The ultimate guide to Chapter 13
By Richard West, Dayton Ohio Bankruptcy Attorney
If you are looking for a comprehensive overview of Chapter 13 bankruptcy in Ohio, you have found it. I’ve been a bankruptcy attorney in Dayton Ohio for nearly 30 years. As a bankruptcy attorney, I filed thousands and thousands of Chapter 13 bankruptcy cases. But what’s more, as a credit counselor, I’ve helped thousands of clients to quickly rebuild their credit, and clean up their credit reports. The credit rebuilding process AFTER bankruptcy is an essential part of a full and complete financial recovery. Bankruptcy is only one part of a complete recovery program.
If you need information about bankruptcy in Dayton Ohio, or Cincinnati Ohio, without all the legalese and doubletalk, this guide will help you immensely. Here, you’ll get some practical advice, in plain English and I’ll tell you things that other attorneys won’t tell you.
My goal is to make it clear to you what Chapter 13 will and won’t do for you and help you to know if Chapter 13 bankruptcy will be the best tool for you to achieve your financial reorganization.
How to know if Chapter 13 Bankruptcy is right for you.
First, look at your big picture. Forget about the means test that you read about when searching for information about Chapter 7, bankruptcy exemptions, median income charts and all of the other bankruptcy snippits and information that pop up on the Internet when you search for bankruptcy information.
Chapter 13 does use the means test, but in a very different way than you might suspect when researching it. The forms are different, the information is not the same as it is in the chapter 7 means test, and best of all, in many ways, it doesn’t even matter what the results of the means test are for you when you file chapter 13 bankruptcy.
The main reasons people chose chapter 13 bankruptcy are to do things that you simply cannot accomplish in chapter 7, or because you are not eligible for chapter 7. All things being equal, I often will recommend chapter 7 over chapter 13, because, although chapter 7 is more expensive to file in terms of up front attorney fees, it’s faster, simpler and allows you to get further ahead on your credit rebuild because you will get a discharge faster in chapter 7 bankruptcy compared to chapter 13 bankruptcy.
This is the critical question I want to discuss with you. Can you, at your current income level, take care of your own needs, and those of your family, for housing and food and basic necessities and, with what’s left over, can you pay off your debt in a reasonable time? What is a reasonable period of time? Usually 3 to 5 years.
If you can honestly say that if you cut back on your spending and carefully maintained a budget you would be able to pay off most of your debt in 3 to 5 years then you probably shouldn’t be in a bankruptcy unless you have a foreclosure or other pressing collection problem that just won’t wait for 3 to five years.
On the other hand, if the honest answer to this question is “no,” then probably a bankruptcy, either Chapter 7 bankruptcy or Chapter 13 bankruptcy, should be given serious consideration.
Who files Chapter 13?
A typical Chapter 13 filer could be anyone. I filed people in Chapter 13 with incomes of over $100,000, or as little as social security income of only $1,500 per month.
A typical Chapter 13 bankruptcy filer could be single, or married with kids. Could be buying a house worth $250,000 or could be renting. Her cars might be paid for or she might be making car payments. Often, people who file Chapter 13 bankruptcy do not have higher incomes that people who file for Chapter 7. They have similar expenses, car payments, mortgage payments, and all of the other issues that we all face.
The reason that they file Chapter 13 is because Chapter 13 permits them to accomplish goals that they simply could not accomplish Chapter 7. There are so many things you could do better in Chapter 13, like replace automobiles that are either upside down or falling apart, and keep property that you are purchasing for far less than you actually owe. These are things that could be done in Chapter 13 that are impossible to do a Chapter 7.
And, many of my clients like the fact that they are actually paying some of their debt back, based on what they can afford, and that gives them a tremendous sense of satisfaction because they are making their best efforts to be responsible and pay what they can afford.
A lot more people should be filing chapter 13 than realize it.
Chapter 13 filers can be your mother, your brother, your boss, your friends, coworkers, I filed Presidents of banks, other attorneys, I filed a judge one time, I filed for lots of doctors. I’ve been the Chapter 13 bankruptcy attorney for people of all walks of life and all income levels, because no one is immune from financial problems.
Many people think that being able to file Chapter 7 is better than “having to file a Chapter 13.” In fact, when I counsel people who are interested in filing Chapter 7 bankruptcy and I determine that they’re better off filing a Chapter 13, they sometimes seem disappointed.
Many people ask me, is it better to file Chapter 7 or Chapter 13. It’s actually not that simple. Chapter 7 is not “better” than Chapter 13. Chapter 13 bankruptcy is not “better” than Chapter 7 bankruptcy. The question really is “what Chapter is best for your needs?”
Chapter 7 bankruptcy might be helpful for some people, but sometimes it can be impossible for them to file chapter 7 bankruptcy. For example, people who have filed bankruptcy within the preceding eight years cannot file Chapter 7.
People who have property that is valued in excess of what we can protect with bankruptcy exemption laws in chapter 7 will often chose to file chapter 13. For example, if you had a car that was paid for and worth much more than say $5,000, You might want to look into chapter 13. Sometimes people enter into financial
There are many situations where I find that people who qualify for Chapter 7 bankruptcy are much better off in many ways by filing a Chapter 13 bankruptcy. And, sadly, many attorneys are not comfortable filing Chapter 13 bankruptcy because it is more complicated and complex, so they recommend Chapter 7 when Chapter 13 might be a better choice.
