9 Tips for Success in Chapter 13 Bankruptcy
1. Be Realistic With Your Budget and Expenses
Chapter 13 bankruptcy involves creating a budget based upon your reasonable and necessary expenses. Whatever remains is called your disposable income that must be paid to the Chapter 13 trustee for the benefit of creditors. One Chapter 13 Trustee in Arizona publishes guidelines for expenses which are considered presumptively reasonable. Nonetheless, debtors must be realistic in their own individual needs and cannot underestimate expenses. This includes unusual and unexpected one-time expenses such as significant car maintenance, health scares and insurance copays, and house maintenance and upkeep. Make reasonable projections for these amounts and create a monthly reserve for these and all other budget items. This is one of the most important tips for success in Chapter 13 bankruptcy.
2. Know Minimum Plan Payments Prior to Filing Based on Assessment of Non-Exempt Property
Creditors in a Chapter 13 bankruptcy must receive at least as much as they would receive in a Chapter 7 bankruptcy. Creditors in a Chapter 7 bankruptcy are paid from your non-exempt assets. You must therefore determine the value of your nonexempt assets and divide this amount by the total months of the plan to figure out the minimum monthly payment necessary to receive a discharge. The typical Chapter 13 plan is sixty months. So if you have only one non-exempt asset such as a boat worth $6,000, your minimum monthly payment in a Chapter 13 bankruptcy will be $100/month. Know this amount in advance to determine if your plan is feasible.
3. File All Your Taxes or Be Prepared to File Within 30 Days of Filing
You are required to pay priority debts in full during the period of the Chapter 13 plan. Priority debts include recent tax obligations. The only way to determine what priority payments must be made as part of your plan is for your tax filings to be current. If your tax filings are not current at the time of filing, the Chapter 13 trustee will want them filed by the meeting of creditors or within a few weeks thereafter. Taxing authorities have a slightly larger window to file proofs of claims but they can only do so based upon current tax filings. If tax filings are not current shortly after filing Chapter 13 bankruptcy, your case will get dismissed. This is a common reason for dismissal and unsuccessful Chapter 13 plans.
4. Be Prepared to Pay Priority in Full
Just as with knowing the amount of non-exempt property in a hypothetical Chapter 7 to determine minimum plan payments, debtors need to calculate the total amount of their priority debt such as recent tax debts and domestic support obligations like alimony and child support. Then divide this total amount by the typical plan duration of sixty months to determine the minimum monthly payment. For example, if you have a combined priority tax debt and child support arrearages of $48,000, your minimum monthly payment will be $800. Know in advance whether this payment amount is feasible after keeping current on all current obligations. If not, consider Chapter 7 bankruptcy.
5. Properly Withhold From Your Wages – Do Not Under- or Over-Withhold
You are required to turn over all disposable income to the Chapter 13 trustee for the duration of your Chapter 13 plan. For regular wage earners, it is helpful to withhold as accurately as possible to avoid a significant refund that will have to be given to the Chapter 13 trustee. You must also account for proper withholdings on Schedule I. Otherwise, you will be using tax funds for your disposable income and also lose that same amount when any refund is turned over to the Chapter 13 trustee. Likewise, do not underwithhold or you will owe money to the IRS on an already tight budget and it may cause you to fail in your plan. This is also among the most critical of tips for success in Chapter 13 bankruptcy.
6. Avoid New Credit/Debt During the Chapter 13
You are in bankruptcy for a reason – you struggle with debt regardless of the reason for it. Avoid new obligations that could impede your ability to pay pre-petition debts and get a discharge. Other than new financing for a vehicle if absolutely necessary, stay away from credit cards and unsecured debt.
7. Consider Selling Property Not Necessary for an Effective Reorganization
Just because you can keep all property in a Chapter 13 bankruptcy does not mean you necessarily should. Remember that all non-exempt property must be paid for over time with your disposable income. Consider selling non-exempt property to lower your plan payments if things are tight. A common example is timeshares. Ongoing expenses for luxury timeshares are not allowed in a Chapter 13 bankruptcy and it often makes sense to liquidate these to lower plan payments.
8. Hire an Experienced Chapter 13 Bankruptcy Attorney
Statistics have shown that debtors who file Chapter 13 bankruptcy without an attorney have a dismal rate of success. Literally, it is not uncommon for only 1-3% of these pro se cases to have success. Compare that to the rate of success for attorney-represented debtors. The vast majority of represented debtors are able to have their plans confirmed. Experienced bankruptcy counsel is imperative in Chapter 13 bankruptcy. Likewise, costs of attorneys should not be a deterrent to representation as counsel is usually paid out of the monthly payments sent to the Chapter 13 trustee. Whether these payments go to creditors or their counsel is usually immaterial.
9. Lastly Stay Employed and Healthy
Financial success both in and out of bankruptcy depends on a little luck. A job loss or health scare can put you behind and cause you to fail in completing your Chapter 13 plan. It is perhaps the most common reason for unsuccessful Chapter 13 plans. Stay healthy and hope that your job prospects continue in good fortune.
These tips for success in Chapter 13 bankruptcy will allow you to achieve the success you deserve in eliminating debt and successfully confirming and completing your Chapter 13 plan.