Two common things often cause Chapter 13 cases to fail. First, the plan might become unaffordable. When this happens, the Louisville Trustee files a motion to dismiss the case for not making payments. Second, if a creditor is not paid, he files a motion to terminate the stay to foreclose a home or repossess an auto. So, to qualify for a Chapter 7 or file a Chapter 13, you need to get an affordable Chapter 13 budget or Chapter 7 budget.
How to File Chapter 7 or Get an Affordable Chapter 13 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 and unfortunate fee for being late with a payment.
If the plan is unaffordable, Chapter 13 will fail. Whatever strategy you use, 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 the payments for 3-5 years. Similarly, in Chapter 7 you have to afford the home or car to reaffirm it.
Interestingly, there are three things that increase a Chapter 13 plan payment, and two things that decrease it.
1. Decrease in net income.
When your net income is too high, it forces you 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 then, either your Chapter 13 payments decrease or you file Chapter 7. Usually, the more you earn, the higher your Chapter 13 plan payments. However, if you include expenses and file your bankruptcy while your income is low, you then get a Chapter 7 or an affordable Chapter 13 budget.
Reasonable and necessary expenses are deductions from your income. If reasonable and necessary expenses leave nothing for a Chapter 13 plan payment, you may not be required to file 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 might need to purchase an auto before filing. Then, if they had a $700 per month Chapter 13 payment before, that payment now includes a $500 per month auto payment, and the unsecured claims only get $200.
2. Decrease in assets.
Every Chapter 13 has to pay back what Chapter 7 would have repaid. If you’re a couple that 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. However, you don’t get to file Chapter 7 and keep over $50,000 in equity. Instead, you repay what 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 also drive down the equity in the property by getting a mortgage or making repairs on a home equity loan. Additionally, you often pay for maintenance items before filing Chapter 13.
For instance, you might replace the furnace with a geothermal heat pump, and put on a 50-year roof with solar panels. Then, you might 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 Chapter 13 for a $150,000 dollar home. The result is, you now only have $25,000 too much equity, and you have a $500 plan payment instead of a $1,500 plan payment to unsecured creditors.
3. Manage secured and priority debts.
Every Chapter 13 plan also pays off the priority debts and pays 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 and the plan has to repay the arrearage or default. Plus, the home mortgage or auto payments begin again the month the case is filed. Please be aware that 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 Chapter 7 or Chapter 13 budget. It is perfectly ok to take a medical cost of $1000 per month for your diabetes medications, but you have to document it. Be sure to read our other articles on preparing a bankruptcy budget. Sometimes, Debtors often forget to include items in their budget, such as a disabled child who can only get specialized care at a particular private school. Below is a list of commonly forgotten expenses.
1. College or School Expenses
- College expense requirements – normally only court-ordered is allowable
- Education to meet job requirements
- Music lessons
- Private school for a child with disabilities
- School lunches
- Scouting expenses
- Sports fees
- School uniforms
2. Home Expenses budgeting for Painting and major upkeep
- Furnace, Roof, Air Conditioner and Driveway replacement
- Home maintenance, buying furniture, major appliances
- Landscaping and lawn care
3. Medical Expenses these average about 75 per person per month normally but can be higher
- Diabetes medication
- Contact lenses and solution
- Doctor visits
- Eyeglasses, care, and replacement
- Gym and YMCA fees
- Large medical co-pays
- Medical supplies
- Prescription medication
- Vision care
- Weight loss programs and aids
4. Miscellaneous Expenses
- 401 K loan repayment and investment can continue – if there is a history of it
- Accounting fees – other
- Annual tax return preparation fees
- Banking and Accounting fees especially for your business
- Inspections, preparation costs
- Legal fees, especially if it is required to maintain assets or income
- Monthly website, magazine, or book subscriptions
5. Pet Expenses • List your pet as an asset to take the expense
- Pet food
- Grooming and care
- Veterinary visits
6. Vehicle Expenses
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.