Chapter 13 Bankruptcy: Living Expenses – Need vs. Want

When people consider filing for relief under Chapter 13 of the Bankruptcy Code they are typically consumed with the debts they owe, creditor harassment, and just making it day to day. Because this can be overwhelming, seeking counsel from an attorney can help put things into perspective.

Some people do not think in terms of needs and wants when it comes to considering bankruptcy or even spending and living on a budget. However, this is a major part of what Chapter 13 bankruptcy helps to accomplish.  In the bankruptcy world, a person’s expenses are looked at in two categories – necessary and non-necessary for reorganization purposes.  A necessary expense would be defined as food, clothing, and shelter.  Non-necessary expenses would be things such as cable, internet, gym memberships, etc.  People must begin to put their expenses in perspective and make tough decisions like whether to keep their home or surrender it or whether they can afford to keep their children in a private school which clearly is a non-necessary expense. 

For illustration purposes, let’s look at expenses for food, clothing and other items based on the IRS National Standards for Allowable Living Expenses in bankruptcy cases filed on or after March 15, 2009.  Per month, a household of two people can spend $537.00 for food, $66.00 for housekeeping supplies, $162.00 for clothing and services, $59.00 for personal care products & services and $197.00 for miscellaneous expenses.  These items become budgeted expenses in the sense that you are now limited to what you are allowed to spend on certain things.  Reality sets in quickly and it sometimes stirs up anger or bitterness in Chapter 13 cases when someone must be told that they have to remove their children from private school or give up the RV used for vacation or the boat used for recreation.   Remember, usually these issues only come up when someone files a Chapter 13 seeking to pay unsecured creditors less than 100%.

Anyone who files a bankruptcy is subject to these expense limits and must follow the confines of the law and the applicable rules if they want the benefits that bankruptcy offers. In other words, you have to take the good with the bad.   Because we must follow the IRS expense guidelines, a person can be forced to give up property in bankruptcy and/or reduce their spending in they want the benefits of a Chapter 13 reorganization.  So keep this in mind when you elect to file a Chapter 13 and attempt to pay your unsecured creditors less than 100%.

Question: What Should I Do If I Can’t Afford To Pay An Increased Credit Card Payment? Should I Contact A Debt Consolidation Company Or Consider Filing A Chapter 13 Reorganization Bankruptcy?

Before you take any affirmative steps to reorganize your debt with a debt management company or file for bankruptcy, you should sit down and work up a detailed financial budget for you and your family so you know how much disposable income you have each month to apply towards your credit card debt.

When you have completed your budget, contact your credit card companies directly and see if you can get them to agree on changing the terms of the repayment of the debt.  Unfortunately, most credit card companies will not change the repayment terms unless you fall at least three months behind.  Of course, if you stop making your payments, your credit score will drop significantly.  

If you are unable to negotiate directly with your creditors, then consult with an attorney to consider all of your options including hiring a debt management company or filing bankruptcy. 

A common question we receive in our offices is “what’s the difference between private debt consolidation and filing Chapter 13 and which is better?”  Though the concept is nearly the same, there are many important differences.  If you’re interested in maintaining a good credit rating and you don’t want your debt problems to become public record, then private debt consolidation may meet your needs. Private debt consolidation, however, can’t give you guaranteed court protection from your creditors.  Creditors can still proceed with legal action against you to collect their debts. On the other hand, Chapter 13 offers significantly more protection to you and your family, allowing you to pay your creditors a percentage of the debt owed (often as low as ten percent) and discharges the remaining balance.  And perhaps best of all, creditors cannot repossess or foreclose on your property.

What’s best for you will naturally depend on your specific debts, personal priorities and income status.

Attention Indiana Residents: You May Have Judgment Liens On Your Property And Never Even Know It!!

According to Indiana Statute, once a Judgment is entered in a civil lawsuit (whether it be a Default Judgment, Summary Judgment or Agreed Judgment) that Judgment automatically becomes a Judgment Lien on your real property.  The Judgment Creditor doesn’t have to take any action to file a lien and have it recorded in the property room of your local county courthouse.  The Clerk of the Court records the lien automatically when a Judgment is entered in a state court case. Typically, you won’t even know about it until you try to refinance your mortgage or sell your home.  It could cause HUGE problems for you in the future, but there is a way to protect yourself and your property from these “Judgment Liens”. 

If you are currently in bankruptcy OR if you are just thinking about filing for bankruptcy relief, and are worried that you may have liens on your property, go to your local property room and do a check to see if any Judgment Liens are recorded.  More than likely, these Judgment Liens are going to be recorded in the “Miscellaneous Book” and will have a stamped book and page number, just like your recorded mortgage and deed.   

 You are probably asking yourself this question: “What if they aren’t recorded?  How can I find out if I’ve ever had a Judgment entered against me?”  Well, I have an answer for you!  Go to the county courthouse in which your property is located and do a search for Judgments against you.  Don’t forget to provide the Clerk with any other name you may have been known by in the past or nicknames you may use.  The clerk will then run a report and will be able to determine if any Judgment have been entered against you.  If there are Judgments, have that clerk print out a copy of these Judgments and bring them to your attorney’s office.  It can then be determined if the Judgment Lien can be avoided and ensure that the Lien is removed once your bankruptcy is discharged.    

