Is CH 13 better for the future than CH 7?

[erinmi]

I'm not sure where to put this and likely it has been asked before but I'm hoping for some input.

I posted earlier that my DH had an unexpected increase in income that could put us into a 13 instead of a 7 based on disposable income after expenses budget (Schedule J), even though we would still qualify for a 7 under the means test because we are under the median income. This will be offset a little bit because I am losing one day a week of work plus my free daycare due to some family stuff going on.

We also had some friends of ours who are concerned about us filing bankruptcy at all and want to help us sit down and figure out whether we can make it work without filing. Apparently one of their sets of parents filed several years ago and it caused a lot of trouble for them in terms of buying a house, car even though they paid on time, etc. after discharge. I think once they sit down and actually see our numbers, they may feel differently about our situation.

We currently have roughly $36K in CC/unsecured debt (current min payments $1500), $32K in student loan debt (in forebearance), $24K in auto debt (payments $584/mo), and $38K from a short sale on our old home (not paying on at all because they wouldn't work with us on a payment less than our old mortgage payment of $852/mo!) for a grand total of approx. $130K.

My best guess is that our disposable income could be as much as $500/mo if we left our budget as is. I went low on what I gave him for our budget initially, so we could increase some things without it being over the top.

But I've heard that it doesn't matter whether you file CH 7 or CH 13, it is all the same on your credit report and when you apply for credit in the future.

So my question is:

Are there benefits to filing a 13 over a 7?

Or should we attempt to not file at all now and see if we can make it work with the new income?

I'm in a dither about it all!! We did come up with the $1000 to file and we meet with our attorney next week on the 27th. I did talk to his assistant and she seemed to think that we would have to switch to a 13 with the new income....

[Dirk Squarejaw]

Depends on the situation. Some say a 13 looks better since it drops off your reports sooner and that it looks good that you worked through a plan to at least pay off some of your debt. However, with a 7 you can start rebuilding very shortly after you file. Some people have decent credit scores just months after they file a 7 if their score wasn't it the toilet to begin with. It takes some work cleaning up your credit reports making disputes and working with the 3 agencies but is worth the time and effort.

I think most people on here will tell you to do whatever you can to pull the chapter 7 if you can. Make sure your lawyer has every little bit of info and that you are including everything you may possibly spend money on throughout the upcoming months. Car repair items (tires, oil changes), hair cuts, tobacco products if you use them, etc. All these little things add up and can reduce your excess money each month. Maybe you can still pull off a chapter 7 and get out from under all your dischargable debts now instead of 3-5yrs from now.

[erinmi]

It has been my line of thinking that if we are going to do this, we want to do a CH 7.

I've come up with a couple things we left off the budget, so hopefully between those and my lower income, we'll be able to work it out.

Otherwise, if any one wants to chime in about CH 13, I'd love to know if there are any "benefits" in terms of receiving future credit (i.e., buying a house).

Thanks

[Bandit]

The benifit in 13 is you get to keep everything or most everything (& kind of get to work out a nice deal). Then you make lump sum payments back at a small percentage & no interest of what you would normally have paid & if you have things worth keeping like equity in a home or whatever, though I would not expect a break on your mortgage payments like with the unsecured debt. & that goes on for about 5 years give or take...

In a 7 you just liquidate & give everything you have away except for what you are exempt in that state- but sometimes you can reafirm some loans & still keep things even if it goes a little bit over the exemption allowed.

It also depends on how much money you have at the end of the month after paying expenses & sometimes you don't get a choice on what you want to file, they try to push people into one or the other.

For example if you have 500 left at the end of each month you will most likely get pushed into a Ch13. If you have less than 100 left at the end of the month you cannot qualify for a 13, or so that is how I always see it written.

Is all that correct, someone else?

[woeisme]