There’s another reason why many attorneys don’t want file Chapter 13 bankruptcy. Chapter 13 bankruptcy requires a commitment by the attorney to support the client for 3 to 5 years. Many attorneys simply don’t have the staff, the time, or the desire to partner with the client for that length of time to help that client achieve a complete financial reorganization. Some have actually told me, privately, that they’re in it for the money – and would rather put that client into a quick Chapter 7 than have a long-term relationship with and commitment to, that client.
I’m just the opposite. I want whatever is best for you. And if that turns out to be a Chapter 13 bankruptcy, then I will support you for the full five years and beyond to help you recover your credit afterwards
Do you qualify for Chapter 13 Bankruptcy?
If you search on the Internet to try to figure out if you qualify for Chapter 13 bankruptcy you will find a ton of confusing and misleading information. The first thing you will always see is the means test. I have created several videos that explain the means test in detail, how it works, what to do if you fail it, and why it really doesn’t matter in most cases. You can find the videos on youtube and my website.
I suggest you don’t spend too much time studying the means test because in chapter 13 it works in a very different way than it does in Chapter 7, and at the end of the day, the outcome of the means test in chapter 13 bankruptcy is often irrelevant. You don’t pass or fail the mean test in chapter 13 like you do in chapter 7. It’s used to give us an indication of how much you should be paying back to your unsecured creditors, like credit cards and medical bills. But the outcome is often wrong, and in most cases we are not required to follow it.
Qualifying for Chapter 13 when you have excess equity in property that you own, and don’t want to lose, requires an experienced attorney to get the best answer. If you just read about it, you won’t know how to get the best results. That comes from having filed thousands of cases over decades and knowing how far you can go in certain areas to get the best result. Each case is different.
Related to the means test is your income. Actually, your household income. Income from all sources must be considered. Again, as stated above, if your income is enough so that you can actually pay for your debts then you probably are going to only qualify for a chapter 13, and not a Chapter 7 bankruptcy. It’s important to note that even if you do pass the means test, this does not mean that you automatically qualify for Chapter 7. There are other tests that are applied. And, even though your particular situation may not even require you to do the means test, the court might find that you have enough income to pay your debts. You would be disqualified from Chapter 7 for that reason.
But there is good news for folks in this situation. Often I find a way to file a chapter 13 bankruptcy for those who fail the means test or otherwise don’t qualify for chapter 7 and still pay very little, sometimes nothing at all, to the medical bills and credit cards.
Before filing, don’t do these things!
If you’re thinking about filing Chapter 13 bankruptcy, is a good idea not to make any large or significant financial transactions prior to seeing a bankruptcy specialist. Don’t liquidate your retirement plan, don’t transfer property out of your name, and don’t pay any creditors off above or beyond the normal monthly payment.
It’s usually a bad idea to buy property prior to filing a bankruptcy, although in some cases I have advised people to buy automobiles before filing because as a practical matter it’s easier sometimes to get credit before you file a Chapter 13 instead of waiting until after you file. In fact, when we plan to file a chapter 13, we usually spend a lot of time talking about automobiles. I want you to get the best results, and to do this we need to look at the big picture, not just your bills and income. Let me give you an example.
Because my reputation, I do a lot of second opinion consultations. People come to me after they see another bankruptcy attorney initially because they were not convinced that the attorney was the right one for them.
All too frequently, they tell me that the attorney essentially plugged all their numbers into a formula and gave them a payment plan in chapter 13. This is a very simplistic and dangerous approach. I am always concerned about your future. If I see that you have an older car, or an automobile that is simply a horrible deal, very upside down and overpriced, I know that we probably need to discuss the possibility of making some changes before we file Chapter 13.
After all, we will be in a 3 to 5 year plan and we need dependable transportation for the entire 3 to 5 years and beyond. In many cases, a little bit of time spent up front considering different options to replace these automobiles before we file Chapter 13 can make the difference between a successful outcome , and a plan that fails partway through. In these cases, looking at the big picture helps me to ensure that my clients are going to have a successful Chapter 13 outcome.
This is why the vast majority of my cases have successful outcomes, something that cannot be said of many other offices
Because I’ve been a bankruptcy attorney in Dayton Ohio for so many years, I even know where to send my clients to find cars so they will have an easier time buying an automobile before they file their bankruptcy. Experience is a great thing to have. On my website I have an entire page of things to avoid before filing bankruptcy
Different kinds of debt discharged in Chapter 13 bankruptcy.
For a video of this topic, go to Discharge Medical Bills in Bankruptcy
Often, medical bills are the main reason for filing Chapter 13 bankruptcy. A common question I get is whether filing Chapter 13 bankruptcy will prevent you from being able to obtain medical care. The good news is that Chapter 13 bankruptcy does not disqualify you from ever going to hospital emergency rooms for necessary treatment and continuing to see your doctor.
Hospitals and laboratory bills are regularly discharged in Chapter 13 bankruptcy and I’ve never known anyone to have difficulty getting necessary lab work done even if they have filed bankruptcy on the very same hospital or laboratory that they now seek to use.
Emergency rooms will not refuse to treat you simply because you have discharged a debt to the emergency room in a Chapter 13 bankruptcy. In fact, the emergency room generally doesn’t even know if you’ve filed bankruptcy or not.
