to energy costs. Here in Florida, my electric bill is twice as high in the summer months than in the winter months. If I spend the "excess" money in the winter, when the bill is low, then where is the money in the summer when the bill is double? If I can't save and budget the difference, then I have created a problem within the first year of my multi-year Chapter 13 plan.

A Chapter 13 is a very powerful tool if you plan and budget correctly.

(Please remember that I'm not an attorney and this is not legal advice. Just the rantings of a seasoned debtor having experienced both Chapter 7 and Chapter 13. Also, please note that dollar amounts used in this posting are for illustrative purposes only. They may not reflect the USTP Expense limits or IRS expense limits.)

[Sammie]

JB Thank you so much for your insight. I wish I had found all of you a yr. before we filed. Chap. 13 is a learning process, & you have given some great tips for those who come in at the beginning. Sammie

[Kricklet87]

This is exactly what I did wrong. I filed in April, for electric bill I put down 75 dollars, because that is how much my electric bill was that month. I didn't think about in the dead summer when its 100 degree's or the winter when its 30 and my electric is 4 times that amount. For clothes, I put 25 because I hate to shop and normally do not go shopping, but I swear I haven't bought even a pair of socks in the last 5 years! For food, I put 100/month. I had just left an abusive relationship and I didn't know how much money I was going to need for groceries. I thought that would be plenty. I love when I have enough money to buy ingredients for a casserole because I can make it last for 3-4 days. I totally screwed myself on so many levels but I didn't know any better. I didn't know these forums were out there, and its not something that you want to broadcast to get advice. I wish my attorney would have questioned my amounts because now, I normally have 20 dollars (literally) to last me from paycheck to paycheck (paid bi-weekly). If anything unexpected comes up, I am screwed. Thank God for my family, I don't know what I would do without them. My kids help me when they can, but they grew up very privileged and this is hard on them to grasp. I do budget, and I pay every bill before I spend anything on groceries or anything else. I was late on my phone bill one time, very early in my bankruptcy, but since everything is paid on time. I will literally go hungry before I let my bills slip away from me again. Three and a half months to go. The first thing I am doing when I am done is going grocery shopping!

[BNKRPTinNC]

Excellent rant, if you want to call it that. Much prefer "Justbroke's Chapter 13 wisdom". You can't stress enough the importance of going into this with some kind of preparation. We were fortunate in having found a knowledgeable/experienced attorney that made our plan feasible. If you don't get informed you had better hire someone that is. The war is won when you go into it with the mindset of success and how to achieve it.

[jange]

JB, great words of wisdom for anyone planning on entering a ch13. My attorney did a pretty good job of giving us some wiggle room. Almost 4 1/2 years in, some of my expenses have gone up and others have gone down. I've gotten raises, my husband lost his job. It is so hard to see 5 years in the future.

[dmc-2008]

Great rant. I just can't seem to relax and feel like I will be ok, I worry every day! Did they add the cost of stress and worry to the budget? I just hope hope hope that my payment doesn't increase, that my health holds up, that there are no catastrophic expenses coming down the pipe!

I really think that a 5 year BK is not for wimps. I think I could have emotionally handled 36 payments easier. I would be half way by now and that would be a relief. But I have a year to get to that point !!!

Gah!

[sophieanne]

Hi Justbroke,

This is an excellent post that all new filers can learn from (before they file). It is one of the times though that I can honestly say I am happy for the attorney I hired. I was one of those people who wrote a budget that asked for very little because I wanted to look good to the trustee. Fortunately my lawyer reviewed my numbers and made changes throughout to ensure I had more money to use/keep then put into the payment. With this we're able to keep up with the little surprises that come up (gas increase, heat increase in he winter, etc.). My attorney has a good relationship with the trustee and everything was approved as submitted. Just wanted the opportunity to voice my gratitude for the attorney we hired and to thank you for your post that will help save grief down the road. Thank you....

[SweetGeorgia]

Justbroke, that's not even a rant so much as an honest statement of facts. I agree 100%. Certainly Chapter 13 debtors aren't doomed, but it has always bothered me that Chapter 13 plans include no automatic buffer. Things change. Things go wrong. The planning ought to account for that.

And of course people's ability to budget comes into play, but folks filing bankruptcy have little power (that is, you take the deals you can get when you're poor). I would actually like to learn more about the history and origin of Chapter 13 bankruptcy. I remember reading somewhere that it originated in the South, where it is more popular. I wonder if there is a political or class element there. I would like to learn more.

