Chapter 7 converting to a 13 or negotiate credit debt??

[IambrokeinGA]

We filed Chapter 7 in September 2011 and have now had 3 extensions added to our case. The Trustee seems to be pushing us towards a Chapter 13. My question is this and I have not yet asked my attorney but wanted to get some others opinions first.

My wife and I recently informed our in laws of our situation and they have offered to help us if needed in some way.

The ideal situation for us is to be discharged with a Chapter 7.

If we are moved to a 13 can I now at this point call my credit card companies and negotiate a settlement? We have $130,000 in secured and unsecured (majority) debt and from what I have read a lot of credit card companies will settle for 25% of your debt. I feel as if my in laws would give us the $32,500 to settle our debts with the credit card companies to avoid Chapter 13. Or are we at a point now that we cannot contact our creditors since we have filed already.

Any advice will help. Thanks

[keepsmiling]

Have you had settlement offers? Are you employed?
I've had offers as low as 13% but they know we are virtually collection proof.
If you have a lot of unsecured creditors, getting them ALL to agree to 25% will probably be tricky.

Any idea what a tentative 13 would look like for you? Have you crunched some numbers? Is this still about your child care expenses?

You may also need to calculate any tax consequences from settlement. If you have a retirement plan, there may very well be some.

[IambrokeinGA]

No settlement offers. Both my wife and I are employed.

Based on what the Trustee sent us with his numbers it shows us paying $1,255 per month for a 13. We would never be able to do that. Childcare expenses they were $140 off of what we showed but I sent an explanation so I think we are ok there. The biggest gap is in our health, disability insurance and our charitable contributions.

Our attorney put in flexible spending deductions in the health, disability section which is not allowed. I would have thought he would have known this. And we only started making contributions monthly to our church in 2011 and they are more than what we gave in prior years. So they are questioning that as well.

When you say calculate tax consequences from settling debt how do you find that out? Yes I do have a retirement plan.

[SMinGA2]

There can be tax consequences on 'forgiven' debt. Say you owe $100k and settle by paying $25k. The $75k that is 'forgiven' is taxable/income.

One way around this, is to claim insolvency. As of the time just before you file, if your total assets are less than your total debts, you're insolvent. Example:
You owed $100k, paid $25k, and have $75k forgiven. You get 1099Cs for the $75k dated 12-31-2012.
You also owned a home worth $250k, and owed $275k on it. You have other possessions (401k, cash/checking account, misc property) worth $50k. You owe student loans of $25k.

Total assets: $250k+$50k = $300k.
Total debts: $75k (remaining balances on the cards)+ $275k + $25k = $375k.
You owe more than you own, you claim insolvency & don't owe taxes. <---Would be wise to have your taxes done by a professional.

While you're in the bankruptcy process, creditors probably will not talk to you. If you get your case dismissed, it could take a while to work out arrangements. IF some settle and others don't, you have a problem because you've only solved part of the problem.

Regarding the tax situation, it would be best to settle them all in the same tax year. The insolvency test is conducted with the forgiven debts still on your debt side - because you calculate your financial balance BEFORE the debts are forgiven. If you settle most this year, and some next, the odds of claiming insolvency again go down because the prior-year forgiven debts are no longer counted as debts. Your retirement plan is an asset, so its value counts in your assets. Its protected from bankruptcy, but could make it harder to prove insolvency. If you do pay taxes on the forgiven debt, it will just depend on your tax rate. If your marginal rate is 28% for example, you'd owe the IRS 28% of the forgiven amount. (Possibly some to state also.)

[justbroke]

It's really hard to gauge a specific case without very specific facts. The fact is, however, that most people that claim they can't afford a Chapter 13, actually can't afford living on a budget. Yes, the budget is the real problem. There is no other (virtually) guaranteed way to shed hundreds of thousands of dollars of unsecured debt without a settlement, than a Chapter 13. The superdischarge in a Chapter 13 is not something to quickly set aside because the payments "appears" to be too high.

As a person who was in a chapter 13, I'll be amongst the first to tell you that it's no joy ride and certainly not for everyone.

Think about this. What is your actual DMI in that Chapter 13. That is the number that actually tells me what your real disposable income is like. What if your percentage payback (not really worth mentioning, but work with me on this) was 2% of $100K You'd pay back 2% of the $100k or $2,000 over the life of the plan. No interest, and the debt completely gone. No issues with resold debt, possible tax issues with 1099-Cs or not actually being able to negotiate your target 25% settlement number.

Now, imagine yourself in a Chapter 13 for 3 years. Imagine your family being there in case of an emergency and giving you $1,000 here and there. Even if that added up to $32,000 over 3 years (almost $1,000 a month!), it didn't get wasted on dischargeable debt.

