The new law can help your Chapter 13 “adjustment of debts” case cost less and take less time to finish.
This blog post is part of a series over the last few weeks on an Oregon law which went into effect July 1, 2013 which can give major benefits to Oregon residents filing bankruptcy. Among the potential benefits—discussed in the last blog post—is allowing people who would under the earlier law have had too much in assets to file under Chapter 7 now be able to do so (and not need to file under the much lengthier Chapter 13) because of the now-available more generous federal property exemptions. Today we focus on how the new law can help if you still need to file under Chapter 13.
Your Chapter 13 Case May Now Last a Much Shorter Time, and Cost Thousands Less
First some background information. A Chapter 13 case’s starting MINIMUM length (and so its total number of expected monthly payments) depends on your income during the 6 months before filing your case, resulting in a case of either 36 or 60 months. (The maximum length is also 60 months, but we’re not focusing on that here.) For the majority of people the minimum length is 36 months because their income—as measured in the specialized way calculated for this purpose—is under the median income for their state and family size.
But beyond this income-determined minimum length, a case is usually allowed to last longer than 36 months—and they often do. There are many reasons Chapter 13 cases can last longer than 36 months. For example, during the life of your case you may need to pay off a certain large amount—a home mortgage arrearage, for example—so stretching out the length of your case can lower the monthly Chapter 13 plan payment. That would make what you need to pay more affordable.
One of the other considerations determining how much you must pay during the life of your case is the amount of assets you are protecting that are not exempt. The general rule is that in a Chapter 13 case your unsecured creditors must receive as much as they would have received had you filed a Chapter 7 case instead. To whatever extent the new law now protects more of your assets (by allowing the use of the often much more generous federal exemptions), you will usually pay that much less into your Chapter 13 case, and therefore finish it that much faster.
An Example
Let’s illustrate with an example, playing off of one used in the last blog post. Assume that a person named Karen just managed to pay off the debt on a vehicle worth $12,000, and that is about the only substantial thing she owns, other than her modest home. But her home is being foreclosed because of a recent long period of unemployment. She’s $15,000 behind on the mortgage. She couldn’t afford the full house payment and her mortgage lender stopped accepting partial payments, so she paid the vehicle loan instead, to make sure she’d at least have a decent car. Karen also owes $30,000 in a variety of unsecured debts—credit and store cards, medical expenses, payday loans. She’s recently become employed again, but at a salary that only allows her to cover her living expenses and the regular monthly mortgage payment, plus about $550 per month to all of her creditors.
Karen’s goals are to keep her home and her vehicle. Her home is in a perfect location for her new job. It’s worth about what she owes but appears to be increasing in value. Also, the mortgage payment is about what she would pay to rent an apartment, after accounting for the savings on her income taxes from the mortgage interest deduction. She absolutely wants to protect her reliable and efficient car, for both practical and emotional reasons.
She needs to file a Chapter 13 case to be given a good stretch of time to catch up on the $15,000 in mortgage arrears—she simply could not afford the EXTRA $1,250 per month her mortgage lender would demand to pay off this off within a year if she were to file a Chapter 7 case.
Under the Oregon exemptions—the only set of exemptions available to Oregon residents filing bankruptcy before July 1—Karen would have to pay her unsecured creditors about $9,000, the value of her $12,000 vehicle minus the $3,000 Oregon vehicle exemption. That’s about what her unsecured creditors would have received has she instead filed a Chapter 7 case and the trustee taken her vehicle. If her Chapter 13 plan payment was $550 per month, and assuming the Chapter 13 trustee fee was 10%, the $9,900 extra she would have to pay into her Chapter 13 plan ($9,000 + 10%) would take her an additional year and a half to complete her case.
But now utilizing the federal exemptions under the new Oregon law, Karen’s vehicle would be completely exempt, not just $3,000 of it. That is because the federal vehicle exemption of $3,675 is increased, first, by any unused regular wildcard exemption of $1,225, and second, by $11,500 in unused homestead exemption. That’s a total of up to $16,400 exemption applied to her vehicle, more than enough to protect its full $12,000 of value. As a result Karen’s unsecured creditors would receive nothing in a hypothetical Chapter 7 case, meaning that her Chapter 13 plan does not need to pay these creditors anything either.
As a result her Chapter 13 case lasts about 36 months—enough to pay off the $15,000 in mortgage arrears plus trustee and attorney fees. She avoids having to pay anything to keep her vehicle, and so does not have to pay for an extra 18 months for that purpose. So under the new law her case is prevented from lasting 50% beyond what it would have, and saves close to $10,000. While doing so she meets her goal of saving her home by bringing her mortgage payments current, and also preserves her vehicle. Both of these are accomplished much faster and cheaper after July 1 than before.