Private doctors are another story. If you’ve been treating with a particular doctor and owe the doctor money when you file Chapter 13 bankruptcy, I generally suggest that you contact the doctor’s office, and talk to the doctor himself or herself. My experience is that if you contact your doctor prior to filing bankruptcy and try to make arrangements to make payments on these debts then you will continue to be able to see that doctor.
You should know, however that the doctor is not required to continue to see you – but often they will. If you owe a debt to a doctor, this debt must be listed in your Chapter 13 bankruptcy. You are not permitted to exclude any debts, including your doctor. The doctor is not permitted to try to collect the debt you discharge in bankruptcy but you are permitted to voluntarily pay it. And this is what most of my clients do.
Credit Cards and Personal Loans
The most common kind of debt discharged in a Chapter 13 bankruptcy is credit card debt. This accounts for more Chapter 13 bankruptcy cases than any other single kind of debt. Personal loans, signature loans, loans not secured by any personal property, are all discharged in a Chapter 7 bankruptcy without any payment whatsoever. Of course, the credit cards and open loan accounts will be closed when you file, but credit cards are so easy to get that this should not be of concern to you.
These are the kinds of loans that you get from places like One Main Financial and Springleaf, formerly Beneficial, Household Finance, and American General. These are high interest loans and generally these finance companies require you to fill out a form that lists personal property that is used as security for the loan.
I’ve actually had my clients tell me that when applying for these loans that the people working at the finance company put down property that they did not even own.
Theoretically, if you don’t pay these loans, the finance company can repossess these items. This is a seldom done, as a practical matter. In fact, I’ve had clients try to surrender the property because they wanted to discharge the debt and feel that they treated the creditor fairly, since they did pledge the property as collateral, only to have the creditor refuse to take the property back.
Unlike Chapter 7, where you have limited options for these kinds of collateral loans, in chapter 13 you are able to keep the property, but you only have to pay the value of the property, in most cases, which is often much less than what you owe. Because these collateral loans are normally not made for the purpose of purchasing the property that is used as collateral or security they are able to be crammed down in a Chapter 13.
For example, if you borrow $10,000 from spring leaf and you used your car for collateral, you must pay something to spring leaf in order to keep the car in a Chapter 13. However, in chapter 13 you are able to cram down what you owe, in other words, you only have to pay to spring leaf to the value of the car. This means that you can pay spring leaf $4000, and keep the car.
The remaining $6000 that you owe spring leaf over and above the value of the car is treated like a credit card or medical bill in chapter 13, an unsecured debt. In most cases, the Chapter 13 cases I file pay very little, often one cent on the dollar, so basically you would pay $60 to spring leaf to discharge the $6000 unsecured portion of the one.
And the interest rate will be lowered to 4.75 % as well, saving you even more money.
By loans are legal in Ohio. It is a shame to see people who can’t afford the very high interest rates charged by these lenders suffering and paying out money they really need for living expenses because they are afraid their car will be repossessed. And, in fact, the title loan companies do repossess cars. These are probably some of the most dangerous and frustrating loans that I see.
Because everyone needs their car for just about everything they do in daily life, the threat of not having the automobile is huge. Although the debt owed to a title loan company is dischargeable, because they have a security interest in your car, they can actually take your car if you don’t pay the loan.
In chapter 7 cases, we often try to pay these loans off before filing our bankruptcy. But this is often difficult and sometimes impossible. We don’t need to do this in a Chapter 13. In a Chapter 13 we can pay back the title loan over a period of 36 to 60 months.
And, the interest rate will be changed to 4.75%!
In most of the cases that I see, the title loan people are pretty smart. They generally won’t loan anyone much more than the value of the car. If you have borrowed an amount that exceeds the value of your car then you can cram down the loan just like you can with the collateral loan. Either way, Chapter 13 is a very effective tool to use against title loans
Payday loans are dischargeable in Chapter 13 bankruptcy.
Even though the Payday Loan company makes you sign documents that seem to indicate that these loans would not be dischargeable in bankruptcy, they are, in fact, dischargeable in a Chapter 13 bankruptcy. Although there is a provision in the bankruptcy law that says that cash advances adding up to more than $825 made within 70 days prior to filing are presumed to be nondischargeable in chapter 13 bankruptcy, in practice I have yet to see a payday loan creditor file anything in any of my cases requesting that their debt be paid.
Typically, these payday loan creditors will require payment by automatically deducting the money from your bank account where your paycheck is deposited. They like to time the payments so that the loan payment comes out very same day your paycheck is deposited. This makes it virtually impossible for you to take the money out of your bank account prior to the automatic payment on the payday loan being made.
Occasionally payday loans are paid by check, typically a post-dated check that the payday loan creditor is supposed to hold and deposit on a certain date. If you try to put a stop payment on these payday loans they are generally successful in avoiding the stop payment and end up getting the money anyway. As you might expect, they’re very experienced at this. There is a particular way that I generally advise my clients to avoid payment on the payday loans that has worked very well. Of course, once you file a bankruptcy case, you stop making payments on these loans too.
In chapter 13, payday loans are treated just like any other unsecured loan, like a credit card, or medical bill. Once you file your Chapter 13 bankruptcy, the payday loan lender is not permitted to further access your bank account.
Will they take my car?
Probably the number one question I get as a bankruptcy attorney in Dayton Ohio concerns the car. Of course, everybody has to have their automobile get to work, school, the grocery store – practically everywhere. In fact, I’ve had people tell me that they were so afraid of losing their car if they filed bankruptcy that it kept them for years from even finding out if bankruptcy was an option – or whether or not it was even true that they would lose their car if they file Chapter 13 bankruptcy.
