“Pretend” Chapter 13 as a Method of Boosting Savings?

Posted By : admin
Category : Bankruptcy
27 - Dec - 2016

Illustration depicting a roadsign with a debt concept. Blue sky background.I know, I know.  Why would anyone ever want to pretend that they filed a Chapter 13 bankruptcy?  After all, bankruptcy is bad, right?  Well, as a bankruptcy attorney I don’t necessarily see bankruptcy as a good or a bad thing.  To me bankruptcy is simply one tool in a toolbox that I use to assist those who are struggling financially.  But, it has occurred to me recently that pretending to do a Chapter 13 bankruptcy might assist those who are attempting to boost their savings accounts for an emergency or for some other financial goal.  Keep in mind that I have made up the term “pretend Chapter 13.”  There is only one type of Chapter 13 and it is very real.  A “pretend Chapter 13” as used in this blog is simply a method for boosting savings.

First, lets discuss what Chapter 13 bankruptcy actually looks like for people who file in the Indianapolis area.  Chapter 13 is a repayment plan that typically will last 36 to 60 months. During that time period the debtors make a monthly payment to a Chapter 13 bankruptcy trustee who pays the debtors creditors according to a Chapter 13 payment plan that is drafted by Debtors’ attorney.  A few of the more notable benefits that Chapter 13 can bestow on those who file are as follows:

  1.  Allow debtors to repay mortgage arrearage over 60 years so that they are able to stop mortgage foreclosure and catch up on their payments so the they are current on their mortgage at the conclusion of Chapter 13;
  2. Allow debtors to repay the actual value of a car that is worth less than is owed so long as the vehicle was purchased more than 2.5 years ago;
  3. Allow the debtor to strip off a second mortgage on their residence when the house is worth less than is owed on the first mortgage (strip off means remove the mortgage as a secured debt and make it an unsecured debt upon the successful completion of a Chapter 13 plan.
  4. Allow Chapter 13 debtors to repay income taxes owed without fear of tax levy;
  5. Stop collections lawsuits against the Debtors to allow some breathing room for them to use their disposable monthly income to pay all of their creditors (typically creditors do not receive 100% of what is owed).

So, why do I think pretending to file a Chapter 13 might be a good way for people to boost their savings accounts?  Well, the premise of Chapter 13 is that the Debtors’ monthly payment to the trustee should equal the Debtors’ monthly disposable income.  Disposable income means the amount of money a person has left at the end of the month after paying their reasonable living expenses.  The payment to the Chapter 13 trustee is due every month, and if the Debtors do not make the payment to the trustee then their Chapter 13 case will be dismissed and they will again be subject to the collections efforts of their creditors.

The largest component of pretending to file Chapter 13 bankruptcy in order to boost your emergency fund is to put together a budget.  I know, I know, a budget is no fun.  But, saving money takes discipline and writing down what you have coming in versus what you have going out helps to identify your wastefulness with money.  We all have our problem areas, but keep entertainment to about $150.00 per month for a family of 4 and groceries to about $750.00 for the same household size.  Keep in mind that eating out is entertainment.  Also, keep your clothing budget for 4 to about $150.00 per month.  Did I mention this isn’t easy?

Once you have done a minimal budget (pretending you have a lot of creditors and living minimally) look at the amount you have left each month.  That is likely near the amount you would pay to the trustee in a real Chapter 13 bankruptcy (although it would probably be more if you actually filed).  Each month make it a priority to transfer the amount you have left over to savings.  Remember you can’t skip a month and sit back and watch your savings grow.  It doesn’t matter how many months you do this. Simply using this technique in order to achieve your savings goals.

Contact our Carmel Attorneys About Chapter 13 Bankruptcy

If you are a visual person, why not make a chart to hang in your home where you check off each monthly transfer to savings and track your progress.  Use this charge to both visualize your success and as motivation to continue forward in your savings program.  Remember, it is hard to save money.  Any motivation you can use to help keep yourself and your partner on track are valuable. Good luck boosting those savings accounts for 2017! Contact us today with any questions!