In the middle of Chap 13, should we switch to chap 7?

[hopefulmomma]

I am so confused and I hope there is someone who can help.

My husband and I have been working on a Chap 13 for four months now. We have credit card debt, a 2nd mortgage, a first that is higher than the current market value of the home and student loans (I know those can't be discharged). We went with 13 because we want to keep our home and because our income was modest but enough to pay the trustee.

We are hoping to file as of May 1 and last week I received a promotion at work effective May 1. My income will go up $30k a year, and I was hoping that it would happen before the filing so that our payment won't be sky high. Today our lawyer said that last week the trustee rejected a plan because the applicant had a $2 an hour raise so I can't imagine what this will do to our payment.

The problem is that we are still hoping to have another baby (we have one 3 year old and are in our late 30's). If we do, there is a good chance I will not work, at least for a year. While I am happy about the promotion, I am very concerned that it will mean that we are so reliant on my income that a baby is out of the question.

So, my questions are: When calculating the payment, does the trustee take an average of the last 6 months or do they just look at current income?

Should we conside Chpater 7 or debt consilidation instead?

BTW, our current income is $23k from me and $50k from DH, with the promotion my income will increase to $54k. The new job is full time, whereas I've been part time for the last 4 years, and one of the jobs I have is contractual--meaning that at some point they could decide not to renew the contract.

[Methuss]

Chapter 13 plans come with a huge catch: You must report increases in your income to the trustee or the trustee can ask the court to dismiss your case.

If that happens you loose the discharge, you loose the court's protection, and you are pretty much left in default on everything that was getting payments less than minimum under the plan.

The point of a Chapter 13 plan is to repay as much as possible to the creditors during the course of the plan while maintaining a minimum standard of living. You need to understand that.

Unfortunately, you have some hard choices. And that may include not having another child until your financial house in in order. I don't say that to be mean. It simply is the reality of the situation.

Now one thing I noticed in your description is that you owe more on the house than your 1st loan. If you choose chapter 13 (and that is what I would suggest), you have the ability to strip that second mortgage from your home essentially turning it into unsecured debt, no better than a credit card. And when you exit the plan whatever is left of it is discharged. That would save you tens of thousands of dollars in the long run.

Your plan may be as little as 3 years, then you will be without any debt except your 1st mortgage, in a very good position to have another child or two, and be able to put them through school without much worry. Think about it.

[hopefulmomma]

Thank you for the advice, that's kind of what I was thinking. Unfortunately, given my age (36) and our difficulty conceiving, chances are that we won't be able to have another child in three years.

However, that's the reality of our situation, I guess. We are going to include our 2nd mortgage in the BK, that's one of the reasons we went that route. This promotion is totally unexpected and is throwing both of us for a loop--not that we aren't willing to pay the $$ back, but that a percentage of our income is somewhat unstable and we are afraid of getting in over our heads with the chap 13. (For example, if we do the settlement and I lose my contract when it is up for renewal in October.)

So, any income changes between now and when everything is finalized must be reported to the trustee, right?

[Methuss]

So, any income changes between now and when everything is finalized must be reported to the trustee, right?

You must tell your bankruptcy attorney of any substantial increase in your income. It is your attorney's responsibility to represent your interests to the court. The trustee represents the creditor's interests. The trustee's responsibility is to try and claim that increase for the creditors. Your attorney's responsibility is to defend your position to keep it for yourself. Let them do their jobs and work it out. Usually it meets somehwhere in the middle.

Oh and one other thought came up as I pondered this. Your bankruptcy living expense exemptions go up if you have another child. Which means you get to keep more of your income to support the extra headcount. It is not unheard of to petition the court to adjust a plan because of an "accidental" increase in the number of dependents. So ask your attorney about this as well.

[hopefulmomma]

Thank you for that info, it is a huge help! We told our attorney about the increase today and he also said that because I am going from part time to full time, we will also have to adjust our budget to account for the additional expense (child care, gas, clothing, etc). I will ask him about petitioning the court in the even that we have another child.

He also said that it is fiarly easy to switch to chapter 7 should we decide that the payments are too high for us. Given our income and debt levels, he does not think it will be a problem. We are going ahead with the chap 13 for now and will see what happens. Thank you so much for your time!!