The good news is that nobody has to lose their car in a bankruptcy.
It’s true that if you have a car that is worth more than can be protected in a Chapter 7 bankruptcy then you may have to use a Chapter 13 bankruptcy in order to keep the car but you can still discharge your debts in Chapter 13. And sometimes pay almost nothing to your creditors in the process.
Think of cars as being in one of two categories, cars that are paid for, and cars that aren’t. If a car is paid for, its value is considered equity and, as mentioned above, is protected up to about $5000 if I combine all of the protection that I can for the individual car.
We use the book value as a starting point, but your particular car may be worth more or less than the Kelley blue book or KBB value that you look up online. As a general rule if your car is worth less than about $5000 (use clean trade in value on the chart) you should be able to keep it in a Chapter 13 bankruptcy and pay nothing extra to your unsecured creditors.
But what if your car is worth $10,000? In this case, we would want to consider filing a chapter 13 and pay the creditors something to compensate them for the extra value we have in our car and are keeping.
Here’s an example. Lets say you own a car worth about $10,000 and the car is titled jointly. I can protect about $7,350 of the value and the difference, or $2,650, would be paid out to the creditors over 3 to 5 years. This could be as little as $44 per month, and you get to keep the car.
Cramdown of cars in chapter 13.
When can you pay less for the car than you owe on it?
A powerful feature of Chapter 13 is the ability to cram down the debt that you owe on automobiles. The “cram down” is a term used to describe how you can pay a creditor only the value of your automobile even though you may owe much more on it.
For example, if you have a car is worth $6,000 and you owe $10,000 on it, when you cram this car down in a Chapter 13 you only pay $6,000 as a secured debt, and the interest rate will be 4.75%. The $4,000 that you owe on the car over and above it’s value is treated like an unsecured debt, like a medical bill or credit card. Because in most cases we only pay a penny on the dollar, essentially you are only going to pay $6,000, the value of the car, even though you owe $10,000 on it.
Bankruptcy law does not permit you to cram down all car loans, however. The car has to be purchased more than 910 days prior to the filing date of your bankruptcy. This means that we need to be very careful in choosing the filing date. You wouldn’t want to file your bankruptcy only 909 days after the car purchase date, because this would mean you would have to pay the full amount that you owe on the car.
In our example, you would have to pay $10,000 for the car, the interest rate would still be lowered to 4.75%, but you wouldn’t be able to cram the car down. The car has to be purchased more than 910 days prior to your filing your bankruptcy case. So, by waiting a day you will save $4,000. Little details like these make a big difference.
As an example, once I had a client come to me in a big hurry to file. His wages were being garnished and he asked me to file his case at once to stop his garnishment. But, I never get in a hurry and fail to do a proper analysis. When I pointed out to him that if we just waited 4 more weeks, we could save him about $8,500 by cramming down his car, he was very grateful and was happy to let his garnishment continue for 2 more paychecks. The amount of money he lost to the two extra garnishments was not too much, especially compared to the $8,500 I saved him on the car.
Even if you can’t cram down the automobile, there is still a great benefit to paying for automobiles in chapter 13. In many cases, my clients have high interest loans on their automobiles. Perhaps the automobile is worth close to what they owe on it but their interest rate is 24.99%. By putting the automobile and the bankruptcy they will save thousands of dollars in interest charges.
How to get a car after bankruptcy (or before bankruptcy)
Sometimes you know that you’re not going to keep your car. You want to send it back to the creditor and be done with the car and the debt on the car. The car is, perhaps, in bad condition and so for that reason you don’t want to keep it. You probably owe more on it than it’s worth anyway.
But, we all have to have a car, don’t we? In these circumstances, you would buy a car before filing, and although you cannot cram down the car, since the purchase date will be very recent before you file your bankruptcy case, you still get the benefit of changing the intereste rate to 4.75% which is normally a lot less than what you end up paying for a car before you file a bankruptcy case. Your old car will go back to the creditor, whop will sell it at auction, and the difference is treated like a medical bill or credit card in yoiur chapter 13.
Apartment leases, do you want to stay or go?
Filing bankruptcy will not cause you to lose your apartment lease. Sometimes apartment complexes want you to reaffirm the lease but most of the time they don’t. You just continue to make your monthly payment and continue on as normal.
The apartment must be listed because it’s actually debt that you owe. You will state in your Chapter 13 bankruptcy petition that you’re going to keep the lease and continue to make payments. If you don’t make payments of course you can be evicted just the same as if you were not in bankruptcy. But the bankruptcy itself will not cause you to be evicted so long as you’re current on your rent payments.
On the other hand, sometimes it’s you’re better off breaking the lease and moving somewhere else. If you had a loss of income or divorce or some other setback and you need to get out of a lease that you could no longer afford, Chapter 13 bankruptcy will allow you to move out, break the lease and discharge the remaining payments, including, generally, any damage claims that the landlord might later want to bring against you.
The standard practice for doing this would be to move out of the apartment before you file bankruptcy, and then include the lease debt in a Chapter 13 bankruptcy to be discharged.
A very common question and concern everyone has when considering filing Chapter 13 bankruptcy when they are renting is whether or not they will be able to find another apartment to rent. Fortunately, this turns out to be not a problem at all.
