How a cheap car payment can help you on the bankruptcy means test.
How a cheap car payment can help you on the bankruptcy means test.
The Bankruptcy Judge in Norfolk just made chapter 13 in Virginia even more dangerous. And last night one bankruptcy judge in Alexandria hinted that he agrees.
The issue came up the the case of In re Marlene Evans. Ms Evans made her bankruptcy payments to the Chapter 13 Trustee for five years. According to her plan, she had paid about $4500 toward $23,000 in debts, and the rest of it was supposed to be discharged–gone.
Not so fast, said the Chapter 13 Trustee, Clint Stackhouse. The Trustee said, you paid me, but you are behind with your mortgage payments. And sure enough, Ms Evans admitted she was about ten months behind on the mortgage.
That means, argued the Chapter 13 Trustee, you didn’t keep all your promises–you paid me, but not the mortgage. And you promised to do both.
The Judge, Stephen St John, agreed. Even though she had paid what she promised toward the $23,000–mostly credit cards, personal loans and payday loans–they are allowed to start chasing her again, when the bankruptcy was over. Why, because she fell behind with the mortgage payments.
It doesn’t seem fair. Ms Evans paid what the credit cards were promised–why does she have to pay them again? Since she admits she’s behind on the mortgage–well, everybody has always agreed that the mortgage company can come after her for that. And if she can’t work it out, she’ll lose her house. But why do the credit cards get to hide behind the mortgage company?
People often finish Chapter 13 a few months behind on their mortgage. That’s because Chapter 13 budgets are very tight. In Northern Virginia, where the cost of living is real high, they are very, very tight. So after four years of the Chapter 13 trustee draining every available cent from your budget, towards the end, you may need a $2500 car repair. And skipping the last couple mortgage payments seems like the only way to do that. Figuring when the Chapter 13 payment is done, then there’s money to catch up the mortgage.
That strategy is now officially a disaster, at least in Tidewater, and maybe in all of Virginia.
Last night was the annual dinner of the Bankruptcy Judges and the bankruptcy lawyers. The Judges got to talk for an hour, and Judge Robert Mayer brought this up. He didn’t say he agreed (Judges are supposed to tell you what they think–except when you are in court in front of them.) But he did say that “most courts around the country” that have decide this, have all decided the same way.
A US District Court Judge in Norfolk, today on January 13, 2017, agreed with the bankruptcy judge. (You can read it here. Evans v Stackhouse.) It’s now the law in Virginia. If you finish your Chapter 13, and pay the credit cards all your promised, but fell behind on your mortgage, your bankrutpcy is tossed out. The credit cards are allowed to start chasing you all over again.
Here are some disadvantages of Chapter 13, compared to Chapter 7.
1. If your income increases after you start paying, the Chapter 13 trustee will want more.
2. If you inherit money while you are in Chapter 13, that money goes to the Chapter 13 trustee.
3. In many cases, the bankruptcy trustee takes your refund.
4. It’s worse on your credit than Chapter 7.
5. Less than half of Chapter 13 filings succeed.
6. And now, you can complete your payments and still not get a discharge, if you slip behind on your mortgage payments.
Hank Hildebrand, Chapter 13 Trustee in the Middle District of Tennessee, and one of the nation’s most frequent speakers on Chapter 13 issues describes Chapter 13 as a “complex, expensive and unproductive system.”
Just had a ruling from the 11th Circuit. Suppose during the Chapter 13, you are injured in a car accident. If you go ahead and sue for your injury, without first telling the bankruptcy court, you forfeit your right to sue for that injury.
Client, two years into Chapter 13, asked me today if getting married will affect his Chapter 13 plan. Well, it might. If the spouse is working, too, the trustee can claim that the increased family income is a substantial, unforeseen change, and ask that the payments be increase.
The members of Congress of the Judiciary Committee, who care about family values, could support a change in the law that blocks the trustee from arguing that.
That’s (almost) a mathematical certainty. Here’s why.
