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To file or not to file?

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  • To file or not to file?

    Filing Bankruptcy is a very difficult decision, there are many factors, and many emotional factors in play. However, you need to realize that, in many respects, bankruptcy is a financial "tool". A tool that is no different than any other financial tool, like credit cards, car loans, certificates of deposits, life insurance etc...they are all financial tools that serve a particular purpose. At some point, and for whatever reason, if you are reading this forum, your debt load is becoming too much to handle, but you are reasonably employed and probably cannot file for a chapter 7, thus, how do you determine if a chapter 13 is the right tool for you?

    In summary, the decision methodology is a comparison between a standard-self-help-debt reduction five year plan, and a chapter 13 five year plan. If you can't get your self out of debt in 5 years (and were talking about unsecured debt, i.e. credit cards, lines of credit, some types of business debt, etc), then a Chapter 13 is probably right for you. Let's do an example.

    You: have 4 credit cards, 2 car payments, a mortgage, and the typical household expenses, and no meaningful savings to speak of, (at least not any savings you can get out without incurring serious penalties and fees to get). Credit Card (a) $12,000 at 14%, (b) $8,000 at 11%, (c) $9,000 at 8%, and (d) $3,000 at 18%. (total debt of $32,000)

    First, assuming a standard 2% minimum payment, your combined minimum payments would be $640 per month. Granted, each month, the minimum payment would decrease a little...but we don't care, if you were to only make minimum payments, as they decreased, it would take you 524 months (43.6 years) to pay off that debt.

    Step one...stop using credit cards, do a budget, cut expenses, where possible and see how much money you have left over at the end of the month to pay down debt. Let's assume you are able to come up with $900 per month to pay to the credit cards each month.
    Step two, rank your credit cards by interest rate, highest to lowest.
    Card (d) 18% $3,000
    Card (a) 14% $12,000
    Card (b) 11% $8,000
    Card (c) 8% $9,000
    Step three, pay minimum payments on cards (a), (b) and (c), and devote all of your remaining funds to Card (d), the card with the highest interest rate.

    Thus, Payments would be...
    Card (d) $320 per month
    Card (a) $240, Card (b) $160, Card (c) $180

    1-11 months, Card (d) would be paid off in 11 months.
    Balances on Card (a) $10,833; card (b) $7,002; card (c) $7,635

    Devote the $320 payment you were making to card (d) to the card with the next highest interest rate, in this case, card (a). Thus, total monthly payment to card (a) is $560 ($320 + $240).

    12-34 months. Card (a) is paid off in month 34. The balance on card (b) is now $4,561; and the balance on card (c) is $4,437. Do the same as before, take your payment from card (a), and apply it to the card with the next highest interest rate, in this case Card (b). Your new monthly payment to card (b) is $720


    35-41 months, Card (b) is paid off in month 41. The remaining balance on card (c) is $3,362. Devote your entire excess funds to paying off card (c) for a total monthly payment of $900 per month

    42-45 months. Card (c) is paid off in month 45. And you have paid off your credit cards.

    Note, over this period of time, the minimum payments on the cards will go down as you pay them off, since the minimum payment is generally 2% of the balance owed. My plan above assumes you continue to make the same payment each month as you did in month one. For example, in month 1, the minimum payment on Card (b) is $160, but in month 11, the minimum payment would be around $140-$145. So you could probably save yourself another couple months if you made the actual minimum payment and continually devote the extra to the highest rate card. However, my plan above assumes you make a $160 per month payment to Card (b) during the plan, until it is Card (b)'s turn to have the excess funds applied to it.

    Since this plan is doable in under 60 months (5) years, you probably should not file chapter 13. Also consider this, if you were to file chapter 13 and pay off your debt (note, in a chapter 13, interest stops accruing) and paid into your chapter 13 plan $900 per month, you would be in the plan for 40 months (note, the trustee gets a 10% fee, and then you have attorneys fees). You only save yourself 5 months worth of payments in a chapter 13, hardly worth it. Another benefit, given the length of the plan, by month 45, you would probably have either paid off, or be close to paying off your cars. If you still had a balance on your cars, you can devote the money you were paying to the credit cards to over-pay your car payment, and pay them off early . Just think, in less than 4 years, you could be credit card debt free, and have your cars paid off. Think of how much money that would save you per month. Then, you can really start doing some serious saving.

    However, if you go through this exercise and realize--you cannot pay down your debt in under 60 months--then your next stop would be a consultation with a consumer credit counseling firm, and if they can't help (and they usually can't), then chapter 13 would be for you.