I filed thousands of cases and I can tell you that it is a very, very rare occasion to hear anyone tell me that they’ve had any difficulty finding a place to live, wherever they want to live, because of a Chapter 13bankruptcy.
Keeping your house
Many of my clients who file Chapter 13 bankruptcy own their own homes. They are making house payments and buying their home, and they don’t lose the home in a Chapter 13 bankruptcy.
In chapter 7, you need to be current in your house payments in order to keep the house. If you are behind, the creditor can request permission to proceed against the house in foreclosure. The bankruptcy does slow down the process but eventually the foreclosure will happen.
You can do the same thing with a chapter 13, but the chapter 13 gives you more options, if you know how to approach it.
By filing Chapter 13 bankruptcy, you can stop a foreclosure and the Chapter 13 plan will give you 3 to 5 years to catch up all of your missed payments. In fact, this is one of the major reasons why people will file Chapter 13. They get behind in their house payments and the mortgage company simply won’t work with them. When you get three months behind on your house, your mortgage company will typically refer your mortgage out to a law firm to sue you for foreclosure.
If you’re in foreclosure, you need to know that filing chapter 13 stops the foreclosure process so long as it is filed prior to the sheriff sale date. In other words, it doesn’t matter that you’ve already been sued, or that you’re already in court. It doesn’t matter if the court has already granted judgment against you. It doesn’t matter even if the sheriff sale has been scheduled. All that matters is that we actually file your case prior to the scheduled sale date.
There are so many advantages to using Chapter 13 when it comes to mortgage debt. Although you can’t change the interest rate on a mortgage like you can with an automobile, you can sometimes totally eliminate second or third mortgages and have them treated as an unsecured debt, like a credit card or medical bill. Also, you can remove judgment liens that may have been attached to your house because you were sued.
Also, in today’s real estate market, it is not uncommon for your real estate to have dropped in value. So now, your house could be worth far less. This often provides us with an opportunity to strip off second mortgages. Even if you don’t have a second mortgage or even if you’re not sure that you want to keep the house, Chapter 13 gives you an option to change your mind after the case is filed.
That’s right. You could file a Chapter 13 with your initial stated intent to be to keep the house. You can see how that works with your budget, and if everything works out as planned and you still want to keep the house, then your Chapter 13 will do just that for you. But what happens if, while you’re in the middle of your Chapter 13 plan, you have a change in your life circumstances? Maybe you change jobs or you get transferred or divorced. You have options.
With Chapter 13 you are not locked into your decision. You can file your plan to keep the house, and if it works out fine – but if you change your mind I can modify your plan to drop the house out of the plan and discharge the deficiency. This way, when you end your Chapter 13 and get a discharge of all your debt, the house deficiency will be discharged as well. And, if you do change your mind in the middle of the plan, you still are able to live in the house for a period of months while the foreclosure is taking place.
Land Contracts in Chapter 13
What if you’re buying a home on a land contract, or selling one? If you’re buying a home on land contract, this is considered an interest in real estate. This interest in real estate is protected by the residential real estate exemption. If you’re selling on a house on land contract you don’t have any residential exemption (and it and there is no protection for any equity that you may have in the contract, either).
Chapter 13 provides you with several options if you are purchasing your home on a land contract or if you are selling well. Often, if you are purchasing a home on the land contract, the contract will require that you pay the full purchase price only a few years after you enter the contract. This is called a baloon payment. With Chapter 13, it is possible to extend the time within which you must pay off this contract by up to five years. Of course, you still have to pay the total amount due and may be difficult to obtain financing a Chapter 13 but it is possible and we have done this on several occasions.
Therefore, if you are selling a house on land contract later on you are entitled to receive money because of a land contract – the money that you would receive on a land contract could be lost in a Chapter 7. Therefore, you might want to consider filing a chapter 13, which would give you more options to deal with the contract than are available in a chapter 7.
Credit unions deserve special mention. Credit unions are very easy to deal with, and it’s sometimes easier to get loans from a credit union than a bank. Credit unions provide car loans, sometimes mortgage loans, credit cards, personal loans and frequently the credit union is the only banking institution that families may use.
The difficulty that sometimes arises with a credit union when you file a Chapter 7 bankruptcy is the concept of cross collateralization. That’s a legal concept that means that the credit union ties all your loans and collateral, if any, together. So if you have a car loan, credit card, and a personal loan, then all of these loans are generally going to be secured by your car.
So, if you get behind on your credit card payment – surprise! – your car can be repossessed. When this happens, the credit union member is often taken by surprise because, after all, he’s currently is current on his car payment. “What’s up!” screams the credit union member. “Why did you clean out my bank account, and repossess my car? I only missed my credit card payment! My car payment is current!
You even take it directly from my account! (Expletives deleted)
The credit union then explains, often for the first time, that the credit card is secured by the car, personal loan is secured by the car, and if any of these payments become late they have the right to take money out of your bank account, checking, savings, without warning and repossess the car. And, they frequently do all of this at the same time causing you to bounce checks and have to pay repossession fees.
It’s a very hard way to learn about the concept of cross collateral station.
Cross-collateralization frequently causes problems in a Chapter 7 bankruptcy. This is because often you will have a credit card, a personal loan, and the car that you want to keep in a bankruptcy but you want to discharge (with no payment) the credit card and personal loan while keeping the car.
The credit union will often not agree to this. In fact, credit unions almost never agree to this. The credit union will not agree to allow you to keep the car, unless you also agree to pay back the balance on the credit card and personal loan. Often the amount owed on the credit card personal loan and car loan far far exceed the value of the car.
