How to file Chapter 7 or Get an Affordable Chapter 13 Budget
Two common things often cause Chapter 13 cases to fail. First, the plan can become unaffordable. The Louisville Trustee will file a motion to dismiss the case for not making payments. Second, if a creditor is not paid and he files a motion to terminate the stay to foreclose a home or repossess an auto. To qualify for a Chapter 7 or file a Chapter 13, you need to get an affordable Chapter 13 budget or Chapter 7 budget.
When a creditor files a motion to terminate the stay in Chapter 13, the Debtor has to pay what the bank paid to file the motion. This is about 400 in filing fees and 1000 in attorney fees. That is a huge fee just for being late with a payment.
If the plan is unaffordable, a Chapter 13 has to fail. Whatever strategy you used, your budget must include all of your expenses to make a Chapter 7 or 13 possible and affordable. In Chapter 13 you have to afford payments for 3-5 years. In Chapter 7 you have to afford a home or car to reaffirm it. Three things will increase a Chapter 13 plan payment, and two things will decrease it.
Get an Affordable Chapter 13 Budget, reduce your net income
If your net income is too high, you are forced to file a Chapter 13 due to the means test. Remember, there are two parts to the means test. Just because you make 150,000 a year doesn’t mean you can’t file a Chapter 7. If your expenses give you little or no net income either your Chapter 13 payments decrease or you can file a Chapter 7. Usually, the more you earn, the higher your Chapter 13 plan payments. If you include expenses and file your bankruptcy while your income is low, you can get a Chapter 7 or an affordable Chapter 13 budget.
Reasonable and necessary expenses are deducted from your income. If reasonable and necessary expenses leave nothing for a Chapter 13 plan payment, you may not be required to file a Chapter 13. Or your Chapter 13 plan payment may repay little to the unsecured debts.
I often have to remind someone they need an auto to drive to work during a 5-year plan. If they have no car payment, and their auto has 300,000 miles on it, they may need to purchase an auto before filing. If they had a 700 per month Chapter 13 payment before, that payment now includes a 500 per month auto and the unsecured claims only get 200.
Every Chapter 13 has to pay back what Chapter 7 would have repaid. If a couple owns a 150,000 dollar home with no mortgage, then your plan has to repay about 100,000 dollars. Each Debtor gets a 25,000 dollar exemption for a home. You don’t get to file a Chapter 7 and keep over 50,000 in equity. You can repay what a Chapter 7 does and keep the property in chapter 13. This is called an asset driven plan where assets cause the plan to have a high payment. In cases like this, you often spend the asset or convert it to an asset you can exempt. You can also drive down the equity in the property by getting a mortgage or making repairs on a home equity loan. You often pay for maintenance items before filing a Chapter 13.
For instance, you could replace the furnace with a geothermal heat pump, put on a 50-year roof with solar panels. Then repair the air conditioner, paint the home, get new windows and doors, replace the driveway, and finish the basement. None of these maintenance items would increase the value of the house. But a 75,000 mortgage means you now only have a 25,000 dollar Chapter 13 for a 150,000 dollar home. You now only have 25,000 too much equity. You have a 500 dollar plan payment instead of a 1500 dollar plan payment to unsecured creditors.
Manage Secured and Priority Debts
Every Chapter 13 plan has also to pay off the priority debts and pay the secured debts up to date during the plan. If you owe income taxes that are less than three years old or have some other priority debt, then you must pay that claim off during the 3 or 5 years of the plan.
Secured debts which are in default also have to be brought up to date. Bringing the secured debts for items you want to keep up to date means the plan has to cure any foreclosure or repossession problems. But you have to afford these expenses. The plan has to repay the arrearage or default. And the home mortgage or auto payments begin again the month the case is filed. There are no free houses or cars just because someone filed a Chapter 13.
Often overlooked expenses
Many people forget to include all of their necessary and reasonable expenses into the Chapter 7 or Chapter 13 budget. It is perfectly ok to take a medical cost for 1000 dollars per month for your diabetes medications. But you have to document it. Be sure to read our other articles on preparing a bankruptcy budget. Debtors often forget to include items in our budget, such as private school expenses for a disabled child who can only get specialized care at that private school. Below is a chart of the commonly forgotten expenses you should budget.
OFTEN OVERLOOKED EXPENSES
|Legal Fees especially if it is required to maintain assets or income||Haircare personal grooming products makeup etc.|
|401 K loan repayment and investment if there is a history of it||Private school for a disabled child|
|Banking and Accounting fees especially for your business||DAYCARE, School lunches, Scouting|
|Annual tax return preparation fees||Charitable donations|
|Saving for Home Repairs Furnace, roof replacement, etc.|
|Other accounting fees||Work expenses|
|Pet food List the dog as an asset so you can take the expense||Parking|
|Veterinary visits||Summer camp and summer activities|
|Pet grooming and care||Sports fees, School uniforms|
|Inspections, preparation costs||Medical Supplies Contact lenses and solution|
|Vision Care; Doctor visits; Dental visits co-pays medicine||Taxes car tags registration|
|Eyeglasses (care and replacement)||Required education for job|
|Required College expenses normally only court-ordered is allowed||Home office supplies (postage/computer toner/ink/paper/software)|
|Motor vehicle oil changes required maintenance||Home maintenance landscaping and lawn care|
|Car washes||Weight loss programs and aids|
|Annual registration cost for Motor Vehicles||School Expenses Music lessons|
|large medical Co-pays and Medications||Car Maintenance including tolls|
|Home and Office security if necessary and reasonable||Gym and YMCA Fees|
|Be Ready to Document expenses and how they are necessary if taken|
|Monthly website/magazine/book subscriptions||Gym/YMCA fees|