Is Chapter 13 Right for Me?
Chapter 13 of the Bankruptcy Code allows you to cure the arrears on your home mortgage and discharge your credit card debt.
The decision to file a bankruptcy case is a serious matter. You shouldn't make the decision without talking face-to-face with an experienced bankruptcy attorney. Here are some factors to consider:
- Do you have regular income? You must have the ability to make regular monthly payments to a Chapter 13 Trustee for between three to five years. In general, you need a job or a close relative who is willing and able to commit to helping you.
- Do you have disposable income? You must have sufficient money left over every month after paying your basic expenses (including your full monthly mortgage payment) that you can pay the Trustee. A handy rule of thumb is to average your payments on your credit card bills over the past 6 months -- that will approximate the amount of your disposable income, because you will not be making direct payments on your credit cards after you file for bankruptcy. Your disposable income goes to the Trustee, who then pays the arrears on your mortgage first and (if there's anything left over) pays a fraction of your credit-card debt.
- What did you do with the money you were supposed to be sending to the mortgage company? Once your loan went into foreclosure, the mortgage company probably stopped accepting your payments. If you spent that money on other things instead of putting it back in the bank, you may not have sufficient self-discipline to succeed in a three- to five-year repayment plan under Chapter 13.
- Do you have any money at risk? In other words, did you make a sizable down payment to buy your home? If not -- for example, if you got 100% financing -- you don't have much to lose except pride by letting your house go to foreclosure. You can think of the payments you made as equivalent to rent on an apartment. On the other hand, if you made a substantial down payment out of savings, it might make sense to try really hard to keep your house.
- Can you live on a tight budget for up to five years? Most Chapter 13 cases fail, because it's really hard to keep up your mortgage and plan payments over the 3-to-5 year length of the case. Make an honest assessment of whether you can live for five years without a vacation trip and without a new car or a 3-D television.
- Are you current on income taxes? Unpaid income taxes are generally priority debts that must be paid in full through your Chapter 13 plan, in addition to the catch-up payments on your mortgage.
- Is there an underwater second mortgage? If your house is worth less than you owe on the first mortgage, it may be possible to "strip" the second mortgage in Chapter 13. That is, we can treat the second mortgage as an unsecured debt and pay the second mortgagee the same percentage dividend as your other unsecured creditors -- and that may be as little as zero percent. The ability to strip an underwater junior lien is a major advantage of Chapter 13 over other kinds of debt relief, in fact.
An example
As an example, think of a couple that takes home $3,500 per month. Their first mortgage payment is $2,000 per month, and they missed three payments before being put into foreclosure. The mortgage company added another $1,000 in legal fees, so they owe $7,000 in arrears. Their other bills (electric, gas & oil, insurance, groceries, etc.) average out at $1,268 per month. They have agreed to pay their attorney a pre-bankruptcy retainer of $2,000 and to pay the remainder of the agreed legal fee and expenses of $2,500 through their plan. They can propose a 5-year Chapter 13 plan that would pay the following total amounts to the Trustee:
| Remainder of Attorney Fee | $2,500.00 |
|---|---|
| Unpaid income taxes | 3,000.00 |
| Mortgage Arrears | 7,000.00 |
| Trustee commission | 1,389.00 |
| Total: | $13,889.00 |
Their monthly plan payment will be $232, which exactly uses up the excess of their take-home pay over their basic expenses. Credit card and other unsecured creditors will receive nothing.
At the end of the five years, those unsecured debts will be discharged. The couple will also be caught up on the mortgage and on payments to their bankruptcy attorney.