CHAPTER 13 BANKRUPTCY: NOT THE LEAST OF EVILS
Chapter 13 bankruptcy has a bad reputation. It’s the form of consumer bankruptcy you have to file if you fail the so-called Means Test. It’s the form of bankruptcy in which you have to repay some of what is owed to your creditors rather than the nothing typically repaid in a Chapter 7 bankruptcy. It’s the form of bankruptcy in you are tied up for 3-to-5 years in a legal process in which your entire financial history and budget is scrutinized by the Federal Bankruptcy Court.
Sounds awful, right?
Is that all there is to it, though? That characterization is not inaccurate. Those things are true.
However, that characterization does not capture the full picture. The end of the Chapter 13 story is what your life is like after the Chapter 13 bankruptcy is completed, compared to what it looked like before you filed it.
Let’s try another characterization:
- Chapter 13 bankruptcy is the best consolidation of debt you’ll ever get.
- Chapter 13 bankruptcy doesn’t require negotiation with the creditors holding your unsecured debt.
- Chapter 13 bankruptcy only requires that you repay what you can afford to repay.
- Chapter 13 bankruptcy can save your home from foreclosure.
- Chapter 13 bankruptcy can help you get caught up on past due property taxes.
- Chapter 13 bankruptcy can help you repay your non-dischargeable tax debt at 0% interest.
- Chapter 13 bankruptcy protects you from creditors’ collection activity for as long as 5 full years.
- You never lose any assets or property in a Chapter 13 bankruptcy.
- A Chapter 13 plan can be modified anytime during the 3 to 5 year plan period
That sounds better, doesn’t it? It’s still somewhat abstract, however. These are still just statements about the bankruptcy process floating in the air.
Let’s pull them down to earth with 2 case studies, instead, that will demonstrate how a Chapter 13 bankruptcy can help you—and how it works.
Note that these case-studies are not drawn from actual clients of bankruptcy attorney Walter Metzen but are illustrative composites only.
CHAPTER 13 BANKRUPTCY CASE-STUDY #1: JOE’S HOME FORECLOSURE
Joe has just received a terrible letter in the mail. Six months after being laid off from his job as assistant manager of a golfing supply store, he has missed four monthly mortgage payments. The letter has been sent by a local foreclosure law firm. It is informing him that, in 90 days, his home will be auctioned at a county sheriff’s sale.
The timing is terrible. Joe has just accepted an offer for a new job that will pay more than the golfing store did, offers healthy annual bonuses depending on company profitability, and gives him the weekend off to spend with his two children.
Things are looking up. However, Joe and his wife have depleted their savings. The foreclosure law firm isn’t willing to negotiate and isn’t particularly nice when he calls to discuss the sale.
A friend suggests he contact a bankruptcy lawyer. He’s heard that filing a bankruptcy can stop a foreclosure sheriff’s sale.
He schedules a free consultation with a Detroit area bankruptcy attorney who tells him that, yes, a Chapter 13 will not only stop a foreclosure sale along with any other creditor collection activity but will also allow him to catch up the arrearage on the mortgage payments at 0% interest over as many 60 months.
The bankruptcy attorney also tells him that the foreclosing mortgage servicers and its foreclosure law firm will not have any ability to contest this, so long as Joe provides his bankruptcy attorney with an accurate arrearage balance and other details necessary for the drafting and filing of a bankruptcy petition and Chapter 13 payment plan.
The bankruptcy attorney, however, cautions Joe that the petition must be filed before the foreclosure sale, or the Chapter 13 bankruptcy will not be effective in saving the house.
Joe retains the attorney and works hard to assemble the documentation that the attorney needs to draft a bankruptcy and Chapter 13 payment plan.
The Chapter 13 plan that the bankruptcy lawyer drafts requires that Joe make a monthly Chapter 13 Plan payment sufficient to pay his ongoing monthly mortgage and, over 60 months, the balance of his mortgage arrearage.
The majority of the bankruptcy lawyer’s fees and the fees of the Chapter 13 Trustee are also covered by Joe’s monthly Plan payment. A very small amount of the credit card and medical debt owed by Joe is paid by the remaining portion of the Plan payment—and the balance of that totally discharged.
It isn’t easy and the family doesn’t go on any extravagant vacations for a few years, but Joe manages to make each of his required 60 monthly Plan payments.
He is granted a discharge of his remaining debt, and he exits his Chapter 13 bankruptcy process current on his mortgage and in no danger of foreclosure.
And he paid far less per month in his Chapter 13 Payment Plan than he would have paid between exorbitantly priced rental housing and monthly credit card installment payments.
CHAPTER 13 BANKRUPTCY CASE STUDY #2: GWEN’S TAX & CREDIT CARD DEBT
One snowy January, Gwen withdraws $20,000.00 from her 401(k) in order to put a down-payment on a house in Ferndale. She uses a modest amount of her Home Depot credit line to purchase supplies to re-paint her new home and make a few other cosmetic updates and repairs, and then settles in.
Spring comes. The snow thaws. And it begins to rain. And rain. And rain. The basement half-bath that cost her an extra $10,000 in home purchase price becomes a sudden geyser. By morning, she is 4 feet deep in sewer water, and, two months later, another $18,000 in debt by way of the credit cards she was forced to use to pay for the restoration costs.
Still, she makes good money as a software engineer for an auto supplier and thinks she can handle it. Then, the following spring, when preparing her tax return, she learns she will have to pay taxes on the $20,000.00 she had withdrawn from her 401(k).
Now panicked, she seeks the advice of an experienced Detroit area bankruptcy attorney.
During her free consultation, she learns that, as a household of 1, she makes too much money to qualify for a Chapter 7 bankruptcy. She does not pass the so-called “Means Test.” In fact, removing the debt payments from monthly her budget hypothetically leaves about $400 per month in her pocket.
Too much for Chapter 7 eligibility.
As she feels her future darkening before her, the attorney tells her about Chapter 13 bankruptcy. She learns that she can make a single payment to the Chapter 13 Trustee assigned to her case by the Bankruptcy Court rather paying the IRS or her unsecured credit card directly. The payment will only be the $400 left over from her take-home pay after her necessary household expenses, such as food and clothing and her mortgage payment, are deducted.
That is less than Home Depot alone was charging her every month.
The Chapter 13 Trustee will take her payment, she is told, pay her attorney, pay the Trustee’s own percentage-based fee, and then pay the IRS in full at 0% interest. Whatever is left over at the end of 60 months is what Home Depot and the other unsecured creditors will get.
And that’s all they’ll get. She will be free to make a fresh start in her now extremely clean home.
THE HELPFULNESS OF CHAPTER 13 BANKRUPTCY: THE BOTTOM LINE
The point of these two case studies is to illustrate the proposition that Chapter 13 is not “a bad deal” because you pay something rather than nothing.
The vast majority of people in Chapter 13 bankruptcy proceedings are paying far less per month in their Chapter 13 payment plans than they would be in monthly installment payments with usurious interest-rates to their creditors outside of bankruptcy.
It is crucial, however, to talk to an experienced and knowledgeable Michigan Chapter 13 bankruptcy attorney
Attorney Walter Metzen has represented thousands of consumers in Chapter 7 and Chapter 13 bankruptcy cases in Michigan. A Board Certified Bankruptcy Expert, Attorney Metzen has obtained thousands of successful Chapter 13 bankruptcy discharges for his clients.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing a Chapter 7 or Chapter 13 bankruptcy in Michigan.