    You can use this interests calculator to help you figure this out on your own.
    http://www.bankrate.com/brm/calc/MinPayment.asp

    Granted, it would take some serious discipline to stick to the plan (and frankly, most people don't), so in that respect, if your the type of person who has a hard time keeping your priorities, a chatper 13 may still be right for you (forced compliance).
    Last edited by HHM; 02-25-2009, 09:17 AM.

  • #2
    Great advice!!! This is a very logical way to determine if bk is right for you.
    Chapter 13 Filed 4/03/06 :blink: 341 Meeting Complete 5/11/06 :yes2:
    Plan Confirmation 6/16/06 :yahoo:
    Discharged: 1/5/2010 :yahoo::yahoo::yahoo::yahoo:

    Comment


    • #3
      Obviously, this plan is for those whose main problem is high unsecured debt, but who can not file chapter 7 for whatever reason. You may need to file chapter 13 for other reasons, especially if you have missed payments on secured debt. In that event, you have few options...if the creditor is not willing to work with your (i.e. foreclosure workout agreement, etc), or you simply cannot afford you secured debt anymore, then you will need to file chapter 13.

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      • #4
        It will work, But don't think it will for my debt I owe

        I have 72K in unsecured debt (Credit cards,etc) with a minimum payment of $1769.45 per month. My wife and I only bring home 3200 per month with 3 small kids.Our mortgage is 620 per month alone. I don't think there's any way possible I could make the pay back plan work.However, I do see where it would if you made alot of extra money, or didn't have a high amount of debt like I do. I wish I would have came across your advice, and plan before getting immature, and foolish with debt, until it got out of control.Now I have to pay the price for a while.If I pay the minimum payment on the credit cards, I will have it paid off when I am 98 years old.
        Last edited by mark3413; 01-22-2007, 03:51 AM. Reason: Add comments

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        • #5
          My thoughts from someone who really struggled

          Filing is a hard decision. I was at first shell shocked with a new job and alittle help from the IRS tax return, I raised the $2500 that I needed. Sign the documents Saturday. I feel alot better. I am looking at $215 to be paid monthly for 3 years.....my debt are a result of homelessness and not mailing address for a few months and having my mail being returned to sender....shot my debt to $157,000. Kind of needed to clear the deck. I adopted a dog to help me weather the storm.

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          • #6
            My hubby and I are looking to file due to private student loans that we are about to be garnished for. We got behind on these due to my hubby being out of work for a significant period of time due to an injury. We were receiving workman's comp, but it was barely over 50% of his income. I was also pregnant during that time, and couldn't find employment. One of our cars was repossessed during this time, and we almost lost our home. We requested that all of our loans be put in forbearance, and received a letter that the forbearance was granted. Since it didn't list which loans were included (or which we wanted to include on the application) we assumed all of them would be included. We continued getting statements, but when we called about them and reminded them of the forbearance, they would say, "Oh, yes, we see that. We're sorry. Disregard the statement." Then, one day, we get a call from a debt collector that the private loans had been turned over to them and they wanted $100 per month immediately. Well, we called the lender and inquired why this happened, but they just left us with, "Well, we can't buy back the loans, now, anyway." So, we tried to make the $100 as much as possible, but with everything else we were trying to pay back, it didn't work for long. So, they sent the loans to an attorney who wanted $100 per month till Jan. 25th, then $5000, then $100 till Jan. 25th the next year, then another $5000. We couldn't do that, either, so he received a judgment for repayment and our garnishment hearing is on Nov. 7th. We feel that a Chapter 13 is the only way to get out of the garnishment. Would anyone recommend this? I am feeling very uneasy about filing, but see no other way out. My hubby's paycheck would be the only one affected, but we have 3 children (one teen, two under 10). Any advice...anyone???

            Comment


            • #7
              From my understanding... You can stop the garnishment.. but you will most likely be put on a plan to pay your entire student loan debt in 36-60 months (depending on your income level). Entire meaning those that were put in forebearance AND those that are being collected upon. These payments could be higher than the current $100 per month you have been required to pay.

              If your disposable income is less than $100 per month, you could have a lower payment while in BK13. However, student loans will not be discharged and you will still be responsible for the loans afterwards.