I am in a CH 13 right now. I would definitely shoot for a 7 if at all possible. Be very firm with your lawyer that you want him/her to do everything possible to try to get a 7 instead of a 13. If you don't have assets to protect, which it sounds like you don't from the fact that you don't have a house and owe on the cars, there is probably no benefit to you to try a 13. You will be locked in for 36 months (because you are below mean income, I think you can go for 36 instead of 60 months) making payments to a trustee, versus getting your unsecured debts erased in a 7. Also, depending on your local trustees reading of the new law, you may not be able to pay on those student loans for 3 years or more, so while they are in forebearance now, they will be accruing interest for years to come, leaving you with more non-dischargeable debt when you end the CH 13. Your lawyer should base your budget off of reasonable expenses, not the bare bones trying to get by and pay off as much as you can expenses! All those dental and medical things that you haven't been taking care of, your clothing allowances, personal care items, etc, should more than cover that $500 difference you are currently seeing. Add them in, and look at the IRS standards to see if you are claiming close to the max on all the areas like food, transportaion, etc. On the schedules is no place to be economizing and going "bare bones" on the budget! Add in EVERYTHING!!! Tell your lawyer you want to try for a 7, and if and only if the trustee objects, convert to a 13!!! You are making below the mean income, for goodness sake try to use that to your best advantage possible. Also, the courts do a 6 month look-back on income, so that your hubby got an increase that you may be offsetting with a decrease may not be as important as you think, as long as you file soon.

As to your buddies, some people have moral objections to BKs. That's their perogative, but don't let that become your issue, that you feel pressure by them not to file. Maybe their parents had problems afterwards, maybe not, maybe it's all a line of hooey they are using to try to scare you against BK. Ask them when did their parents file??? Getting credit after BK used to be very difficult, that is no longer the case today. Unfortunately, credit is still way too easy to come by, which is what helps people bury themselves in debt in the first place. Yes, morgages may be harder and harder to come by now with the morgage crisis. But realistically, when do you plan to buy another house? If it's not for several years, I don't think I'd worry about the BK. As long as you can start saving after filing, enough to get a decent downpayment as opposed to the 0% down type morgages people were getting recently, you will be able to buy a home in the future.

Good luck!

[FreshLikeADaisy]

I was going to post but woeisme said it way better than I would have. 100% agreed with her (his?) post. If you can get a 7, get the 7. If you are below the mean you do not even have to do the means test, only Schedules I & J on Form 6. Good luck!

[erinmi]

Thanks!

We are pretty confident we can make our budget expenses look higher. Although, our lawyer's assistant wasn't sure if we could "get away" with listing student loan payments since we are not paying on them at the time of filing, but she recommended we talk to our lawyer about them at our meeting on the 27th.

I just want to get this filed and over with, so we can move on!!

[biotechsolution]

you do realize the student loans won't be discharged in either BK.

I agree with the previous poster, if you below the mean, there is no reason to file a 13 unless you have something that you need to save.

You can adjust your numbers to use up all your excess disposable income.

[erinmi]

you do realize the student loans won't be discharged in either BK.

Yup.

What I'm trying to figure out is why they don't allow you to build any "savings" into your budget. I get that they want you to pay something back if you can but shouldn't they allow you to build a safety net, so if something bad/unexpected happens you have resources?

It just seems strange and goes against good financial planning (which we did NOT do before )

[nazstar]

[QUOTE=erinmi;129057]

you do realize the student loans won't be discharged in either BK.
QUOTE]
What I'm trying to figure out is why they don't allow you to build any "savings" into your budget. I get that they want you to pay something back if you can but shouldn't they allow you to build a safety net, so if something bad/unexpected happens you have resources?

It just seems strange and goes against good financial planning (which we did NOT do before )

EXACTLY what I thought when I researched all this. We were WAY over and not eligible for a 7 with my current job. I am actually QUITTING my job, waiting 6 months for our income to drop off and then filing for 7. It may not be a solution for everyone, but we have a 7 month old and another on the way. With daycare for 2 small infants, my husband would be working just to pay for childcare and I would be breaking my butt to pay a monthly payment to the trustee for 5 years. It didn't make sense to us especially since I hated my job and the fate of the office in swaying in the wind AND we had no assets we needed to protect. Secondly, we didn't want to put our children in daycare so young and we have no family nearby to help out. Yes, things will be tight for a year or so, but by then we will be free and clear (hopefully) and can start over again. Plus, once all the bankruptcy stuff is done, my husband can start consulting a bit on the side.

Three months ago, he was working 20 hours overtime a week, we were trying to juggle schedules to work from home and take care of our daughter. I was resenting the fact that he was never home - always at the office. Our daughter suffered because we were on edge all the time, and the money wasn't enough anyway to cover everything. It just wasn't worth it. This way, my husband can focus on his career, I can focus on the children, and in the meantime I am going to go back to school and hopefully finally get my law degree. That way, when the children are old enough to go to preschool, I will have a future too!