Because there’s no way to force the creditor to allow you to just reaffirm the car in a Chapter 7 bankruptcy, we usually will return the car to the creditor and allow them to repossess it – sell it – and discharge all the debt with no payment.
Chapter 13 offers you a great way to deal with the problem of cross-collateralization. A Chapter 13 is said to “break” the cross-collateralization. So, for example, if you have an automobile loan, a credit card, a personal loan with a credit union, you can actually keep the car and only pay the credit union the value of the car.
Often the total amount owed to the credit union for car loan, credit card and personal loan far exceed the value of the car. In a Chapter 7, you have to agree to pay the entire amount owed to the credit union if you want to keep the car. In Chapter 13 – this is not the case.
Let’s say you have a car worth $10,000. You owe $8,000 on the car loan, but you also have a $5,000 credit card debt and a $3,000 personal loan. The most you’ll have to pay the credit union in order to keep the car is $10,000, – the value of the car.
Because of cross collateralization, the total amount owed to the credit union, $16,000 is more than the value of the collateral, the $10,000 car. So the credit union is only entitled to be treated as a secured creditor for $10,000. The additional $6,000 you owe the credit union over and above the value of the car is treated like an unsecured debt, like a credit card or medical bill.
Cosigners in Chapter 13 Bankruptcy
If you have a cosigner, typically a family member, you, and your co-signer need to understand that the cosigner has only limited protection in a chapter 13 bankruptcy, in most cases. If you are paying back 100% of your debt in your chapter 13, then your cosigner is fully protected. But not too many cases pay back 100%.
If you are keeping the collateral on a secured debt cosigned by someone, they are still liable for a portion of the debt which is discharged in your chapter 13. The creditors will sometimes even ask for the court’s permission to go after the cosigner for the difference. This can be a complex problem and one best left to a very experienced chapter 13 bankruptcy attorney.
Sometime you are the cosigner for a debt that is being paid by someone else. For example, you may have cosigned for a child who needed a cosigner for a car and the child is paying for and driving the car.
In this case, we will want to discharge your obligation without affecting the child’s car or credit. There are special plan provisions we use to take care of these situations. They are not uncommon but must be properly handled so everything goes smoothly and the cosigner is not affected.
Cosigners are required to be listed in your bankruptcy and will be notified by the bankruptcy court. So if you have a friend or family member who is a cosigner one of your debts, you’ll probably want to tell that cosigner about your bankruptcy filing before you actually file the case because you don’t want the cosigner to first learn about your bankruptcy filing by getting a court notice in the mail.
Discharge Utilities in Bankruptcy
Past-due utilities are discharged in chapter 13. These are unsecured debts and are discharged just like a medical bill or credit card. Sometimes the utility company will make you pay a security deposit just as if you are a new customer. If you have a security deposit on file when you file the bankruptcy, the utility is permitted to keep that security deposit and apply it to the balance that you owe when you file.
Sometimes your utilities are not behind, but yet the utility company may still discharge the unpaid balance that you owe on the date of filing. This is not done in every case but technically the utility company is correct in doing this.
For example, if your utility bill is due on the 30th and you file a bankruptcy on the 15th, approximate one half of your monthly utility bill would actually be dischargeable in bankruptcy. Even if you don’t list it to be discharged in bankruptcy, the utility company will sometimes take it upon itself not bill you for the amount of usage that you had prior to the day that you file your bankruptcy case.
Student loans are generally not discharged in bankruptcy
Generally, student loans are not discharged in bankruptcy. This is true of both federal and private student loans. It is technically possible to discharge student loans in bankruptcy but it is very difficult.
You essentially have to show that you cannot now and probably never will be able to in the foreseeable future pay all or a significant portion of your student loan debt. The way I like to explain the difficulty involved in discharging student loans in bankruptcy is like this: if you can walk into the courtroom to make the argument that your student loan should be discharged – you have already lost your argument. The reason is because you were able to walk into the courtroom to make the argument in the first place.
Student loans are guaranteed by the Government. Essentially you are suing the United States of America and the success rate for these kinds of cases is very low. I will not take on a student loan discharge case as a rule because of the low success rate, I don’t want to charge my clients money for what will probably be a loser case. If your situation is such that you really can’t pay and you are disabled, there are non-bankruptcy ways to get the student loan forgiven.
Sometimes we have to file Chapter 13 just to obtain protection from these kinds of student loan creditors for three to five years, hoping that your income will increase and that the combination of increased income and discharge of other debt will put you in a position where you will be able to make payments on the non-dischargeable private student loans.
In some chapter 13 cases, we have situations where the majority of the debt someone has is student loan debt, not discharged, but also considerable credit card and medical debt. In these cases, chapter 13 provides a very effective way to pay what you can afford, most of the money goes to the student loans, which you cannot discharge, a smaller percentage will go to pay the credit card and medical bills. What is left unpaid on the student loans at the end of the plan is still there at the end of the chapter 13, but the balance owed on the medical bills and credit card debt is gone forever. Any car debts are paid in full, and then you are usually in a better position to get into a payment plan on the balance left on your student loans.
Rent to own debt is discharged in bankruptcy
Rent to own debts are dischargeable in bankruptcy. However the contracts for these rent to own generally require that the property be returned to the rent to own creditor if you discharge the debt. These are generally very bad deals for consumers and I almost universally advise against reaffirming or keeping rent to own debt.
