6 months in, I might get laid off...

[Danglin]

So, after making 6 payments in what must be the smoothest Chapter 13 ever, I learn that my company might be consumed by another and I could be laid off.

Our situation is this:

We just payment number 6 of 60 in the amount of $3600. We've got two car payments ($220 and $235) paid through the plan, and a lien strip for our second that was just approved last week. There's about $14,000 in priority unsecured tax debt from 2003, with the rest being unsecured credit card and second lien being paid back at 46%.

If I lose my job and am unable to find anything while I draw the roughly 4 months of severance, what are our options? Assuming I got laid off tomorrow, I would still have my full income into December, so we would have made 10 payments, meaning that the priority unsecured would be paid off and a small amount of unsecured would have been paid, too.

Is an early discharge even possible? Could we convert to a Chapter 7 since we won't be able to make the 13 plan payment on my wife's income alone? Obviously, in either case, we would lose the house, but am I missing anything else here?

This whole scenario is a real bummer, because our Chapter 13 has been very easy. Our plan is very livable and we've had to do only minor adapting. We have a tremendous amount of travel expense, to which the trustee did not even object, and we even got to keep our time-share. Even our $80 per month DirecTV claim was allowed. It's a bit disheartening to think that this situation is now jeopardy if we get dismissed due to job loss.

[LadyInTheRed]

Since you are paying 46% to unsecured creditors, it sounds like there is a lot of room for a plan modification if you have a reduction in income. A conversion to a 7 may also be a possibility. I don't know what the requirements are for an early hardship discharge, but my guess it is very rare to qualify. If you get laid off, I suggest you contact your attorney as soon as the layoff is final. You may not be able to petiton for a modification or conversion until after your severance period, but it's a good idea to discuss your options with your attorney before you get to the point where you can't make your plan payment.

If your income is reduced to a point where you can't afford your house, you should try to go for a conversion to a 7 because your first mortgage will not be discharged in your Chap 13.

ETA: I just realized that if your 1st mortgage is the original mortage used to purchase your home, it is non-recourse and it probably doesn't really matter if it is not discharged, except that an eventual foreclosure may cause additional harm to your credit rating. So, it may make sense to stay in a 13 to take care of the tax debt even if you do have to give up your house.

ETA, again: Duh! I'm tempted to delete the last 2 paragraphs, but I guess I'll leave it and correct myself once again. If you give up your house in a 13, I am pretty sure the 1st mortgage will be discharged. But, if you retain the home during your 13, the mortgage will not be discharged and if you decide later to give it up, the foreclosure will probably show up on your credit report. But, either way, you won't have liability for a deficiency if your loan is a purchase money loan because purchase money loans are non-recourse in California. If you refinanced the first mortgage and it is a recourse loan and it is not discharged, but you later have to walk away, the lender can come after you for the deficiency.

Sorry for the confusion. But, maybe my conversation with myself will help others understand how mortgages work in a 13. I think a lot of people think that your personal liabilty for a mortgage is discharged in a 13 even if you keep the house.

[Danglin]

Thanks for the response!

Our first mortgage was never refi'd so it's the original purchase money loan from when we bought the house.

I guess the key question for me is, if we convert to a Chapter 7, do we have to lose our home? We were and have been current on our first mortgage all long, but the second mortgage was approved to be stripped at the successful conclusion of our 13. If we have to convert to a 7, then the second can no longer be stripped, meaning that we'd be behind on it. Is there any other course of action for us?

[LadyInTheRed]

If you convert to a 7, the 2nd is unlikely to foreclose until there is enough equity to make it worth while. In the meantime, you can try to settle the 2nd to get the lien released for much less than the loan balance. I believe somebody posted here recently who settled their discharged 2nd for 10% of the balance. There's no guaranty you'll be ever to settle for that little or at all. So, there is a risk that they will eventually foreclose once you pay down your first and/or there is enough increase in the value to create equity.

[Danglin]

Thanks for the explanation...It makes sense.

Last thing: Both of our cars are included and payed through the plan. We were never behind on the car payments at any point prior to filing, and the trustee has been making the reduced payments every month. If this rolls into a chapter 7, what happens with the cars? Do we lose them?

[LadyInTheRed]

I have some guesses, but I don't really know the complete answer to that question. Maybe somebody else will chime in.

Regarding settling a discharged second, see this thread for a success story http://www.bkforum.com/showthread.ph...ement-progress...

[lrprn]

So sorry to hear you are having to deal with all this uncertaintly around your job so soon after filing. It's a good idea to be thinking ahead, but keep in mind that until you are actually laid off, this is just a hypothetical discussion. Keep your attorney aware about the possibility you may be laid off and be sure to let him/her know immediately if you do get the word you really will lose your job in the takeover. Let's hope that doesn't happen. However, if it does......

Last thing: Both of our cars are included and payed through the plan. We were never behind on the car payments at any point prior to filing, and the trustee has been making the reduced payments every month. If this rolls into a chapter 7, what happens with the cars? Do we lose them?

If you are able to convert to Ch 7 or dismiss and file a new Ch 7 as soon as the six month income lookback drops your income low enough to wipe out your disposable income on the Means Test, how your cars will be impacted depends on how much of the California auto exemptions (plus wild card if applicable) covers the actual market value of each of your cars minus whatever you still owe on each of them, and also on which of the two CA bankruptcy systems are used.

Did you file Ch 13 using System 1 or 2? How much equity (current market value minus what you still owe on the car) do you have in each of your cars right now?

[LadyInTheRed]

I addition to the exemption issue, I there is an issue with the fact that the trustee is making a "reduced" payment on the cars. So, if the 13 is dismissed, won't the loans will be in default? If it is converted to a 7, assuming that is an option, if Danglin can't bring the loan current before discharge, would a reaffirmation be possible on a delinquent loan? What about a cram down (if the cars were purchased long enough ago) or redemption if the cars are underwater?

[Danglin]

So sorry to hear you are having to deal with all this uncertaintly around your job so soon after filing. It's a good idea to be thinking ahead, but keep in mind that until you are actually laid off, this is just a hypothetical discussion. Keep your attorney aware about the possibility you may be laid off and be sure to let him/her know immediately if you do get the word you really will lose your job in the takeover. Let's hope that doesn't happen. However, if it does......

If you are able to convert to Ch 7 or dismiss and file a new Ch 7 as soon as the six month income lookback drops your income low enough to wipe out your disposable income on the Means Test, how your cars will be impacted depends on how much of the California auto exemptions (plus wild card if applicable) covers the actual market value of each of your cars minus whatever you still owe on each of them, and also on which of the two CA bankruptcy systems are used.

Did you file Ch 13 using System 1 or 2? How much equity (current market value minus what you still owe on the car) do you have in each of your cars right now?

Not sure which system we used, but we're about even on on one of the cars, and we're about $3000 under water on the other due to mileage.

I addition to the exemption issue, I there is an issue with the fact that the trustee is making a "reduced" payment on the cars. So, if the 13 is dismissed, won't the loans will be in default? If it is converted to a 7, assuming that is an option, if Danglin can't bring the loan current before discharge, would a reaffirmation be possible on a delinquent loan? What about a cram down (if the cars were purchased long enough ago) or redemption if the cars are underwater?

Cars were purchased in May 2009. The reduced payments were due to the fact that we had less than 5 years to pay on them, so we were forced to put them in the plan. The trustee stretched the payments back to the 60 month term of our 13 and reduced the interest to 4% on each one. That's why the payments are lower than what was in the contracts.