Unsure whether to wait 3 years for Chapter 7, or file Chapter 13 now

[bankadamus]

Hi everyone,

Unfortunately I am considering bankruptcy.

I have talked to a few lawyers for initial consultations but they all seem to want me to rush into chapter 13 as the only option.

Some stats about me:

Filed for Ch 7 ~ Nov 2012, got a discharge (about 20-30K of debt discharged, but still stuck with 50k student loans)

Fast forward to today:

Chapter 13 Plan
=============

I don't own any assets. I rent. I have a high income (though not so unusual for silicon valley), and a lot of debt.

I live in California / Silicon Valley:

Income: 140K
Annual Bonus: 0-15K

Unsecured Debts: 80K
Student Loans: 50K
Car Loan: 35K
--------------------------------
165K debt total

To get an idea of what life might look like under a chapter 13, I filed out some forms:

Schedule I (Income): My total monthly income after all mandatory deductions is $6800
Schedule J (Expenses): I estimated this to be at $4200 (includes stuff like rent, food, etc)
Monthly Net Income: $2600

My understanding is that my payments in a chapter 13 would be (165 / 60 = $2750).... I'd probably have to reduce food or some other category to meet this.

The success rate for a chapter 13 is around 33% and it lasts for 5 years...

Under Chapter 13, I would potentially be debt free in June 2022.

I *might* have been able to save 70K in retirement accounts by this time (if I am allowed to contribute to my 401K during chapter 13).

There is also the possibility that I lose my job and then all my chapter 13 payments will have been a waste since I'd end up having to wait and file chapter 7 anyways.

I feel like under this plan, for 5 years, I'd be extremely miserable and likely lose my job anyways (I work in an industry with high chance of layoffs every year).

Alternate Plan
============

I was wondering if it would be better to simply stop paying all creditors (except student loans). I am eligible for Chapter 7 in roughly 36 months.

All excess monthly income will be socked away into 401K and IRA accounts, and paying off student loans.

I could maybe last 6-12months before being sued for judgements on the unsecured debts (capital one is one of the creditors, they are ruthless from what I hear).

At this point, I would either have to take the wage garnishment (they can take 25% but I might lose my job due to multiple garnishments) or file chapter 13 to stop wage garnishments.

I could also hire a consumer debt attorney to try fight the judgements (prove the debt, the interest, etc, sue for FDCPA violations etc).

During this time, I'd use all extra income to pay off my student loans (remove 50K of burden).

I'd save up enough money to live off for 6 months and go travel or work on my own business (or both).

In 2020, If I am still employed, I would quit or ask for a unpaid leave of absence 6 months prior to Nov 2020.

Then I'd file for chapter 7, discharging the 80K of unsecured debts (by this point, this will probably be 150K+ of unsecured debt due to fees, penalty, interest, etc).

Under this plan by Nov 2020 I would have:

* Saved 120K in protected retirement accounts by redirecting what I've currently been paying towards minimum credit payments.
* Have paid off all student loans (50K)
* With exception of 1 yr remaining on the car loan, DEBT FREE as of March 2021 once discharge granted.
* Use 722 Ch 7 Cramdown rules to save $$$ of my car loan, potentially ~5K in savings

Is there anyone who could offer suggestions or "non-legal" opinions as to what you'd do in this situation?

I'm pretty torn and have to decide soon on whether to file chapter 13 within the next few days or go with the alternate plan and prepare to fight it out.

I feel like under the alternate plan I come out farther ahead than doing a chapter 13... what do you think?

[justbroke]

I would simply file. You have no option but Chapter 13 until 2020. Could you survive that long without judgments? Maybe. Is it the best course of action? I can't answer that question because it is entirely speculative.

Your Chapter 13 payment would be your secured debt service payments (car) plus attorney and trustee fees. It would not be simply "165/60" unless you're required to be in a 100% plan. Thus, no need to reduce food expense.

It reads to me that you're already set on doing the "let's see what happens" route and not filing Chapter 13. I say that because you seem to have spent a lot of effort on the planning sequence and how long you could hold out, as well as save during this period of time.

I personally do not like scenarios that are comprised of a bunch of "what if" scenarios, pixie dust, and a lot of hope.

What's really wrong? Is it your spending lifestyle? Where is the money going?

I calculate your tax burden (**mandatory payroll deductions** -- taxes) at less than $4,300 a month. That leaves over $8,200/month for expenses. Even with USTP allowed rent of $2,292/month, $459/month allowance for non-rent expense , allowance of $639/month for living expenses (food, clothing, necessary, misc.), $750/month for medical insurance (estimated), an allowed 6% contribution of $750/month for 401(k), $489/month allowance for car payment, $261/month allowance for car operating expense, student loans don't count, and throwing in $550 in miscellaneous expenses, I still calculate over $2,000/month in "disposable monthly income" (DMI). ("allowance" means within USTP guidelines)

If your DMI is $2,000 then you'll pay your car payment (re-ammortized to 5 years, approx $575/month) plus $2,000/month. Let's assume it will be $2,575/month over 5 years.

