- The Difference Between Chapter 7 and Chapter 13 Bankruptcy
- Chapter 7 Bankruptcy In a Nutshell
- Chapter 13 Bankruptcy In a Nutshell
- The Chapter 13 Payment and Payment Priority
- Creditor Payment Priority
- The Payment Plan Amount
- Why Would a Single Parent File for Chapter 13 Bankruptcy?
- Unique Considerations for Single Parents in Chapter 13 Bankruptcy
- How a Good Bankruptcy Attorney Can Help Single Parents Navigate Chapter 13
As a single parent, you face a unique set of challenges when it comes to managing your finances and protecting your assets. If you’re struggling with overwhelming debt, you may be considering filing for bankruptcy.
While Chapter 13 bankruptcy is a powerful debt reduction tool for single parents, it’s important to understand the unique considerations and requirements of this process.
In this Article, we’ll provide an overview of Chapter 13 bankruptcy and its benefits for single parents. We’ll also discuss the unique considerations that single parents must keep in mind when navigating the bankruptcy process, including child-related expenses and custody arrangements. Finally, we’ll provide tips for finding an experienced bankruptcy attorney who can provide personalized advice and guidance throughout the Chapter 13 bankruptcy process.
By gaining a comprehensive understanding of the Chapter 13 bankruptcy process and working with an experienced Michigan bankruptcy attorney, you can take the necessary steps to regain control of your finances and protect your assets as a single parent.
First, some basic questions and answers.
The Difference Between Chapter 7 and Chapter 13 Bankruptcy
Charting a course through Chapter 13 bankruptcy as a single parent first requires that you understand the difference between Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy In a Nutshell
Chapter 7 bankruptcy is generally what the non-lawyer on the street understands to be “bankruptcy.” It is a Federal legal process through which single parents can discharge their debt without having to repay any of it to creditors.
A Bankruptcy “Discharge” means that, at the end of a successful Chapter 7 (or Chapter 13) process, a permanent Federal injunction is enforced relieving you of any obligation to pay the debt you owed before you filed. Any creditor trying to collect a discharged debt is subject to sanctions. Your credit reporting must be adjusted to reflect that the debts are no longer owed.
Some debts are not dischargeable at all in bankruptcy. Child support obligations are one example. This Article will not discuss the full array of non-dischargeable debts in detail, but it is important to bear in mind that, when we refer to the discharge of debt, we mean only those that can be discharged in the first place.
The vast majority of commercial debts not incurred through fraud are dischargeable.
In Chapter 7 bankruptcy, if you have property that is valuable, it may be seized and sold off by the Chapter 7 Trustee for the benefit of your creditors. Most routine household property will be easy for your bankruptcy lawyer to “exempt” from the Bankruptcy Estate created with the case’s filing and to protect.
This is why Chapter 7 is sometimes referred to as a “liquidation” bankruptcy process.
The Chapter 7 bankruptcy process, in most cases, lasts about 4 months.
It’s an amazing deal. Chapter 7 gets rid of your debt without any need to repay or negotiate with your creditors at all. However, you must qualify for Chapter 7 on an income basis.
If, as a household (meaning all wage earners under your roof who are not boarders or renters) collectively earn more on average than the median income for a household of your size in your part of Michigan, you will not be eligible for Chapter 7.
The so-called “Means Test” computes this household income average. (Avoid online Means Test “calculators.” These do not work. It requires a skilled bankruptcy attorney familiar with local approved income deductions and other finer legal points of law and practice to properly calculate a Detroit-area Chapter 7 Means Test.)
Chapter 13 Bankruptcy In a Nutshell
Chapter 13 bankruptcy, on the other hand, is an even more complicated process. No one in Michigan should bother to file a Chapter 13 bankruptcy without the assistance of an experienced Detroit bankruptcy attorney.
Chapter 13 is a reorganization bankruptcy process rather than a liquidation process. That is, no property or assets are ever seized or liquidated in Chapter 13.