I suggest you really work these numbers in a spreadsheet and see how you come out. Remember, the Trustee doesn't really dictate what's in your plan. Your plan must be confirmed by a Judge and the Judge can overrule a Trustee's objections. Having changed your charitable deductions just before filing, makes it look like it is not a customary amount you spent and that you may have done so solely to file Chapter 7. Your attorney can fight on all the expense numbers.

HSAs are allowed in the "Health Insurance, Disability Insurance, and Health Savings Account Expenses" section of Official Form B22C (Chapter 13 Means Test). However, the HSA amount must be something that you could actually justify as an expense. The form already allows a monthly healthcare out-of-pocket cost per individual. The HSA would need to go beyond that to be "included" as an additional expense. In other words, you'd need to prove that you have the expense beyond what they already allow. Double counting is never allowed.

It just reads to me that the attorney did some creative expenses that the Trustee is questioning. Whether the Trustee prevails, is another story. I don't think the expenses are necessarily indefensible, but it appears you will need to defend them. (Also, you'll have a Chapter 13 Trustee if you convert. The numbers are a little more relaxed in a Chapter 13... as more things are allowed.)

[IambrokeinGA]

It's really hard to gauge a specific case without very specific facts. The fact is, however, that most people that claim they can't afford a Chapter 13, actually can't afford living on a budget. Yes, the budget is the real problem. There is no other (virtually) guaranteed way to shed hundreds of thousands of dollars of unsecured debt without a settlement, than a Chapter 13. The superdischarge in a Chapter 13 is not something to quickly set aside because the payments "appears" to be too high.

As a person who was in a chapter 13, I'll be amongst the first to tell you that it's no joy ride and certainly not for everyone.

Think about this. What is your actual DMI in that Chapter 13. That is the number that actually tells me what your real disposable income is like. What if your percentage payback (not really worth mentioning, but work with me on this) was 2% of $100K You'd pay back 2% of the $100k or $2,000 over the life of the plan. No interest, and the debt completely gone. No issues with resold debt, possible tax issues with 1099-Cs or not actually being able to negotiate your target 25% settlement number.

Now, imagine yourself in a Chapter 13 for 3 years. Imagine your family being there in case of an emergency and giving you $1,000 here and there. Even if that added up to $32,000 over 3 years (almost $1,000 a month!), it didn't get wasted on dischargeable debt.

I suggest you really work these numbers in a spreadsheet and see how you come out. Remember, the Trustee doesn't really dictate what's in your plan. Your plan must be confirmed by a Judge and the Judge can overrule a Trustee's objections. Having changed your charitable deductions just before filing, makes it look like it is not a customary amount you spent and that you may have done so solely to file Chapter 7. Your attorney can fight on all the expense numbers.

HSAs are allowed in the "Health Insurance, Disability Insurance, and Health Savings Account Expenses" section of Official Form B22C (Chapter 13 Means Test). However, the HSA amount must be something that you could actually justify as an expense. The form already allows a monthly healthcare out-of-pocket cost per individual. The HSA would need to go beyond that to be "included" as an additional expense. In other words, you'd need to prove that you have the expense beyond what they already allow. Double counting is never allowed.

It just reads to me that the attorney did some creative expenses that the Trustee is questioning. Whether the Trustee prevails, is another story. I don't think the expenses are necessarily indefensible, but it appears you will need to defend them. (Also, you'll have a Chapter 13 Trustee if you convert. The numbers are a little more relaxed in a Chapter 13... as more things are allowed.)

Maybe I am looking at the numbers incorrectly. The spreadsheet that the Trustee gave back to us shows that I have a monthly disposable income of $1,255. So what I was under the assumption was that this is what we would pay per month if we were in a chapter 13. Is that how you would read this?

Sounds like negotiaiting with the creditors is not the way to go.

Let me ask this question. If we are converted to a chapter 13 does the whole process start over again. Meaning I have to go to a new 341 hearing? And what 6 months are looked at? Is it the 6 months prior to when I filed or is it 6 months prior to when I was converted to a 13?

Thanks

[SMinGA2]

The worksheet that shows the $1255 DMI - is it accurate? Is it showing your correct monthly income and all of your expenses? Have you accounted for things like routine vehicle & home maintenance, all of your utilities, gas for vehicles, appropriate amounts for clothing, groceries, household needs, etc.? If its not accurate, now is the time to make sure all of your expenses are accounted for.

Also make sure you understand what the $1255 includes. Would it pay your car loan, for example.

[justbroke]

I would have the same questions that SMinGA has. Are you surrendering a home or something? Where is all of that DMI coming from?

