Why file a Chapter 13 Bankruptcy when you qualify for Chapter 7?

A Chapter 7 bankruptcy is a liquidation bankruptcy, which in essence wipes out most of an individual’s general unsecured debts (i.e., credit card and medical bills) without a need to pay the balances through a repayment plan.  A Chapter 13 bankruptcy is a bankruptcy that reorganizes an individual’s debt and creates a monthly repayment plan that repays at least a portion of the debt over a period of three to five years.  The easiest way to qualify for a Chapter 13 bankruptcy is to not qualify for a Chapter 7, meaning, an individual would need to make more than the median income. In Michigan, the median household income from 2017 was $54,909. However, a Chapter 13 bankruptcy is not limited to only individuals who do not qualify for a Chapter 7 bankruptcy.

A Chapter 13 bankruptcy has a few more advantages than a Chapter 7 bankruptcy. For example, an individual who is behind on their mortgage has the ability to catch up on missed mortgage payments and prevent the possibility of a foreclosure action. An individual behind on car loan payments also has the option to restructure their debt to get caught up on missed car payments and prevent a possible repossession. This is not true under a Chapter 7 bankruptcy, in a Chapter 7 bankruptcy an individual is not able to catch up on missed payments. Therefore, the possibility of repossession or a foreclosure is still possible. Under a Chapter 13 bankruptcy, an individual is able to restructure their debt in a way to keep maintaining their payments as well as pay any possible arrears in order to get caught up and avoid the possible repossession or foreclosure.

When an individual falls behind on their mortgage, they have the benefit of filing for a Chapter 13 bankruptcy in order to prevent a foreclosure. Additionally, if the individual’s home is worth less than the first mortgage, any junior mortgages would be “stripped” away. Under a bankruptcy, those junior mortgages would be considered “wholly unsecured” and as such they could be stripped. Those junior mortgages would be treated the same as other unsecured debts and at the end of the bankruptcy, would be discharged the same as the other unsecured debts.

Another benefit to a Chapter 13 bankruptcy is that an individual will be able to keep all of their property under the bankruptcy, even if some is unexempted. In a Chapter 7 bankruptcy, property would need to be exempt in order for the individual to be able to keep their property. If an individual’s property cannot easily be exempt, for example, if an individual has a lot of valuable property or a lot of equity in their homes, then the individual’s total property may not be exempt. Any amount that is not exempt, the individual is required to either hand the property over to the trustee so that the trustee can sell it, or pay the trustee the monetary value in order for the individual to be able to retain possession. Whereas an individual filing for a Chapter 13 bankruptcy is able to retain possession of all property but must pay unsecured creditors an amount (typically pennies on the dollar) equal to the value of nonexempt assets through a process called the Liquidation Analysis.

Additionally, if someone owes significantly more on a vehicle than it is worth, they can “cramdown” the debts to its’s Fair Market Value (FMV).  This “cramdown” is allowed in Chapter 13 cases, as opposed to a Chapter 7. In order to utilize this process, the loan must have been acquired at least 910 days prior to the bankruptcy. This way, an individual who goes out and buys a new car and acquires a loan cannot turn around and file for bankruptcy in order to lower the loan.

So while there are a ton of advantages to filing a Chapter 7 bankruptcy, an individual may be more inclined to file a Chapter 13 bankruptcy, especially if a foreclosure or repossession is possible. It is good to check each individual’s needs in terms of what they are looking to get out of the bankruptcy, and not just to get out of debt.

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Chapter 13 Bankruptcy: Examples of Disposable Income

Disposable Income in the bankruptcy world will be whatever is left over after taxes, insurance, and any necessary household expenses. This disposable income must then be turned over to the Chapter 13 trustee.

However, there are additional forms of income that can come into when calculating disposable income:

  • Bonuses – If these were not already factored into the Schedule I, then the funds must be turned over to the trustee. However, one can submit an application to retain.
  • Tax Refunds – This is the most common form of “disposable income” that is turned over to the trustee. However, please review our article on how you can keep you tax refunds.
  • Inheritance – The amount deemed disposable could be reduced by available exemptions
  • Life Insurance Proceeds – The amount deemed disposable could be reduced by available exemptions

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Chapter 13 Bankruptcy: Can I Keep My Tax Refunds?

Short answer, yes, as long as the paperwork is handled correctly.

In a Chapter 13 bankruptcy, tax refunds are treated as disposable income, and as stated in other articles, by default all disposable income is to be turned over to the trustee. However, the following are the most common avenues we take to ensure our clients are able to retain some, or all of their tax refunds.

Application to Retain:  If a client has unexpected expenses, not already accounted for in their budget, we often submit an application with the trustee’s office to retain some or all of their refund.  Examples of this is home repairs, vehicle repairs, vehicle replacement, and post-petition medical expenses. We sit down for a meeting which takes approximately 30 minutes, we review the tax returns, and documentation for these unexpected expenses and submit the application that day. Often, we can have the refund request approved within a week.