Occasionally, I will find someone who has just about completely paid off the rent to own contract and it doesn’t make any sense to turn the property back over since it’s almost paid for. In these limited situations we generally will use a special plan provision in the chapter 13 bankruptcy to keep the the rent to own property and continue to pay until the contract is completed.
Will I lose my tax refund in bankruptcy?
Tax refunds have limited protection in a Chapter 13 bankruptcy. As a general rule people to keep $800 of their refund, but that’s a gross oversimplification. The amount of the tax refund that is subject to the bankruptcy is determined by the date the case is filed. It is not determined by the date you get a refund.
And, tax refunds get examined each year in a chapter 13, since the plans run for 3 to 5 years. So, it makes sense to adjust your withholding to minimize the refund, and that way you will get to keep it. Also, by adjusting your withholding, you will maximize your take home pay, and that is a good thing for anyone’s budget.
Will I lose property if I file bankruptcy?
More and more people today know that you don’t lose everything in a bankruptcy. They don’t know how much they’re going to be able to keep, but they do know that they are not going to lose everything. And this is true. The truth of the matter is that in chapter 13, most people don’t lose anything. In fact, in those situations where there is value in property that would be a problem in chapter 7, filing a chapter 13 is just the thing to solve this problem. You get to pay a reduced amount to compensate the creditors for the property you keep, and you get to pay the reduced amount over 3 to 5 years, at no interest.
Most of the stuff that anybody owns has very little, if any, practical resale value. Everything that we own is used, and although its replacement cost may be significantly more than $10,000 – this is not the test. The test is what is the resale value in its current used condition. Therefore, it is almost always the case that everything that we own is fully protected in a bankruptcy.
Some property is not protected in bankruptcy. For example, if you have stocks and bonds, they generally are not going to be protected. A common example of this is employee stocks. I’ve had people who would be excellent candidates for Chapter 7. But they find, to their dismay, when we look up their stock that they have about $20,000 worth of stock in their company account. They don’t want to lose it so use chapter 1otwe end up having to do something other than filing a Chapter 7 bankruptcy for them.
Another situation that frequently causes problems for people is when, as part of estate planning for parents, real estate is put into their names. A common situation is where mom and dad put their home in a child’s name to eliminate probate proceedings upon their death. Mom and dad are still living in the house and perhaps the house is paid off but it’s in the son’s name. The son doesn’t live there so the house is not his residence, and the son has no equity exemption. The equity is totally unprotected if the son chooses to file Chapter 7 bankruptcy.
This is a very real situation and one that cannot be fixed by the son transferring the property back to parents because there are some things that you can’t safely do prior to filing bankruptcy. This is definitely one of them. This is a situation that is difficult to deal with and requires extensive planning and order to get the best result.
There are some things that can be done to keep property that would otherwise be lost. This is called exemption planning and it is perfectly appropriate. In fact, it’s my opinion that if an attorney doesn’t know how to do this well he shouldn’t be filing bankruptcy for people.
Exemption planning is the process of taking assets that would otherwise be lost in a Chapter 7 and converting them into assets that are protected and therefore will not be lost. For example, let’s say that we want to file bankruptcy in Chapter 7 and we have $10,000 in cash and our bank account. Depending on the time of year and the age of the client, we might want to take that money and purchase private IRAs. Particularly towards the end of the year and the husband and wife both maximize their IRA funding in December and then in the following year they do it again they can effectively convert money which would be lost in Chapter 7 bankruptcy in two protected IRA which would not be lost and bankruptcy. Proper planning just saved my clients $10,000.
Retirement accounts are protected in bankruptcy
Most retirement accounts are 100% protected in bankruptcy. There are some exceptions to this rule. Generally, your retirement account will be through your employer and these are almost always protected. Occasionally I see retirement accounts that are not protected. These are retirement accounts that are in name only and not actual retirement accounts.
So for example if you are putting aside money in a mutual fund and your intent is to use this mutual fund for retirement at a future date, you may think of it as a retirement fund because that is the use for which you have set this fund. However, mutual funds are sometimes not protected retirement accounts. So although you may think of this account as a retirement account – but is not legally protected and would be subject to being taken by the trustee if you file Chapter 7 bankruptcy. Also, retirement accounts that are inherited are not protected according to a recent court ruling
Bankruptcy hearings. Do I go to court when I file for bankruptcy?
First of all, you will probably not go to a court hearing. Bankruptcy meetings are generally held a meeting room in front of a trustee, not a judge. But I want to stress this reality, it’s not about the hearing.
When you get to the hearing stage it is probably too late to fix any problems that you may have. And probably you won’t know you have a problem until you get to this hearing. The work that needs to be done right is always done before the hearing.
The last thing anybody wants is a surprise at the 341 meeting. Sadly, I see this happen all the time. I recently sat and watched attorney squirm as the trustee started asking questions about a personal injury settlement listed in his client’s bankruptcy petition.
As it turns out, the attorney did not ask enough questions of his client and the client, in all fairness, thought he was telling the whole story when he told his attorney that a particular account was from a personal injury.
The problem in the case was that the personal injury was not from the client. The personal injury was from his mother and the client had inherited it because the mother has had passed away. Although generally speaking personal injury awards are exempt up to over $20,000 in bankruptcy, this was not the client’s personal injury and therefore the exemption protection didn’t apply.
