Chapter 13 is a Great Tool, Unless . . .
There are pitfalls to avoid. Getting your case dismissed when you thought it was your last hope to save your house is a disaster. Yet, it happens much more often than not.
Pitfall 1: Losing Your Job
Such a no-brainer, yet it may sound like something you cannot avoid. However, we all know that sometimes it is. If you don’t get along with your boss, take a deep breath. Take an anger management course. Take a Tylenol. Take a break. Take a nap. Because it could be a case of lose your job, lose your house. If you’re in a chapter 13 bankruptcy to catch up the arrears on your house, then you must keep up your mortgage payments current and you must keep up your plan payments. Quit paying either one and your chapter 13 will be dismissed. Once it gets dismissed, and you no longer have bankruptcy protection, you go back into foreclosure.
Pitfall 2: Don’t Get a Divorce
Again, while it may sound like something that probably can’t be avoided, often it can be. Be the best spouse that you can be. Bring flowers. Bring chocolates. Bring movie tickets. Read, How Full Is Your Bucket? On my wedding day, the officiant gave me 5 little magic words for when you come home and find the baby in the highchair, his food is everywhere, the dishes aren’t done, and the other kids have homework, and you’re just back from work and the 5 little magic words are: “What Can I DO To Help?”
Pitfall 3: Re-evaluate Your House Situation Carefully Before You File
Before you file the case, you should reevaluate the house situation carefully. Chapter 13s are designed to put you on a seriously Draconian budget. So, unless you’re making great money, a budget that is too tight will ruin your marriage or your relationship to your significant other in a big fat hurry. Don’t lose your spouse over a house.
If you DO qualify for a Chapter 7 but want to file a Chapter 13 to try to save the house, then your budget will be under a huge strain, there won’t be any money for fun, recreation or vacations and I’ve seen that lead to divorces and split ups over and over again and then neither of you will end up with the house.
Pitfall 3: Make Your Chapter 13 Plan Payment On Time Every Time
Get behind, you’re toast. Nuff said.
Pitfall 4: Get Health Insurance If You Don’t Have It Yet
If you’re not properly insured, with health, life, auto and disability, you’re an accident waiting to happen. If you get sick or injured, you’re outta there. If you cannot pay the plan, then you will lose that house.
Pitfall 5: Not Filing a Chapter 13 When You Should
If you make great money, and if you could just get all of your credit cards to agree to zero interest (0%), then you’d be able to pay everyone no problem, then do it. That’s exactly what a Chapter 13 can do for you. If you pay the regular payments it will take forever and you’ll pay almost 3 times what you owe before you’re through. If you go to a Debt Consolidation, they’ll be able to reduce your interest rates, but not to zero percent (0%). Paying at zero percent interest (0%) for 5 years usually will cut your payments by a little under half. Take the deal.
Pitfall 6: Including Your Car
If you can file a Chapter 13 without having to include your car, then avoid putting it in the Chapter 13 payment plan like the plague. If your bankruptcy gets dismissed, you’ll find that you’re now perhaps months or years behind on your payments on your car. You’ll also find that you’ve got mega late fees now attached to the car note. Also the repo guys will be on their way soon after your Chapter 13 gets dismissed for non-payment. I had clients who wanted save a house, but to do that they had to lower the car payment by including it in the 13. I suggested that they move out from the beginning. When the case finally got dismissed the balance on the car was approximately twice what it was before filing.
Pitfall 7: Technical Tricks and Traps
Most of these are things your attorney is going to have to be familiar with and help you avoid them. However, my favorite is one that you can help avoid: In the Central District of California, in Riverside, you are required to pay your plan payments directly to the Chapter 13 Trustee at the hearings until the judge approves your payment plan. This approval is called a Confirmation Order. Your Chapter 13 plan payments are due 30 days after your case is filed and then ever month on the anniversary of your filing date. However, your hearing date will be approximately 45 days after you file. If for some reason your judge continues your confirmation hearing, it will most likely be for another 45 days. When you show up to that hearing, you must bring two (2) payments with you to the 2nd hearing, not just 1. Because 45 + 45 = 90, your plan requires that you pay 3 plan payments by that 2nd hearing date, not 2. If you don’t bring the 3rd with you, your case will be dismissed.
Pitfall 8: Mal-Adjusting Your Tax Withholdings on Your Pay Checks
Whenever you pay less than 100% of your credit cards and medical bills and so on through your Chapter 13 payment plan, the bankruptcy trustee will want to intercept your tax refunds as you get them from the IRS every year until your case is over. Phew!
Many people try to adjust the withholdings so that they end up zeroing out their tax refunds. However, if you reduce it too much, you end up creating a new creditor for yourself, and it’s the biggest most powerful collection agency in the world, the IRS. But at least it’s not the meanest, that distinction goes to the Franchise Tax Board of the State of California.
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