You would certainly have a new 341 meeting, but the 6 months doesn't really MATTER for a Chapter 13! A Chapter 13 is forward looking "projection" (see the Supreme Court's 2011 Lanning decision). The Means Test is a silly thing to use for DMI -- if you were to ask me in 2008! Now, the Supreme court confirmed my thoughts on the topic.

Also, remember that the Trustee's B22A "Analysis" spreadsheet looks at a Chapter 7. in a Chapter 13, there are more allowable expenses.

If your DMI is really that high, then there is something afoot. The only time I have seen a Trustee get upwards of $1,000 of DMI in a case initially filed as a Chapter 7, is when the debtor is surrendering secured property.

I would look at whether that was a DMI number, or a payment to the Trustee number (which includes your secured debt and priority debt -- like the IRS).

[IambrokeinGA]

All of your responses give me a better feeling. The 1,255 amount was based off of the numbers pulled from the form for chapter 7. So no these numbers do not include additional expenses like my car and other living expenses. So I would imagine that the number will be lower. My attorney is still working towards a chapter 7 so we will see what happens.

Is there a worksheet that is used to help calculate what you may pay for a chapter 13?

[justbroke]

It's tough for a Chapter 13 to just say... look at Form B22C for a hint. Getting your budget right in a Chapter 13 is an art form. Your attorney would know what's allowed and what's not for a Chapter 13 budget. If you really have $1,200/month in DMI, that's $72K over 5 years and is a significant amount!

Hopefully, you can work with your attorney to get to the real number (bottom line number). For now, it appears that your attorney is fighting your DMI under the Chapter 7 rules, so see where that goes first.

As a defense, your attorney is probably looking at a Hypothetical Chapter 13 as a reason why your case should not be dismissed (or converted).

[SMinGA2]

The simple answer is its your income less expenses.

For income - average monthly income would be total regular income in 12 months, divided by 12. So if you get paid every 2 weeks, its a little more than 2 paychecks. (Because you get paid 2x in 28 days, not 2x in 1 month.)

Expenses would include standard items like utilities, groceries, fuel for your vehicle, insurance, auto & home maintenance, clothing, personal care items, out of pocket medical, and so on. You should spend a good bit of time on thinking about your expenses, what you need in a year's time. Some things you may pay occasionally. If you pay $240 once a year to renew your vehicle registration for example, you'd account for that as $20/mo. For vehicle maintenance, you'll have some out of pocket even if you have a newish vehicle covered under warranty. Consider the cost of routine oil changes, occasional scheduled maintenance, tire & brake work.

Some things might or might not be included - depending on your district. If you'll pay your car loan inside the plan, you would NOT count your car payment as an expense. Same for mortgage. (Yet if you would pay these things in addition to the plan - you would count them.) Your attorney will help you navigate this area.

Some things you would NOT count. On a payment plan with the IRS? Making student loan payments? These things, as well as credit card/medical collections, you would not count in your list of expenses because they'd get payment in your plan. Some things, like student loans, would have a balance remaining after the plan finished - but would get some $ during your plan assuming there is something going to unsecured.

I have heard that 401k loans, if you have them, can be tricky. Ch. 7 trustees don't like them - because you're paying yourself. But a ch. 13 trustee probably would not be too concerned about them. (Though the ch. 13 trustee might not allow you to contribute $ to your 401k AND repay a 401k loan.)

[SMinGA2]

If you'd like feedback on your expenses listed in your schedules, you can list them here.

[IambrokeinGA]

Thanks SMinGA2! I will pull together my expenses and post to get opinions/feedback.

In regards to childcare right now I am spending $1,200 per month. In the fall 2012 this is going to go away. I am assuming I include that now. But what happens in the fall when this is gone? Will my payment have to be adjusted?

[SMinGA2]

That is a tough one. In general, you'd adjust your plan if/when expenses or income changed. Your attorney should be able to give you an idea of how much of a change is worth documenting. SUch as if you get a 3% cost of living raise, its probably not enough to adjust your plan.

I imagine if the child care expense changes - other things may change also. Such as if its going away because a child will be in school, you'll probably have some educational expenses. Such as school supplies, required field trips. Not as much as the daycare now, but something you'll need to account for. And lunch money. My kids are $1.60/day in elementary, $1.75 a day in middle school. (Next year is high school - ugh - it will be higher.) Possibly an after school care expense as well.

[mountanddo]

But a ch. 13 trustee probably would not be too concerned about them. (Though the ch. 13 trustee might not allow you to contribute $ to your 401k AND repay a 401k loan.)

Can you contribute to a 401k if while you are paying back a 401k loan? I know that if you take a hardship withdrawal from your 403b that you aren't allowed to contribute for a period of 6 months. They don't allow that to be paid back.