The census bureau shows–no surprise–that people who are working spend on average double on transportation gasoline and maintenance than people who aren’t. (For more, see this from the American Association of State Highway and Transportation Officials.)
If you are in chapter 13, you’re working. Unless you telecommute, you’ve got to get to work and get there everyday.
Your Chapter 13 vehicle operating budget in Northern Virginia is $277 a month, for one car, $544 for two or more. That amount is figured based on all cars–NOT just on all cars owned by people who have to get to work. (That budget is in the the bankruptcy means test. That’s a formula that says how much money you have to pay back on your debts, and what you are allowed to keep to live on.)
There are more cars than jobs in America.
There are 250 million passenger vehicles.
There are only about 150 million Americans working or looking for work. )
So there are a hundred million cars in America that are NOT being used to get people to work.
If we recalculated that $277 by whether people work, we’d have $340 monthly for cars that take people to work; $170 for cars that don’t.
If your car takes you to work, your Chapter 13 transportation budget will be $65 a month short, every month. That’s $780 short each year.
To put it differently, if you use a tank and a half of gasoline a week, driving to work (plus whatever else you have to do), you have enough money left for insurance, but NO money for car repairs.
People with short commutes aren’t using a tank and a half. But for many people in the outer suburbs, that’s low.
A budget with no money for car repairs is ok, if you a driving a new car under warranty. No money for car repairs is awful, if you’ve got a hundred thousand miles on your car. And you have to get through a sixty month chapter 13 plan.
Car repairs don’t come on a regular schedule (well, you should change your oil every three months.) At some point you need new brakes, new tires, a new transmission. And you will need them now!
Maybe you’ve saved some money, but since the bankruptcy court is taking ALL your “projected disposable income,” saving is tough.
At that point, you’re choices are: skip the rent, stop eating for two months, walk to work. None of those work every well.
Recently, I proposed a chapter 13 plan, with a higher transportation allowance, each year of the five years, as the cars got older. I pointed that the Supreme Court said we should project virtually certain changes in a chapter 13, when calculating how much you had to pay the chapter 13 trustee, and how much you could keep.
I argued that is was “virtually certain” that over five years the cars would get older. Nope, said Bankruptcy Judge Robert Mayer–the cars will be older but who knows if they need repairs. (Huh? I thought everybody knew that.)
If you have to go into Chapter 13, and you have a long commute, how can you avoid certain failure of your chapter 13 plan? What can you do when your car needs major repairs?
Here are some ideas.
1. Have four thousand dollars for car repairs already set aside when you go into Chapter 13
2. Get the boss give you a company car.
3. Make sure you are driving a new car, with a strong warranty, before you file.
4. Move closer to work.
5. Ask the bankruptcy court for permission to buy a brand new car–and then see if someone will finance you while you are still in bankruptcy. (Alexandria Chapter 13 Trustee Thomas Gorman recently told the Fourth Circuit Court of Appeals that buying a new car in chapter 13 is easy and painless. Brief 5-23-2014 To me, it looks a little harder.)
Here’s my last idea–keep track of all your transportation expenses–gasoline, car repair, insurance, tolls, parking–every year and ask your lawyer to submit them to get a reduction in your Chapter 13 payment. Each year, here in Alexandria VA, Chapter 13 Trustee Thomas Gorman demands to see your tax returns to see if he can squeeze you for more money. Maybe you and your lawyer should look at your transportation costs, and annually ask to pay less.
PS Here’s a good article by Heather McGivern, a Michigan Bankruptcy Lawyer, that talked about this problem in 2011. She says there are many people who drive to see their bankruptcy lawyer in car that probably won’t last much longer. And there are many people about to file bankruptcy who need to go out and buy a newer car. And that some people say your lawyer cannot tell you that.
PPS I’ve got a hundred thousand miles on my Honda Civic, and it cost me $1500 last month to get it through the safety inspection. My service rep at the Honda dealer told me it needs new shocks and struts but I should “buy a new car rather than spend any more money on this one.”