              Hope that answers your questons.
              Chapter 13 Filed: 12/3/07
              Payments: 2/60

              Comment


              • #8
                Trying to decide--Credit union question

                We bank at a credit union. If we file 13 can they close our account. We have a credit card and unsecured loan with them

                Comment


                • #9
                  they can close your checking account, but not your share (savings) account. The only way they can close your savings is by a vote by membership. However, they can freeze your money and deny any services that they offer. They can make it very difficult for you to bank there anyway so unless you intend on reaffiming your debt with them, you are better off moving you accounts around and finding another credit union to deal with.

                  Comment


                  • #10
                    Originally posted by lorine View Post
                    We bank at a credit union. If we file 13 can they close our account. We have a credit card and unsecured loan with them
                    Worse than closing your account, since you have a credit card and an unsecured loan with them, if your account agreements that you signed when you applying for each of them have a cross-colleratlization clause, they can empty your checking and savings accounts to pay off the credit card and/or loan.

                    Move your checking and savings account to another bank or credit union NOW before you file. No sense taking a risk that you can easily prevent.
                    I am not a lawyer and this is not legal advice nor a statement of the law - only a lawyer can provide those.

                    06/01/06 - Filed Ch 13
                    06/28/06 - 341 Meeting
                    07/18/06 - Confirmation Hearing - not confirmed, 3 objections
                    10/05/06 - Hearing to resolve 2 trustee objections
                    01/24/07 - Judge dismisses mortgage company objection
                    09/27/07 - Confirmed at last!
                    06/10/11 - Trustee confirms all payments made
                    08/10/11 - DISCHARGED !

                    10/02/11 - CASE CLOSED
                    Countdown: 60 months paid, 0 months to go

                    Comment


                    • #11
                      Originally posted by mark3413 View Post
                      I have 72K in unsecured debt (Credit cards,etc) with a minimum payment of $1769.45 per month. My wife and I only bring home 3200 per month with 3 small kids.Our mortgage is 620 per month alone. I don't think there's any way possible I could make the pay back plan work.However, I do see where it would if you made alot of extra money, or didn't have a high amount of debt like I do. I wish I would have came across your advice, and plan before getting immature, and foolish with debt, until it got out of control.Now I have to pay the price for a while.If I pay the minimum payment on the credit cards, I will have it paid off when I am 98 years old.
                      Please do not feel bad about filing BK - if you must. BK is there for us all to use when things get out of hand. It's not the end of the world. We were discharged in June 2006 from Chapter 13, kept our home and 2 vehicles which were already fully paid for, but put into lien by credit card bill collectors. We finally have relief. The stress of overburdened debt is unbearable. Get your life back on track - it's wonderful.

                      Comment


                      • #12
                        Originally posted by lorine View Post
                        We bank at a credit union. If we file 13 can they close our account. We have a credit card and unsecured loan with them

                        We filed Chapter 13 in April 2004 and have been discharged in June 2006. Once we filed for BK - even the credit cards that were up to date and not in default were immediately closed and we were no longer able to use them. The particular one I remember was Home Depot, which was never in default they still closed the account and it went into the Bankruptcy matrix.

                        Comment


                        • #13
                          Filing chapter 11 is mostly used by business, and the source link explains how it's done and why a lawyer is essential.

                          A case as filing chapter 11 reorganization of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. While individuals are not precluded from using chapter 11, it is more typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership.

                          In chapter 11, you may continue to operate your business, but your creditors and the court must approve a plan to repay your debts. There is no trustee unless the judge decides that one is necessary; if a trustee is appointed, the trustee takes control of your business and property.
                          URL removed.
                          Last edited by HHM; 12-09-2008, 08:23 PM.

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                          • #14
                            Can someone please explain further the "standard 2% minimum payment".

                            If I have $300,000 of unsecured debt (including the amount from student loans because they are added to the total but not discharged ???), is the minimum payment I can expect under Chapter 13, $6000/month

                            Comment


                            • #15
                              Originally posted by BKFreedom View Post
                              Can someone please explain further the "standard 2% minimum payment".

                              If I have $300,000 of unsecured debt (including the amount from student loans because they are added to the total but not discharged ???), is the minimum payment I can expect under Chapter 13, $6000/month
                              The standard 2% minimum payment has nothing to do with a chapter 13. At the time of writing this post, most credit cards required a minimum monthly payment of 2% of the outstanding balance (most still do). Thus, if you owed your Chase Master Card $20,000, odds are, the minimum payment would be $400.

                              This thread compares a self-help program to get out of debt to that of achapter 13. Self-help meaning you have where-with-all to make the sacrifices necessary to have disposable income to get out of debt on your own without filing BK.
                              Last edited by HHM; 02-25-2009, 09:15 AM.

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