Because the attorney didn’t probe deeply into the nature of this account to find out that that this particular personal injury account didn’t enjoy the protection of the exemption statute – the client lost the personal injury account to the trustee. I don’t know what happened after that – but I bet it was probably a very unpleasant situation.
I share this story with you to prove a point. I have many checklists which cover dozens of items. We check all of our cases and recheck and double-check everything to make sure that we know everything we need to know in order to make sure our clients are protected. In fact, sometimes we go overboard, I think, but it never hurts to be over-prepared and it never pays to be underprepared.
If you want to file Chapter 7 bankruptcy you need to select your attorney carefully. Very little can be done to fix problems that turn up after the case is filed. The damage, once done, is normally not reversible. You can’t back out of a chapter 7 case if you later find out you will lose property. It’s too late at that point.
You deserve a fresh start, a real financial recovery. You want a successful outcome, you need financial reorganization. Don’t take chances. Bankruptcy is a complex specialty area of the wall. Your attorney should ideally be a board certified specialist. You wouldn’t go to a general practice doctor for brain surgery or anything else that was very important. You shouldn’t trust a once-in-a-lifetime financial reorganization to a jack of all trades attorney who is not a certified specialist.
Credit after bankruptcy – Getting a real fresh start
They say bankruptcy is a fresh start, and I agree. But it’s just a start. We will all agree that you need to finish what you start. But bankruptcy alone doesn’t do this at all.
How does your attorney help you out after the bankruptcy? Well, the truth is, most attorneys don’t, in fact I know of no attorney in Ohio who has a formal program of credit rebuilding and credit report correction like mine.
In fact, I’m the only attorney in Ohio who is a certified credit counselor, board-certified bankruptcy specialist and a certified debt arbitrator. These non-attorney designations and the Board certification which is recognized by the Ohio Supreme Court, means that I do much more than just file bankruptcy. I assist my clients in rebuilding their credit.
Sadly, none of this is taught to attorneys at law school.
You’ve probably heard that bankruptcy will stay on your credit can ruin your credit for 10 years. Unfortunately, there is sometimes truth to that statement. If you don’t do anything after bankruptcy filing to improve your credit and clean up your credit report, you could expect to have poor credit for a long time. But this isn’t necessary. You can do better.
I found that by following a specific course of action after Chapter 7 bankruptcy is filed, I can generally help my clients to achieve credit scores a 650 and higher, clean up their credit report, so that they are able to buy cars at decent interest rates and even purchase houses only a few years after their bankruptcy discharge. However, this doesn’t happen by itself.
Credit reporting after bankruptcy
Did you know that $1 billion in debt discharged in bankruptcy is actually paid by consumers every year? It’s true. Creditors often fail to update information on your credit report after you file Chapter 7 bankruptcy.
Legally, you do not owe these debts, but it appears on your credit report anyway, sometimes, as if you did still owe it. Creditors often take the position that they are not doing anything wrong because they are not reporting that you owe the debt. They’re not reporting anything, in fact. They stopped reporting. But you can’t make them go back and clean it up very easily. There is a way to dispute is properly and I’ve built this into my Chapter 7 bankruptcy practice.
Sometimes people want to use credit repair companies like Lexington Law or Bradley Allen law to clean up their credit report after bankruptcy and help them recover their credit. I can’t speak for the overall success rate of any company, of course, but I can tell you that my clients report to me that they have not enjoyed much success with these kinds of companies. Often times, I read that a shotgun approach is used to dispute everything on a credit report in hopes that will do the trick. I found my own experience that that’s probably not the best way.
I prefer to use a scalpel, not a shotgun, and individually analyze every single credit report carefully. Then, I only dispute the items that are both incorrect and hurting my clients. In fact, careful examination of many credit reports reveals that some errors are actually favorable to your credit score. Of course, it takes more time to individually analyze a credit report than it does to just dispute everything on it all at once . But the results are much better if you take the time to do it right.
How long will it take you to recover from bankruptcy?
That depends on the approach that you take after your bankruptcy discharge, of course. Many people tell me that they intend to follow a “cash only” lifestyle. While there is some attraction to this notion, I tell them, it’s probably a bad idea if you want to rapidly rebuild your credit.
You have to use credit properly in order to improve your credit score. Having no credit, living a “cash only” life, will hurt your credit score. Going after too much credit too quickly, and using it improperly, will also hurt your credit. What you need is the right approach.
There’s definitely a right way to do this. If you follow my approach, you should be recovered from your bankruptcy after about one year. You should be able to get car loans at interest rates that are good and in 3 to 4 years you should be able to qualify for a real estate mortgage, provided that you make enough money to qualify. In other words, the bankruptcy will not hold you back.
Chapter 7 is a very powerful tool to obtain a financial reorganization. Chapter 7 bankruptcy is the chapter that is filed in roughly 60 to 70% of my cases. But even if you qualify for Chapter 7, it may not be the best solution for you because Chapter 13 bankruptcy offers more flexibility and more options and better results in many cases than a Chapter 7.
Much of the information that you will find on the Internet when you look up Chapter 7 bankruptcy is not helpful and even misleading. Even truthful information is not helpful in many cases because the application of information cannot be figured out simply by Internet research. You really need to talk to a certified specialist who has decades of experience solving the kind of problem that you are trying to solve.
Worrying about median income, trying to figure out the means test, searching for exemption laws is not a total waste of time, but it doesn’t really give you the ability to answer the questions that you need answers to.