Instead, over the course of 3-5 years (depending on the Chapter 13 Means Test results and your own debt repayment circumstances), you repay some of what you owe. At the end of the process you discharge whatever balance of unsecured debt has not been repaid.
The advantage of a Chapter 13 over some non-bankruptcy debt repayment plan or consolidation scheme is that it operates with the teeth of Federal law. When you file a Chapter 13 (just as with a Chapter 7), an “Automatic Stay” injunction activates that prevents creditors from collecting directly from you while you are in the bankruptcy process. Violators are subject to monetary sanction.
Outside of Chapter 13, all of your creditors are perfectly free to try and collect from you at the same time. Not so in bankruptcy.
A standard debt consolidation scheme requires full repayment. Chapter 13 does not. A non-bankruptcy debt remediation process requires the consent of your probably unwilling creditors. Chapter 13 does not.
Beyond that, the Chapter 13 bankruptcy process is a “reorganization” process. (Not “liquidation.”) The Chapter 13 process allows you to re-order your creditors so that you can pay the most important debts first.
The Chapter 13 Payment and Payment Priority
In Chapter 13 bankruptcy, single parents will make a single payment each month to the Chapter 13 Trustee assigned to the case. Creditors in most cases are not paid directly during the Chapter 13 (with exceptions).
The Chapter 13 Trustee’s job is not to liquidate property. Rather, the Trustee’s job in Chapter 13 bankruptcy proceedings is to collect your payment and to distribute it to your creditors in the priority order and in the amounts directed by your court-approved Chapter 13 payment plan.
This Chapter 13 payment plan is a document that is drafted by your Michigan bankruptcy attorney and filed with the Federal Bankruptcy Court along with your bankruptcy petition.
Creditor Payment Priority
Your Chapter 13 plan’s creditor payment order, or priority, must follow the rules outlined in the US Bankruptcy Code. You can’t just pay your grandmother first, even though you love her more than, say, Citibank.
Secured creditors must be paid first. This would include your mortgage and car payments. Arrearages on secured debts are paid next.
After that, contract and lease payments are accounted for, with “priority” unsecured debts following. These sorts of “priority” unsecured debts would include non-dischargeable tax debts, child or spousal support, and a few others.
Finally, the bottom of the priority sit your credit card debts, medical bills, back-rent, and all other non-priority unsecured debts.
These low-priority unsecured debts only receive whatever is left over after everyone else is paid first. As noted above, whatever balances are still owed “on paper” after the Trustee disburses these funds is then discharged just as it would be in a Chapter 7 bankruptcy.
So how much do you pay each month?
The Payment Plan Amount
The amount that a single parent would send to the Chapter 13 Trustee is whatever is left over at the end of the average month. That is, in your bankruptcy petition you will complete a form (“Schedule”) that averages your monthly income and take-home pay. Another Schedule details your average monthly necessary household expenses.
When the expense total at the bottom of this second Schedule is deducted from the take-home pay at the bottom of the other Schedule, the resulting amount will be your monthly Chapter 13 plan payment. It may be $200 or it may be $2,000, it all depends.
That said, you must have a positive number remaining in order to “qualify” for Chapter 13 bankruptcy.
If this math results in a negative number, you either don’t earn enough for Chapter 13 or you need to take a good, hard look at your expenses. Luxury-level or “unnecessary” expenses will draw objections from the Chapter 13 Trustee, in any case.
You cannot make the monthly payment on a brand new Porsche and discharge the debt owed to your unsecured creditors in Chapter 13, for example.
It is common for bankruptcy attorneys to work with clients prior to filing to produce a plan payment that is sufficient to “fund” a client’s own, particular Chapter 13 plan, avoid unnecessary Trustee objections before the case is even filed, and to ensure that a client’s basic household needs are fully met.
Why Would a Single Parent File for Chapter 13 Bankruptcy?
So that basic information in hand, why would a single parent file for Chapter 13 bankruptcy?