 You would be surprised the amount of people that have Liens against their property and never realize it.  When they do discover those liens, it’s too late and it causes additional time, stress and more importantly…more money to have them removed and paid off. 

Remember…Judgment Liens don’t have to be recorded, so if you have ever had any kind of Judgment entered against you, that Judgment becomes on automatic lien on your property.  This is especially important to check out for clients already in bankruptcy and even more important for those thinking about filing.  Do your research and check everything out.  For those of you that have already filed, don’t worry.  The Judgment Liens can be added to your bankruptcy and taken care of in your case.

What Happens During Pre-Bankruptcy Counseling?

Do you have test anxiety? There is nothing to worry about when it comes to pre-bankruptcy counseling.  Pre-bankruptcy counseling can be done in person, by phone or on-line and takes about 30 to 40 minutes.  It isn’t an option—you cannot file your bankruptcy case until you receive a certificate showing that you completed the course—but you can learn a thing or two if you pay attention.

During the counseling session, you disclose your debts, assets (home, car, furniture, bank accounts, etc.) and your income and expenses.  This allows the counselor or automated system to assess your individual situation. Information is provided to you about the impact on your credit score if you have made late payments to your creditors or file bankruptcy. Also, the counselor will explain the differences between a Chapter 7 and Chapter 13 filing.  Further, the counselor provides tips on prioritizing your debts—who should you pay first when you are strapped for cash.  

Pay attention and read the sections.  When you take the course on-line you are required to call the company and talk to a counselor before your certificate is issued.  To verify that you are the person who actually took the counseling, the counselor will ask a few questions to see if you know the answers.  Don’t worry, the questions are not hard and are based on the financial concepts that were covered in the counseling.  There are no trick questions.

Everyone passes!

Ecology DOES Go With Economy!

Nothing is worse when you are broke than having something expensive go wrong with your house-the water heater breaks, the roof starts leaking….  Well, with the 2009 stimulus package and some generous federal tax credits you can do a number of home improvements and expect to get a return on some of the money you spent right away.  Tax credits actually reduce what you owe to the government, as opposed to tax deductions, which lower your taxable income.  Installing energy efficient systems before December 31^st 2010 entitles you to 30% of what you spend, up to $1,500, in tax credit.  Some states offer further incentives.  Visit http://www.dsireusa.org/ for a guide to state and federal tax credits.

Alternative energy systems that qualify include:

-          reflective roofing (look for specially treated asphalt or reflective metal and reduce your air-conditioning costs by 15%);

-          energy efficient doors and windows (look for windows with low-E glass and inert gas between double panes and spacers; look for doors with frames made of vinyl-clad wood or fiberglass with insulating core materials and weather stripping; also installing a storm door qualifies for a credit);

-          insulation (add an additional layer of R-19 or R-30 in the attic and save up to 20% on heating and cooling bills);

-          efficient hot water heaters (gas, propane or oil  heaters with a thermal efficiency of 90% qualify, or a tankless “on demand” system that runs on natural gas or propane – these eliminate the need to keep several gallons of water hearing at all times); and

-          heating and air conditioning systems (look for energy Star package systems or even split systems for your AC; heating systems must be highly efficient and have an Annual Fuel Utilization Efficiency rating greater than 90 for gas furnaces and greater than 85 for oil furnaces, boilers, and waters-heating systems). 

So, if you find yourself with a leaky roof and no choice but to fix it, get some of your investment back right away by choosing the eco-friendly materials.  In addition, you’ll reduce your cooling costs.  Down the road when your AC goes out, you can purchase a smaller system that is less expensive to run (even more savings).   While you’re up there working on the roof, you may as well add a layer of insulation– immediate tax credit, long-term savings on energy costs.

Additional tip – For anyone who’s got the cash to be a little more aggressive, or anyone who’s building from scratch, installing a wind turbine or a solar power system entitles you to a 30% tax credit with no limit.

Question: If a foreclosure action has already been filed in state court, can you still file a bankruptcy in order to save your home?

Yes. The filing of a Chapter 13 bankruptcy can stop the foreclosure action even if a judgment has already been entered against you and the sale of your home has been scheduled so long as the Master Commissioner has NOT actually sold your home. As soon as the bankruptcy case is filed, your bankruptcy attorney will contact the attorney for the mortgage company as well as the Master Commissioner in order to notify them of the filing and at that point no further action can be taken by the mortgage company to sell your home.

Your Chapter 13 plan filed with the bankruptcy court will propose to pay the mortgage company a certain amount of money each month to catch up on your past due payments. These payments are sent to your court appointed trustee who forwards them on to your mortgage company.

Of course, you must also be able to begin making your normal monthly mortgage payment in addition to a payment to the bankruptcy trustee. The advantage of filing a Chapter 13 is that you are given five years to catch up your past due payments at zero percent interest. On the other hand, mortgage companies usually require the past due amount paid in a lump sum payment in order to stop the foreclosure unless you are able to complete a loan modification.

If you do not have the ability to save your home from foreclosure, you may need to consider a Chapter 7 bankruptcy to protect you from garnishment if the mortgage company ends up with a deficiency judgment against you. This would occur if your house sells for less than what you owed on it.