By Gregory L. Dodd
I DON’T WANT TO FILE CHAPTER 13!
That’s what most of my consumer bankruptcy clients say. They want to file Chapter 7, which they see as easy, inexpensive, and quick. They hate the idea of filing Chapter 13. But when they fully understand Chapter 13, they come to like it. They don’t want anyone throwing them out of their Chapter 13 Plan. People who are in Chapter 13 are forcing their creditors to accept a payment plan that the consumer proposes, and the Court approves. And they don’t lose any property.
Why would a person be forced into Chapter 13 instead of Chapter 7? Two big reasons: (1) They have a house that has too much equity to keep; and/or (2) the household income is too high. These days, with home values being high, more people have large amounts of equity in their homes and they can’t file Chapter 7 without losing their house.
Chapter 13: In Chapter 13 bankruptcy, payments are made on a portion of the debt, and the rest of the debt is wiped out. The payments are usually based on subtracting the client’s monthly expenses from their monthly income, and the leftover amount is sent to the trustee every paycheck for the length of the Plan. The Plan will run for either three years (36 months) or 5 years (60 months). Working out the client’s budget is the hard part. Most people whom I see are not wasting money, so there is not much cutting to do.
The first reason people have to file Chapter 13 over Chapter 7: How much equity is in the house? Many people have no idea how to figure out their equity. The quick way is to double the SEV (State Equalized Value, as shown on the twice-yearly tax bill) to get the value of the house according to the City or Township, and then subtract what is owed on the mortgage. But this method assumes the SEV is accurate. Many Chapter 7 Trustees will want to get their own estimate of the house value.
Looking online at Trulia or Zillow is another way, but these sites are often not trusted either. The most accurate way to get the house value is to list it for sale and see what offers come in.
And that is what the Chapter 7 Trustee will do to see what offers the house will bring. This prospect often scares the consumer debtor, and they will not want to file bankruptcy at all.
But the solution is to file Chapter 13, where the debtor cannot lose any property.
Paying for your property in a Chapter 13. The problem is, in a Chapter 13 your non-exempt property must be paid for. Every Chapter 13 has a Chapter 7 case within it. The attorney must calculate what property the client would lose in a Chapter 7, and that non-exempt property must be paid for. The law’s assumption is that the client doesn’t have to file Chapter 7, they could liquidate their property and pay their debts that way. But by filing bankruptcy, the client gets to keep a certain amount of property (the exemptions), whereas if they did not file bankruptcy, they would be selling off all their property to pay their debts. So the benefit of filing Chapter 13 is that you don’t have to sell any property, but you have to pay for the non-exempt portion of what you are keeping. This often makes a Chapter 13 payment unaffordable. In that situation, the attorney will have to counsel the client to consider selling the property and paying the creditors with the net profits.
The second reason people have to file Chapter 13 over 7: How much income is too much? Generally, a single person earning up to about $50,000.00 annually will pass the means testing and be able to file Chapter 7. But above that income, they may not qualify and they will be forced to file Chapter 13. Here is a calculator that you can use to enter a potential filer’s household income and see if the person qualifies: https://www.bestcase.com/quick-median-income-test/
A big benefit in Chapter 13: Some debts (like student loans and taxes) are not wiped out in either Chapter 7 or Chapter 13. But they have to be listed, and they get priority. So if the student loans and taxes have to be paid anyway, that often means that the credit cards and other unsecured debts will get less. In a Chapter 13, the unsecured creditors will end up with only a small percentage of their debts paid and the rest is wiped out.
The Chapter 13 payment is effectively the client’s student loan and tax payment, which would have to be paid anyway - it just goes through the Trustee. And the student loan and tax authorities are forced to accept the Chapter 13 Plan.
A big benefit in Chapter 13: Attorney fees. When clients wince at the thought of having to file Chapter 13, part of the problem is the attorney fees, which will be much greater than for a Chapter 7. What they don’t understand is that in Chapter 13, the attorney fees are usually paid through their plan payment, and the client pays the attorney nothing directly. The usual attorney fee (which is set by the Court) for a Chapter 13 is $3,500.00. But the client doesn’t have to pay that up front – the client makes their regular payment to the Chapter 13 Trustee, and the Trustee and the attorney get paid out of that. Unfortunately for the creditors, that sometimes lowers the amount that the creditors will get. So the net effect is that the creditors are paying the client’s attorney fees. I call it justice.
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Gregory L. Dodd, a past Co-Chair of the WCBA Bankruptcy Law Section, has been filing bankruptcy cases (Chapters 7 and 13) since 1995. He currently handles bankruptcy, probate and divorce matters. He can be reached at greggdodd2000@gmail.com.
I DON’T WANT TO FILE CHAPTER 13!