100% Plan:  Bankruptcy plans where the client is already paying their creditors back at 100% are automatically approved to retain 100%  of their refund. However, clients may turn over some or all of their refund in order to reduce their plan length.

More than 36 months into a 36-month ACP Plan:  A 36-ACP is a case where the client passed the Means Test, but decided to file a Chapter 13 for another reason. In those cases, after the client successfully completed 36 months of their plan, the client is able to keep any future disposable income.

Built into Budget: Clients can list a proration of their tax refund on their Schedule I. For example, the client can list “ProRated Tax Refunds” under miscellaneous income for the amount of $500. By doing so, the client automatically gets to retain $6,000 from each tax refund. If they need to keep more, they may submit an Application to Retain with the trustee.

 

If you have questions about this process, or if you want to know what Russell can do for you, feel free to give us a call at (616) 920-0555.

 

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Grand Rapids Bankruptcy Attorney – Bankruptcy’s Effects On Credit

A common fear among individuals considering bankruptcy, is what the bankruptcy will do to their credit record and how long they will be affected.  It is true that under the Fair Credit Reporting Act, this notation on your credit report will last for ten years, but the effects it may have are not always clear cut.  In many cases, creditors view the bankruptcy as a step up from an individual’s prior credit conditions and some creditors may even view the bankruptcy as favorable, since, after discharge, the debtor will be free of other financial obligations and be more able to make payments on new lines of credit.

To better understand if filing for bankruptcy is the right action for you, it is recommended to set up a consultation with a local bankruptcy attorney.  

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Bankruptcy: Debt owed to the unemployment agency?

If you owed money to the Michigan Unemployment Agency, you might want to give my office a call.

First off, if a determination was made between Oct. 1, 2013, and Aug. 7, 2015 that you owe for back unemployment compensation, Michigan will no longer attempt to collect these alleged “over-payments,” unless the cases were individually reviewed by a human and affirmed with a new notice to the claimant. So if that is you, take a deep breath.

For all others, you can file either a Ch 7 or Ch 13 bankruptcy and one of two things will happen: (1) Michigan does nothing, and the full amount is forgiven under the Bankruptcy Code, (2) Michigan files a Complaint, and then we enter into a settlement.

But how much would the settlement be for? As you may already know, if Michigan is claiming an over-payment, they will demand that you repay them that amount, plus a x5 penalty. So if Michigan claims you were over-payed $5,000, they will also demand you pay them a $25,000 penalty, for a grand total of $30,000. If we enter into a settlement, by default Michigan will accept the original over-payment amount, plus a x1 penalty. As a result, you would owe $10,000 instead of $30,000.  And we can negotiate a manageable repayment amount, based on your circumstances.

More questions, contact me today.

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Bankruptcy: My mother has is mentally incapacitated, can she still file for bankruptcy? Yes.

It is possible for there to be a situation where a parent needs to file for bankruptcy, but has severe dementia, and therefore mentally incapacitated.

Dementia can come on gradually, limiting their ability to make wise financial decisions.  By the time you realize their mental health is affecting their finances, it could be too late. So how do they voluntarily file for bankruptcy?

The first step would be to have someone appointed to represent them. The most common approach is going through Probate Court and having a family member appointed Guardian and Conservator.  Although there is much debate whether having a valid Power of Attorney would be sufficient, having one appointed by the courts is as close to iron-clad as one can get. Then, the individual appointed would work closely with their bankruptcy attorney to draft the requisite paperwork, and would then sign on behalf of the incapacitated individual. Additionally, you will want to attach the Guardianship and Conservatorship paperwork attached to the petition.

Additionally, you can motion to the Court for a waiver for the Credit Counseling Course. You will want to file this concurrently with your Petition to avoid having a MTD filed by the U.S. Trustee’s Office.

If you or a family member are considering filing for a Chapter 7 or Chapter 13 Bankruptcy, you will want an experienced attorney that has already faced virtually any situation that you can throw at them. Give me a call today at (616) 920-0555.

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Mobile Home in Bankruptcy? What are the benefits? A LOT!

If you currently have a loan for a mobile home, there is a chance you are paying a high interest rate for for a loan where you owe significantly more than what the home is worth. If that is the case, then I want to meet with you.

Section 506 of the bankruptcy code allows an individual in a Chapter 13 Bankruptcy restructure personal property loans in situations where they had the loan for more than 910-days by dropping the loan amount down to the Fair Market Value of it. Further, regardless of how old the loan is, you can drop the interest rate down to 4.5%. Let’s look at a few scenarios.

So let’s say you have a trailer that you purchased 10 years ago for $50,000, at 20% interest, with a 30 year loan. Your payment would be $836 a month, for the next 20 years. But let’s assume that due to depreciation, that trailer is only worth $15,000 in it’s current condition. I could restructure that loan for you, for $280 a month, and have it paid off in 5 years.

Please give me a call today if you have a mobile home. I would like to sit down and see how much I can drop your payment for you.

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