Surviving the Holidays in Chapter 13 Bankruptcy

Daughter unwrapping gift with mom in restaurant
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The holidays can be a challenge for families even under the best of circumstances. How much should you spend on the kids? Do you have the resources? Should you use credit cards? 

How does a family cope when they're in a Chapter 13 bankruptcy case? A Chapter 13 bankruptcy requires spending three to five years on a strict repayment plan that doesn't leave much room for extras. Do you have to give up celebrating for five years? Not at all, but it will take some awareness and planning. Here are some things to think about. 

How Much Do You Spend on Holidays?

Christmas isn't the only end-of-the-year event that costs money. It comes on the heels of the back-to-school push with supplies, books, fees, and clothing. Then there's Halloween with parties, costumes, and candy. Even Thanksgiving can take a chunk of change. Then comes Christmas—toys for the kids and gifts for adult family members, co-workers, friends, and service providers. There are parties, food, dress-up clothing, travel, and charitable giving.

A common suggestion is to spend no more than 1.5% to 2% of your gross income on all things associated with the holidays. For a family with an income of $40,000, that comes out to $600 to $800. A family that earns $75,000 should budget $1,125 to $1,500. The 1.5% to 2% suggestion might be more than your budget can handle if you're on a Chapter 13 repayment plan.

Restrictions in Chapter 13 Bankruptcies

If Christmas is a financial disaster for most families, it can seem like a mission impossible for parents involved in a Chapter 13 case. Chapter 13 repayment plans are required to last from three to five years. Payments are made on a monthly basis.

Many factors influence the amount of your plan payment, but one of the most important is your disposable income. You must disclose your income to the bankruptcy court, including any bonuses, part-time work, Social Security, unemployment, income from a business, and interest on savings and investments you might receive. You must also disclose all your expenses. Disposable income is the money you have—or should have—left unspent at the end of the month after you've met all your reasonable and necessary expenses.

Ideally, that disposable income could have been used to purchase fun stuff, give gifts, travel, or save toward a large purchase. But purchases can be restricted in a Chapter 13 case because they're not considered reasonable or necessary. Your disposable income becomes your Chapter 13 plan payment. The money goes to your creditors. 

Taking on New Debt in Chapter 13 

Another important requirement in Chapter 13 is that a debtor must refrain from taking on any new debt during the repayment plan. Remember that these plans can last from three to five years. Although many people go through life without using credit, going “cold turkey” when you file a Chapter 13 case is a difficult adjustment for most. 

Chapter 13 budgets are very tight by necessity and many debtors cannot get through an entire case without some assistance. For these contingencies, the bankruptcy code allows a debtor to take on debt if they have a really good reason and only with court permission. If your refrigerator gives up the ghost, you would probably be approved for a small loan to replace it. But you won’t be allowed to take out a payday loan to give your kid an Xbox for Christmas. 

This applies to credit cards as well. If a credit card lender failed to close your account when you filed for bankruptcy, this doesn't mean you're free to use it.

Debit cards are fine for holiday spending, but you have to be careful about overdraft protection, which is technically an advance of credit.

5 Strategies for Financially Managing the Holidays

There are ways to eke out some cash to fund the holidays without borrowing from the bank or a payday lender. You can save in small increments if you begin well ahead of the holiday. Here are five ideas to help.

  • Some banks offer Christmas clubs: These clubs require you to make small, regular deposits over a set period of time. You withdraw what you accumulated in time to do your holiday shopping.
  • Automatic savings programs: Another way to save is to take advantage of your bank’s automatic savings or “round-up” program. You can set up an automatic savings plan that transfers a small amount every week or month into a separate account. As little as $10 a week will provide you with a nice cushion of $520 after a year. 
  • Modify your payment plan: You may be able to modify your Chapter 13 payment plan to reduce your payments for a month or two so you can use the “saved” money to pay for Christmas expenses. But before you seriously consider this option, you need to know two things. First, your attorney will charge you several hundred dollars to prepare and file the modification request with the court. And second, since you’re paying a set amount over a set period in your repayment plan, your payments will go up in the remaining months to make up the difference if you lower them for a couple of months, 
  • Borrow from your 401(k) plan: The least attractive option may be to borrow from your 401(k) plan. Your attorney will most likely have to file a motion with the court asking for permission to do this. If permission is granted, you'll have to set up a plan to repay the loan. 
  • Use your tax refund: When you’re in a Chapter 13 case, your tax refund is technically more disposable income. Your trustee can take it for the benefit of your creditors. On the other hand, many trustees understand that taking all of a refund is harsh, and they may allow debtors to keep some of the money. If you're lucky and this happens to you, just make sure to save it until the holidays roll around.