[krielly]

We are able to save a little bit, not a lot. We budgeted for house repairs/maintenance, tires,car repairs/maintenance, stuff like that. We also budgeted for a roof, as we knew we would need one before we were done with the plan.

[erinmi]

EXACTLY what I thought when I researched all this. We were WAY over and not eligible for a 7 with my current job. I am actually QUITTING my job, waiting 6 months for our income to drop off and then filing for 7. It may not be a solution for everyone, but we have a 7 month old and another on the way. With daycare for 2 small infants, my husband would be working just to pay for childcare and I would be breaking my butt to pay a monthly payment to the trustee for 5 years. It didn't make sense to us especially since I hated my job and the fate of the office in swaying in the wind AND we had no assets we needed to protect. Secondly, we didn't want to put our children in daycare so young and we have no family nearby to help out. Yes, things will be tight for a year or so, but by then we will be free and clear (hopefully) and can start over again. Plus, once all the bankruptcy stuff is done, my husband can start consulting a bit on the side.

Three months ago, he was working 20 hours overtime a week, we were trying to juggle schedules to work from home and take care of our daughter. I was resenting the fact that he was never home - always at the office. Our daughter suffered because we were on edge all the time, and the money wasn't enough anyway to cover everything. It just wasn't worth it. This way, my husband can focus on his career, I can focus on the children, and in the meantime I am going to go back to school and hopefully finally get my law degree. That way, when the children are old enough to go to preschool, I will have a future too!

I actually have thoguht about quitting my job- I am not fond of mine too, DH's raise is more than what I make per month anyway! But then I got paranoid that we might need the income later. We have a 3 year old and are planning on adopting a second child (we adopted our first as well) within the next couple of years.

[chpxiii]

When I filed, it was on the advice of my AA sponsor. Last time I ever take the advice of someone else. But anyway...

I was so naive. So very naive. I believed the paralegal and lawyer when they said that a chapter 13 "looks better." It doesn't, really, IMO. You'll still have the black mark of a bankruptcy on your credit report.

I was also told if I wanted to save my only asset, a car, to go into chapter 13. Which is fine. But there were other things that I could have probably had taken off.

To be honest, I think a chapter 7, if you can get it, is better. You'll have the black mark of a bankruptcy, AND the dissolution of all your debt (with the exception of the exempt debts like student loans, etc.) rather than paying for 3 to 5 years AND have the bankruptcy black mark.

But, if you need to save some assets, then 13 is the way to go. It's a great way to get your finances in order while being under the protection of the bankruptcy courts and not have debt collectors hounding you.

[nazstar]

I actually have thought about quitting my job- I am not fond of mine too, DH's raise is more than what I make per month anyway! But then I got paranoid that we might need the income later. We have a 3 year old and are planning on adopting a second child (we adopted our first as well) within the next couple of years.

I make double what my husband makes. If he quits and I continue to work, we aren't eligible for 7. If I quit and he works, we still are. After your 7 filing is complete, you could always get another job. It's not like they are going to forbid you from working for the rest of your life or anything. I have no plans to return to the workforce for a few years. If I HAVE to, I will. But, I think that if we budget correctly, we can swing it for a few years. Plus, being a part time worker in retail or something like that is gonna suck for me. In South Florida, PT work is hard to come by IF you want any sort of set schedule. (I guess it's all the retirees just looking for something to pass the time/supplement benefits). I looked into it at several places and they wanted me available 7 days a week, days and night so they could schedule me as they pleased. Not feasible with 2 infants and certainly not for $8/hour. Besides, my husband can go into work an hour early each day and eat lunch at his desk and make 2 hours overtime at $45/hr. That's more in 2 hours than I would make working over 10 hours at Target.

Bottom line for us is how to get the most quality time together and still make ends meet comfortably. Neither myself nor my daughter are gonna miss him for that one hour in the morning (not that Daddy isn't awesome - but munchkin is still snoozing when he leaves for work). We WILL, however, struggle to have family time if I'm running around from 6-10pm each night trying to make $20-30 pre-taxes to supplement our income. Same thinking applied to us filing for 7 vs. 13. One allowed us to put this behind us much faster and still allowed us to raise our family the way we wanted to. Yes, we messed up with our finances but I can live with the "stigma" of a bk on my credit report. I can't live with sacrificing our idea of "family" and our children's "need" to satisfy a trustee payment each month.

[FreshLikeADaisy]

Nazstar, you may have already considered this, but instead of quitting, what about FMLA or other unpaid leave for however long?