[isabella]

You are 100% correct. I was VERY fortunate to have a great attorney which was adamant that I take the full amount for everything. I told her, but I don't go out so we don't need entertainment expenses, etc. I am glad she prevailed! She even added in pet costs and vet visits etc. My 13 will be over in December and thanks to my attorney I have had extra money to allow for all those unforseen events in life. It hasn't been easy, but I know it could have been much worse.

[justbroke]

I found this from a seasoned bankruptcy judge making a ruling on a Chapter 13 "relief from the automatic stay" and "objection" to confirmation of plan. He has sat on the bench for over 14 years and has reviewed, in his words, "literally, thousands of chapter 13 plans, and thousands of schedules I and J".

But regardless of what the debtor's schedules show, the fact is that debtors' financial prospects are fragile, at best. Problems occur during a chapter 13 case. Anticipated overtime pay does not materialize, one spouse loses a job, one or both spouses are laid off, etc. In addition, chapter 13 plan payments must come from "disposable income" which means that they are also dependent on accurate budgeting and control of a debtor's expenditures. Those budgets are often more aspirational than realistic. The anticipated costs of living are usually unrealistically low and usually fail to make any allowance for foreseeable extraordinary expenditures and contingencies such as home and appliance repairs, automobile repairs and replacement of tires and batteries, increases in gasoline prices, unusual unanticipated medical bills, increases in property taxes and utility charges, etc. Variation in income and unanticipated expenses are certain to occur in each household over the 5 year period that a chapter 13 plan usually covers. This variation in income and this unrealistic budgeting lead to default in about 65% of cases.

Judge W. Steen, USBC So. District of Texas
(emphasis added is mine)

[tigergem]

That is a really good post. I think there is leeway in there, because nobody would make it to discharge if it weren't possible. Debtors HAVE to adjust their mindset to making success of the bk a priority. That might far easier said than done if there are children. But keep in mind, the Chapter 13 has a bit of flexibility. I found my court and trustee most accommodating of my frequent modifications for these purposes of needs/cost adjusting. When I had more disposable income, I paid more into the plan. As a result, when I ran into trouble, I was able to ask for a moratorium on payments. I just crammed as many square pegs into round holes as I had to in order to make it work.

[tobee43]

what an excellent post! jb your insight and knowledge is remarkable!

[BKAttyMI]

Good thoughts, just remember, Chapter 13 plans are almost always modifiable to keep up with changes in your life and increases in the cost of living. Make sure you have an attorney that is willing to work with you to modify when necessary, many cases require multiple modifications to keep them going over the life of the plan.

[justbroke]

Good thoughts, just remember, Chapter 13 plans are almost always modifiable to keep up with changes in your life and increases in the cost of living. Make sure you have an attorney that is willing to work with you to modify when necessary, many cases require multiple modifications to keep them going over the life of the plan.

Exactly! What I have found from reading Chapter 13 debtor issues, on this site, is that most do not contact their attorney when things change. Many Chapter 13 debtors will struggle until they have depleted any savings, missed payments, and receive the infamous "Motion to Dismiss" for missing payments to the Trustee.

[tigergem]

My theory as to why the plans are so difficult is this: Constructing the plan is a "left brain" mathematical art form, and I think that most "right brained" lawyers don't have the left side math brains to pull it off. I figured out what I needed for my plan, initially, with less than 1% to the unsecureds and "worked" my budget to arrive at exactly that amount as "excess income". I guess I was lucky because my actual expenses were less than the standardized exemptions in the housing, medical, etc. areas where you are "prescribed" the amount you are allowed to use, so that is where my "cushion" came from (mostly). It just worked out perfectly, and so my plan allowed less than 1% to the unsecured, although they did get a lil more than 1% in the end because there were a couple of years, I just didn't feel like fighting to keep my income tax returns.

I think some of them don't realize that a "36 month plan" CAN BE more than 36 months (thereby reducing the amount to pay in each month), so long as it doesn't exceed 60. Also I don't think that people realize how relatively easy it is to modify a plan. I modified my 58 month plan approximately every 6 months to accommodate my constantly changing circumstances. When I was able to contribute more, I did. Because I did that, I was able to take a 4 month moratium on payments one summer when I had a bunch of stuff coming at me and needed a breather. I still completed my plan in 58 months. I communicated very clearly in my plan modifications what I was expecting to happen.

I paid the trustee FIRST, every month. If I needed to work anything else out, I normally could do that pretty easily. If something unexpected was coming down the pike, I still set that money aside FIRST, looked at the next 6 months projected expenses and decided if I needed to file a Modification. My trustee finally told me once that if I needed to skip a month and make it up the next month, that was ok, I didn't need to tell him that. He said he would wait 60 days with no payment received to file a motion to dismiss. I never needed to actually do that, but I did have a payment go missing in the mail once, and I think that may have been when we had the conversation.