Bankruptcy Second Opinion: Why Chapter 13?
Legal ethics allows me to give a second opinion to people who already have a bankruptcy lawyer. (I don’t like to do that because it really hacks off the other lawyer.) These folks didn’t have a bankruptcy lawyer.
Chuck’s Chapter 13
The first guy, Chuck, had hired one of those bankruptcy lawyers who advertises a low, $899, legal fee. Because of a mix up, his chapter 13 was dismissed six weeks after the case was filed. (Dismissed means a bankruptcy is thrown out; discharged means it’s approved.) That discount bankruptcy lawyer did not get the case reinstated.
Chuck then went to a second bankruptcy lawyer, who did get the case reinstated–and charged a fair fee for that. But Chuck’s second lawyer said, “I’m helping you just this one time. If you get in trouble again, you are on your own.”
Well Chuck was in trouble again, and came to see me for a second opinion.
The reason Chuck’s in trouble is he can’t afford Chapter 13. His chapter 13 plan stopped a foreclosure, and tried to catch the house up over five years. Chuck has been making his bankruptcy payments, but kept falling further behind on his mortgage.
The problem is the big 401k loan that Chuck took out to catch the house up the first time when his wife split. Paying back that 401k loan doesn’t leave enough money in his paycheck.
When we talked it over, we figured out a solution. Chuck’s daughter is living at home, working a low paying job in fast food. She started a radiology program but can’t afford to finish. She’s not saving any money to go back to school, because the little she can put into the family is needed to fund the chapter 13 plan.
If Chuck stops making the chapter 13 payment, then there’s enough money for the daughter to finish the radiology program. When she gets a good paying job, then the family can afford the house.
Before filing the chapter 13, Chuck had tried for a loan modification but was turned down. Turned down for two reasons, I think–too much debt, and too little income.
A chapter 7 bankruptcy will take care of the other debts, and it slows down the foreclosure that will soon be coming because he’s late on the house again. Getting the daughter to finish school and get a good job will fix the income problem.
Chuck and his daughter have to move fast. Stop making the Chapter 13 payments, finish school, get a job, file Chapter 7, apply for and get a loan mod. The pieces have to fall in right for that to work, and he’ll have a chance to save the house.
Some people think you have to file chapter 13 to keep your house. For many people, chapter 7 can work better.
Some people think you have to file chapter 13 if you want to keep your house. and for some people, that’s true. But often chapter 7 can stop the foreclosure and save the house–and is much more likely to work than Chapter 13.
Chapter 13 had no chance to save the house for Chuck and his daughter. There just wasn’t enough money to make it work. Chuck’s chapter 13 guarantees the house will get foreclosed.
I hate to put people into chapter 13 plans they obviously can’t afford. I like finding ways to use Chapter 7 to get people where they are trying to go. That’s one reason I file fewer chapter 13s and more chapter 7s than most lawyers around here. And it’s a reason my dismissal rate is very low.
Karen’s Chapter 13
Karen came to see me after her Chapter 13 lawyers got sick and had to stop practicing law. Karen decided to get a second opinion from another bankruptcy lawyer just in case something came up with her Chapter 13.
After we talked, we decided Karen needs to convert to chapter 7.
Karen and her husband have been getting along badly for years. They are “separated,” and living in the same house. When she started chapter 13, her goal was to hang on to the house until their youngest son graduated from high school.
The young man has successfully finished his first year at Christopher Newport, and now it’s time for Karen to move out and get a place of her own. She’s been holding off, because she can’t afford to move. She can’t afford to move because of her chapter 13 payments.
Switch to chapter 7! That solves that problem.
Often when I recommend Chapter 13, I also recommend that we meet to discuss chapter 7 in a year or two.
Sometimes we can look down the road, and see that in a few years–or even a few months–the reason for chapter 13 will no longer apply. Chapter 13 plans can take five years–and five years is a long time. After a year or two, it is often time to re-analyze the situation and look again at chapter 7.
“Based on a True Story”
Chuck’s name really isn’t Chuck; Karen’s name really isn’t Karen. And I’ve changed all the other details, too.
Both these stories and the true stories they are based on, show why it’s important to have a long discussion with your bankruptcy lawyer about your family situation and life goals.
Bankruptcy is like a giant tow truck getting you back on the highway of life. To get the best result, you need to talk over with your bankruptcy lawyer what road you want to be on and where you are trying to go.
January 2016–Let me Tell You About Mike
Mike came to see me for a second opinion on Chapter 13. He got put into Chapter 13 because there was too much equity in his house. I agreed he had to be in Chapter 13, because there was too much equity. But there was $19,000 less equity than his lawyer had calculated. Why? When his lawyer calculated the equity, they forgot to subtract the $19,000 he was behind on his payments. That would have gotten his payment to be $300 a month less than he agreed to. Which is probably the difference between really being able to make the Chapter 13 payments, and not making them, and losing the house. Mike asked me if he had a chance of correcting that mistake and getting the payments lower. I don’t think so. This court is unforgiving. If your situation improves, they want a bigger payment. But asking for a smaller payment–almost impossible.
Chapter 13 is a nightmare. Before getting into Chapter 13, you really need to sweat the details. Otherwise, people get into a Chapter 13 that has no way to succeed.