What is Chapter 13?

I thought it might be helpful to give our experience with filing for Bankruptcy under Chapter 13 and what it means.  (Disclaimer: I am not a lawyer or financial analyst, I am just sharing our results and experiences.)

Mr. Breeze and I were caught in what I am calling a Financial Trifecta.

We were not having any financial difficulties until Mrs. Breeze was laid off in December 2008.  While searching for another job, she got an offer in the public sector, half way across the country in Ohio. So in March 2009, Mrs. Breeze moved to Ohio and Mr. Breeze stayed in Arizona until we sold our business, put the house up for sale and gave notice at his job.  He moved to Ohio in August 2009.  We expected to be able to sell our primary Arizona home; however we contacted a realtor and the estimate we were given to sell in this market was about $150,000 less than what we still owed on it [due to the Housing Bubble that burst at the end of 2008].  

We wanted to be able to sell or get out of this house as quickly as possible, tried to determine what options we had – Foreclosure, Short sale, Deed in lieu of foreclosure, Bankruptcy, other?

We were current on all our payments, however it took Mr. Breeze almost a year to find a job in Ohio.

We also had a Rental Property with a 1^st mortgage and a HELOC; which soon became difficult to rent especially being so far away.  We did purchase our primary home in Ohio before Mr. Breeze left his job [probably one of the smartest things we did].

We also sold our business during this time, however approximately a year later the new owner defaulted on the seller financing we provided [she filed Chapter 7, so we could not go after anything].  The primary house finally went into Foreclosure, and that is when we found out that the HELOC could come after us personally and garnish our wages for up to 25 years.  Plus the forgiven debt on the first mortgage could create a phantom "income" and cause a tax bill of close to $60,000.

The Financial Trifecta: Loss of Job, Housing Bubble burst causing Foreclosure, Buyer of Business filing Bankruptcy.

We finally decided to meet with a Lawyer to determine our best course of action, and in fact met with three lawyers who all said Chapter 13 was our best alternative in this case.

What is Chapter 13?

You may have heard of Chapter 7 Bankruptcy, where the court takes all of a persons assets (minus a few things that are protected) and then sells them and pays off the creditors with any monies. If there are not enough funds, the creditors do not get paid.

However the laws changed to introduce Chapter 13, for those in financial difficulties who still had decent incomes and could pay off some or all of their debts.  Each state is a little different, but basically the court determine how much money you need to pay for basic necessities, and any remaining income pays off your debt.  However it is capped at 60 months.  You pay as much as possible over 60 months.

For us, based on our income, we had enough discretionary income [in the eyes of the court] to pay off all of our debt. In fact we are paying off 100% of our creditors over these 60 months. The other benefit for us was that the forgiven debt of the 1st mortgages (on the two properties we had in Arizona) would not be considered "income", so we would not get hit with a huge tax bill.

Using the courts formula we were allowed $3,000 a month to pay our bills including our mortgage on our house in Ohio.  Our remaining monthly income of $2950 would be paid in 60 monthly installments.  We had to  short sell our Rental property in Arizona as part of the deal as it was not protected.

We owed nothing on credit cards, our cars were completely paid off, and we had no student loans.  Our only debt came from 2 Mortgages and 2 HELOC on the 2 properties in Arizona (part of those mortgages was for the business and in hindsight I will NEVER take out a HELOC especially for a business - as we could have walked away from a business loan).  

The benefit of Chapter 13 is that after 5 years we can start rebuilding our credit and have learned to live without that income, so we plan to start putting that money away once it is paid off.  If we didn't file, we would have had a huge tax bill, and the HELOC's could have garnished our wages for up to 25 years.  It also helped us to protect our retirement accounts [so many people dip into their retirement accounts when they get into trouble, but these accounts are protected if you filing Bankruptcy].

We are over halfway done on our Chapter 13.  We received a couple tax returns that the court also took a portion of, so we are actually going to pay off our debt a littler earlier than 60 months.

So there you have it, our Chapter 13 story.  I will be happy to have it paid off and done, but it has helped us to deal with the situation that we were in and we have learned that we can live on a lot less and still manage to survive okay!