Living With a Chapter 13 Case, Part 2
In Living With Chapter 13, Part 1, we talked about some of the issues you will face in learning to live within the strict financial requirements of a Chapter 13 case. In this article, we continue the discussion.
Your Budget Will Be Very Tight With Little Room for Extras or Emergencies
Your budget will be tight for the length of the of your three to five year plan. Your attorney will try to build in as much leeway as possible to account for unexpected expenses like an out-of-pocket medical bill or a car repair, but it is hard to plan for job losses, trauma or catastrophic events.
You may have to forgo vacations. Finding money for holiday or birthday presents may be difficult.
Some debtors generate extra cash by taking on second jobs. Sometimes a stay-at-home spouse will get a job. This may not help in the long run. The amount of the plan payment may be tied to income. An increase in income may trigger an increase in the plan payment.
New Credit During Your Chapter 13 Case
Taking out more credit during your Chapter 13 case is generally not allowed. This means you can’t apply for a credit card, take out a personal loan, get a payday or car title loan, or even take advantage of certain types of bank account overdraft protection plans, which are often designed to deposit a sum of money into your account to cover the overdraft and pay back over time.
Under certain circumstances, you may be able to get a car loan or get a loan to replace a necessary item like a refrigerator.
If you need to take on credit during your Chapter 13 case, you will be required to show that the credit is for something that you really need and that the obligation will be reasonable. For instance, you may need to replace a car that was totaled in an accident. Generally, you will only be allowed to purchase a car comparable to the one you are replacing, or your bankruptcy judge may place limits on the amount and the interest rate you can finance.
You will probably have to update your bankruptcy paperwork to show that you will have room in your budget for the debt payment. You may even be required to attend a hearing before the judge to explain why you need the debt and how you intend to pay it.
Many Chapter 13 trustees have a process in place to streamline such requests, but you cannot expect to pick out a car, ask for financing and be approved on the spot. It can take days or even weeks if you are required to file a motion and go before the judge with your request.
This rule even applies if you are required to hold a company credit card in your own name name. See more on this along with some suggestions for alternatives, see Corporate Credit Cards in Personal Bankruptcies.
You Will Likely Pay Higher Attorney’s Fees
A Chapter 13 case is more time consuming and more complicated for the bankruptcy attorney. Therefore, the fees your attorney will charge will be higher than for a Chapter 7 case. Even if you have to pay more in attorney's fees for a Chapter 13, you may not have to pay it all before the case is filed. In a Chapter 7 case, almost every attorney will require that you pay the entire fee up front. In a Chapter 13, however, you can usually pay at least some of your Chapter 13 fee as a part of your plan payment.
You can find some suggestions that might help you better afford the costs of filing a Chapter 13 case at Too Broke to File Bankruptcy? Part 2.
Changing Your Plan Terms
Once your plan is approved (a process called confirmation), you may find that you need to change the terms of the plan. This often happens if you get behind in payments, lose a job, lose income or get a nice raise, wreck your car, have a baby or another significant change in your expenses. Your attorney will have to file papers with the court asking for a change in the payment amount. This is called a plan modification. The attorney’s fee for a plan modification is usually not included in the original fee, but it is often
Here's more on what happens in a Chapter 13 case: Timeline of a "Typical" Chapter 13 Case.
Taking on a New Mindset
Most Chapter 13 cases never make it to the discharge phase. They are dismissed either because the filer asks that the case be dismissed or because the filer does not keep up the payments. This can happen due to a job loss, an illness that makes it difficult to make payments, a divorce, or a change in goals - like a decision to surrender a house the debtor was trying to save from foreclosure. Many Chapter 13 cases are dismissed because the debtor finds the restrictions are more than he wants to bear over 36 to 60 months. To learn more, read Why Do So Many Chapter 13 Cases Fail?
If you are considering a Chapter 13 case because of a significant event in your life, like an extended period of unemployment or lots of medical bills, Chapter 13 can be an effective tool to catch up and reorganize your financial life.
If you are in this financial predicament because you never learned how to manage your money or you spend beyond your means, Chapter 13 will probably not change the way you think about money. I have seen people complete a Chapter 13 case, accept every credit card offer that comes their way, and max out those cards within months.
Our appetite for spending money is a lot like our appetite for food. With increasing scientific knowledge on the subject, we understand that “going on a diet” doesn’t work in the long run. We need a new outlook on food and physical activity in order to permanently lose excess weight. Chapter 13 is like a money diet. It may get you where you want to go, but it won’t keep you there. You still have to learn how to manage your money and how to conquer the demons that lead you into outspending your means.
If you'd like to look at some alternatives to Chapter 13 payment plans or Chapter 7 straight bankruptcy, a good place to start it with Tackling Your Debt: A Plan to Pay Off Your Credit Cards.
Updated February 2017 by Carron Armstrong