If you are facing a mortgage foreclosure, vehicle repossession, wage garnishment or a lawsuit for money damages, Chapter 13 can be a lifesaver. As a court supervised payment plan, Chapter 13 bankruptcy will stop all active collection processes and give you breathing room to formulate a plan to deal with your creditors.
In many cases, Chapter 13 can reduce your budget obligations by hundreds of dollars per month. It can also reduce the total amount you owe. You may be able to “cram down” your vehicle loan, and pay credit card debt at one or two cents on the dollar.
However there are also many situations where Chapter 13 may not the “expense” side of your budget – your monthly out of pocket may stay the same. Further, not every car loan qualifies for a cram down and sometimes you will end up paying your credit card debt at 100 cents on the dollar (although with no accruing interest).
The specifics of your Chapter 13 case will depend on a variety of factors – your household income, the type of debts you have and even the attitude of the Chapter 13 trustee.
What does not change is the reality that Chapter 13 is a math problem. We have, at most, 60 months (5 years) to make your case work. And this is why you need to put on “reality glasses” when we discuss Chapter 13.
It is true that in a best case scenario, you can file Chapter 13, keep all of your assets and lower your payments. But in reality, Chapter 13 trustees (the attorneys who administer Chapter 13 plans for the bankruptcy court) have become extremely aggressive in demanding that your plan payment reflect every penny of disposable income.
Further, you should not assume that you can make it through 5 years without needing new tires, a new roof, unexpected illnesses, family emergencies and other expenses. This means that you should be prepared to give up non-essential items like jewelry or furniture to make your payment plan more feasible.
If your Chapter 13 plan includes multiple secured debts that have to be pain in full, and your budget is based on anticipated bonuses or overtime, we have little room to address emergencies.
Even your home or car should not be off the table if loans for either or both of these assets are stretching you. I have seen far too many Chapter 13 cases falter because my client insisted on keeping a $40,000 vehicle with a $700 per month payment.
Statistically, the percentage of Chapter 13 cases that run for 5 years and result in the issuance of a bankruptcy discharge are at historical lows. Give yourself an advantage by recognizing how difficult it can be to stay in Chapter 13 and use the power of bankruptcy to walk away from as many secured debts as you can so that we have as much flexibility as possible to adjust your plan payment downwards if circumstances take a turn for the worse.