That’s what most of my consumer bankruptcy clients say. They want to file Chapter 7, which they see as easy, inexpensive, and quick. They hate the idea of filing Chapter 13. But when they fully understand Chapter 13, they come to like it. They don’t want anyone throwing them out of their Chapter 13 Plan. People who are in Chapter 13 are forcing their creditors to accept a payment plan that the consumer proposes, and the Court approves. And they don’t lose any property.
Why would a person be forced into Chapter 13 instead of Chapter 7? Two big reasons: (1) They have a house that has too much equity to keep; and/or (2) the household income is too high. These days, with home values being high, more people have large amounts of equity in their homes and they can’t file Chapter 7 without losing their house.
Chapter 13: In Chapter 13 bankruptcy, payments are made on a portion of the debt, and the rest of the debt is wiped out. The payments are usually based on subtracting the client’s monthly expenses from their monthly income, and the leftover amount is sent to the trustee every paycheck for the length of the Plan. The Plan will run for either three years (36 months) or 5 years (60 months). Working out the client’s budget is the hard part. Most people whom I see are not wasting money, so there is not much cutting to do.
The first reason people have to file Chapter 13 over Chapter 7: How much equity is in the house? Many people have no idea how to figure out their equity. The quick way is to double the SEV (State Equalized Value, as shown on the twice-yearly tax bill) to get the value of the house according to the City or Township, and then subtract what is owed on the mortgage. But this method assumes the SEV is accurate. Many Chapter 7 Trustees will want to get their own estimate of the house value.
Looking online at Trulia or Zillow is another way, but these sites are often not trusted either. The most accurate way to get the house value is to list it for sale and see what offers come in.
And that is what the Chapter 7 Trustee will do to see what offers the house will bring. This prospect often scares the consumer debtor, and they will not want to file bankruptcy at all.
But the solution is to file Chapter 13, where the debtor cannot lose any property.
Paying for your property in a Chapter 13. The problem is, in a Chapter 13 your non-exempt property must be paid for. Every Chapter 13 has a Chapter 7 case within it. The attorney must calculate what property the client would lose in a Chapter 7, and that non-exempt property must be paid for. The law’s assumption is that the client doesn’t have to file Chapter 7, they could liquidate their property and pay their debts that way. But by filing bankruptcy, the client gets to keep a certain amount of property (the exemptions), whereas if they did not file bankruptcy, they would be selling off all their property to pay their debts. So the benefit of filing Chapter 13 is that you don’t have to sell any property, but you have to pay for the non-exempt portion of what you are keeping. This often makes a Chapter 13 payment unaffordable. In that situation, the attorney will have to counsel the client to consider selling the property and paying the creditors with the net profits.
The second reason people have to file Chapter 13 over 7: How much income is too much? Generally, a single person earning up to about $50,000.00 annually will pass the means testing and be able to file Chapter 7. But above that income, they may not qualify and they will be forced to file Chapter 13. Here is a calculator that you can use to enter a potential filer’s household income and see if the person qualifies: https://www.bestcase.com/quick-median-income-test/
A big benefit in Chapter 13: Some debts (like student loans and taxes) are not wiped out in either Chapter 7 or Chapter 13. But they have to be listed, and they get priority. So if the student loans and taxes have to be paid anyway, that often means that the credit cards and other unsecured debts will get less. In a Chapter 13, the unsecured creditors will end up with only a small percentage of their debts paid and the rest is wiped out.
The Chapter 13 payment is effectively the client’s student loan and tax payment, which would have to be paid anyway - it just goes through the Trustee. And the student loan and tax authorities are forced to accept the Chapter 13 Plan.
A big benefit in Chapter 13: Attorney fees. When clients wince at the thought of having to file Chapter 13, part of the problem is the attorney fees, which will be much greater than for a Chapter 7. What they don’t understand is that in Chapter 13, the attorney fees are usually paid through their plan payment, and the client pays the attorney nothing directly. The usual attorney fee (which is set by the Court) for a Chapter 13 is $3,500.00. But the client doesn’t have to pay that up front – the client makes their regular payment to the Chapter 13 Trustee, and the Trustee and the attorney get paid out of that. Unfortunately for the creditors, that sometimes lowers the amount that the creditors will get. So the net effect is that the creditors are paying the client’s attorney fees. I call it justice.
–––
Gregory L. Dodd, a past Co-Chair of the WCBA Bankruptcy Law Section, has been filing bankruptcy cases (Chapters 7 and 13) since 1995. He currently handles bankruptcy, probate and divorce matters. He can be reached at greggdodd2000@gmail.com.
(Reprinted with permission from the Washtenaw County Legal News newsletter Res Ipsa Loquitur.)
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