The short answer is that even single parents can be and often are homeowners. Single parents owe tax debts that are not dischargeable. Single parents need to retain reliable vehicles to get to and from work and, especially, to and from child care and schools.
In other words, single parents need the debt relief that Chapter 13 can specifically provide. Chapter 7 is perfect for the non-homeowner with moderate or low income who has primarily non-priority unsecured debt to discharge.
For Metro Detroit residents and others in Michigan with more complicated asset and income scenarios, Chapter 13 provides many more tools than does Chapter 7.
Specifically, single parents file for Chapter 13 when:
- They fail the Chapter 7 Means Test and have no choice;
- When they have a mortgage in arrears and fear foreclosure (Chapter 13 will allow a single parent to catch up past due mortgage payments and even pay lower balance mortgages in full);
- When they have a vehicle behind in payments;
- When they have tax or other debts not dischargeable in bankruptcy (Chapter 13 will allow a single parent to pay these debts in full before sending a single dime to a non-priority unsecured creditors);
- When they have assets—including home equity—that would be in danger of liquidation in Chapter 7 bankruptcy.
These are just a few instances in which Chapter 13 can be a superior and more useful debt relief process than Chapter 7 bankruptcy.
These examples demonstrate, further, that Chapter 13 is certainly far more useful than a non-bankruptcy “hat in hand” creditor debt settlement negotiation in which the creditor holds 100% of the cards and has no legal obligation to provide you any relief whatsoever.
Unique Considerations for Single Parents in Chapter 13 Bankruptcy
Single parents in Chapter 13 have unique considerations, however. Namely,
- Accurate budgeting requirements: A single-income household is always a delicate balance of the “necessary” vs. the “optional.” Children have activities, sporadic educational expenses even in public schools, doctor visit and healthcare expenses, and, yes, kids grow like weeds. A monthly average clothing expense for an adult is predictable. An average clothing expense for, say, a 3-year-old is going to explode over the course of a single year.
- Accurate capturing of childcare and related expenses: Especially in the Detroit Bankruptcy Court, you can expect Chapter 13 Trustees to review your plan with a critical eye and to object to any perceived “luxury” level expense—including childcare. (This despite the fact that many are parents in Metro Detroit themselves. Go figure.) A single parent needs to capture and accurately average—and document these expenses very carefully.
- Child support and alimony income: Child support and spousal support and alimony are payments are “income” for Means Test and Chapter 13 Plan calculation purposes. The court orders awarding these amounts must be gathered and provided to Trustees, and the amounts you are owed versus actually paid by your ex (often not the same number, alas) must be captured in your Schedules and supported with documentation.
- Custody and parenting time arrangements: Income, work scheduling, court appearance scheduling, and many more aspects of a single parent’s life and ability to earn and fund a Chapter 13 plan are affected by Michigan court-ordered custody and parenting time requirements. Lower paying jobs are often accepted by single parents because they offer the flexibility to pick a child up from school at 3 PM instead of from expensive after-school care at 6 PM, for example. The Chapter 13 Trustees will not be appreciative of these considerations, and it will require careful documentation and accurate scheduling of your income and expenses to obtain court approval of your payment plan.
Given all of these unique considerations and the many more that may arise on a case-by-case basis, it is vital for single parents seeking debt relief through Chapter 13 bankruptcy to retain an experienced attorney to assist them.
An experienced Michigan bankruptcy attorney will guide the documentation gathering and petition and Schedule completion process with a practiced eye. A good bankruptcy attorney will do so with patience, kindness, and with empathy.
Single parents must complete the same huge volume of paperwork that every other prospective bankruptcy client must—and must do so in between work, school pick-ups and drop-offs, cooking meals, cleaning house, and everything else that needs to happen in a given day.
A good bankruptcy attorney understands and assists.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has assisted thousands of Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.
If you are a single parent seeking bankruptcy assistance, contact us now to schedule your free initial consultation.