(I am in the $150K+ income range.)

I take "some" umbrage to you wanting to divert money to savings (as much as $120K) while knowingly hindering, delaying or defrauding creditors. I don't even know how you can put that much into a 401(k) in 3 years, as there are limits (unless you're going to put in taxable earnings). Maybe I am wrong, but it seems like you want the cake, the frosting, and the entire bakery.

If you wonder why my post may seem a little unsupportive of your "alternate" plan, it is first what I read between the lines, and then what you wrote;

In 2020, If I am still employed, I would quit or ask for a unpaid leave of absence 6 months prior to Nov 2020.

That, to me, is specifically gaming the system. I understand bankruptcy pre-planning but I also understand delay. If your pre-planning causes some delay and you benefit from that financially, then fine. The umbrage comes where you game the system to maximize your upside specifically by hindering the creditor (or delaying their inevitable judgement) in order to have the best upside. I think you thought about this a lot and your post is a little too polished. Combine that with purposefully quitting work or taking an LOA so that you can file Chapter 7 makes this untenable for me.

As one judge wrote, bankruptcy is designed to give deserving debtors a fresh start; not a head start.

[bankadamus]

Thanks for the detailed reply!

I am going to see a BK attorney this week to find out more about Ch 13. From other attorneys I have done initial consultations with, it seems like I would only qualify for a 100% plan. Going in person this week for a more in-depth consultation with another attorney who might be able to lower that to a less than 100% plan.

As for the 401k savings, I can save 18K a year of my own money, and my employer will put in 7K for a total of 25K/yr. Additionally, I can put 5K into an IRA a year (although with after-tax contributions, so I don't get any tax benefits, but the money would be in a protected account). Employer contributions don't count towards the personal 18K 401k yearly limit.

I have been making payments on these debts for about a year and a half and can no longer continue to support the debt snowball. Balances aren't going down, all my extra money every month is evaporating due to high interest rates. I am stressed and cannot continue to live month to month for the sole purpose of paying back creditors.

I think your calculations are off when you mention $8200/month (I am guessing you are factoring in the bonus, which is not guaranteed every year). I've got it written down as $6800 after all mandatory taxes/deductions plus a 5% 401k contribution factored in. So $6800 for rent, food, transportation, debt, etc. every month (in one of the highest cost of living areas in the USA).

I'm not trying to defraud my creditors (otherwise why waste 1.5yrs - 2yrs paying them religiously), but I am trying to soften the financial blow and lookout for myself, as I'm certain the creditors don't really care what happens to me.

I am not sure what you mean by student loans don't count -- I assume these would have to be paid in a chapter 13 along with the other unsecured debts? I am most worried about the student loans, since they almost never go away (hence why in my "alternate plan" I would want to pay them off as quick as possible).

My "alternate plan" is all just brainstorming at this point. I am trying to consider alternatives to chapter 13 and that was the best I could think of as an alternative course of action.

Open to any other suggestions, thanks!

[newlife13]

Your alternate plans sounds insane. You'll never make 3 years without judgements and wage garnishments. You'll be sick with worry for the 3 years. I'd consult an attorney that specializes in Chap 13.

[bankadamus]

Update:

I decided to go in person to a bankruptcy attorney (I've spoken to several, settled on the one).

I was pretty much told the same thing (my "alternate plan" is insane, I'd probably die from stress, etc.)

I decided to move forward with the Chapter 13 filing. Unfortunately, it seems like I'll only qualify for the 100% payment plan, I also have no assets (just have the above median income).

Planning on submitting the filing around the middle of this month... anything I should watch out for / look for?

So far my attorney has advised me that creditors have X amount of days to submit their claims, and if they fail, then the debt is pretty much discharged (not sure what the chance of this is, but something to keep in mind).

I plan on keeping my car out of the 13 plan since it would be more expensive (considering the 8% trustee fee).

The one thing that has me worried is if I get laid off during the next 5 years...

I'm also going to throw in the student loans into the payments (and give the trustee 8%...) since I have some pretty high interest private student loans at 10%+ currently.

Now that I think of it though, I do have some public student loans around 2-8% interest... should those be included/excluded from the filing? I am guessing if student loan companies fail to submit a proof of claim, I'd still owe the debt. Thoughts?

As it currently stands, I will be paying back roughly 150K including the trustee's 8% fee over 5 years.

Any advice appreciated, thanks!

[Mmwhite022]

You can't pick and choose which debts to include in your bankruptcy. All have to be included and whether or not you can pay them outside of the plan is governed by your local bankruptcy laws. In my district, I am required to include my car and mortgage payment in the plan.