So you chose to file a chapter 13 payment plan? Also known as a chapter 13 plan of reorganization, or a budget plan.
Did you get at least a rough estimate as to what your plan payment will be at the initial consultation?
No?! Why not? I don’t think it really takes too much time or effort to give you a rough idea of how much it is going to cost you each month to make your payment to the chapter 13 trustee. The figure given to you is not set in stone, but a skilled consultation can give you a very close estimate.
For example: how many missed payments do you have on the house you want to keep? What is the mortgage payment on that home? How much of the attorney fee is being put into the plan? Did you know the trustee is paid by a 10% premium on the plan payment?
Let’s use: $1500 mortgage, 3 months behind ($4500), and $2500 of the attorney fee in the bankruptcy = $1616/month for 60 months.
Then you add the trustee fee of $161.60 and your total payment is $1777.60 for 60 months.
This is an oversimplification with a minimum of items in the bankruptcy, but this fictional person now has a rough payment to expect for the next 60 months.
I didn’t take me long to determine and also illustrates the next two points…
1) What if you cannot afford the payment? Wouldn’t that have been nice to know at the initial consultation? Again, let’s assume you are behind on your home. It doesn’t do you any good to be promised the ability to keep your home by catching up through a chapter 13 to only find out that you cannot afford the required payment to achieve that goal. But at that point, you have paid some, if not all of an attorney fee towards a chapter 13 that might not be successful.
2) Does your payment seem too low? Too good to be true? Using the example above of a $1777.60/month payment, what would you think if the attorney told you the payment is only $1500? Well that shouldn’t make sense. Your mortgage payment alone is $1500/month! How do you pay the back due amount on the mortgage, the attorney fee, and trustee fee? It is not possible, and something is wrong.
And it usually is one of two things, or possibly both. The attorney does not know how to properly compute a chapter 13 payment that can be confirmed, or the attorney is lowballing the payment amount.
The first answer is obvious… But why lowball the payment amount? Here is a possibility: The attorney fee is able to be paid in the first few months of a chapter 13, it is accelerated. So the attorney files a low payment to make sure the client actually makes the payments. That increases the likelihood of the attorney being paid in full, but not necessarily ensuring the client’s successful completion of a chapter 13.
The problem arrives when the chapter 13 gets confirmed (which usually happens sometime in months 3-6 of the bankruptcy). Since you have been making a low payment, the payment needs to be increased to cover the short fall that occurred in the first few months (because a chapter 13 must be completed in no more than 60 months). So… that comfortable payment may rise to an amount you are not able to pay. You fall behind and then eventually are dismissed.
This sometimes starts an ugly cycle of going back to the same attorney who may promise to fix the problem with a new chapter 13.
You guessed it! An additional attorney fee! I recently saw this happen with a person that had filed more then 5 chapter 13 bankruptcies with the same attorney.
When I asked the clients why they kept going back to the same attorney with the same bad results? I didn’t really get a response. I don’t think the clients ever realized what was happening to them.
So make sure you demand at least a rough figure of your proposed plan payment. It is for your benefit and will help ensure you make a wise decision regarding the likelihood of success in your chapter 13 bankruptcy. You have to wonder why an attorney won’t give you this important figure? That attorney isn’t capable, doesn’t want to give you any more time, or both? Any combination may be a recipe for rough times to come.