10 Sep Engineer A Prison Break With Chapter 13
Anti debtor attitudes in the “reformed” bankruptcy law make Chapter 13 resemble debtor’s prison, claims my BLN colleague Carmen Dellutri. Let me counter that being in debt is itself debtor’s prison, and if the escape route out of debt has some rough spots, it’s still better to end up debt-free through Chapter 13.
As a society, we provide a legal means to walk away from debts in the form of bankruptcy because we believe that the society is better off if debtors can start over, financially. People have an incentive to work; we don’t drive the indebted into an underground economy.
The supposed bankruptcy “reform” act is a Congressional expression of hostility to those in debt and the lawyers who help them, without doubt. And how that hostility plays out in bankruptcy courtrooms across the country varies widely.
The atmosphere in the Northern California bankruptcy courts where I practice is not nearly as pinched and extractive as the atmosphere that Carmen describes. Here, the debtor usually keeps any increase in income he experiences during the life of the plan.
Even if my Chapter 13 trustees chased the debtor for every penny of improvement in their income during the plan, I’d still be advising clients to file Chapter 13. Remaining in debt is a virtual life sentence. Take a look at my analysis of how long it takes to retire a modest amount of credit card debt by making minimum payments: 37.5 years!
Suppose you could devote more than minimum payments to paying off your debt and you shortened the time it took to become debt-free in half. That’s still more than 18 years, years in which you probably save nothing for retirement, short your emergency fund, and sentence your kids to crippling student loans if they want to go to college.
Being in debt is extremely stressful and stress is deadly. A Chapter 13 plan provides certainty and the protection of the bankruptcy court while the debtor with some disposable income makes payments to some fraction of his debt. The debtor can relax and focus on family and work. The plan is completed in 3 to 5 years.
What is required to be paid to the plan is the money that is left after a basic budget. My experience with families trying to pay off their debts outside of bankruptcy is that they make terrible choices about which creditor to pay first, shorting the taxing authorities to pay the unsecured credit cards because the credit card collectors call multiple times a day. That doesn’t happen in Chapter 13, where the debtor writes the plan, within the statutory rules, and the support and tax claims get paid first, before consumer debts.
Carmen has it right that too much of the change in the law is mean spirited and without compassion or perspective on the consequences of discouraging bankruptcy relief. People get into debt for a variety of reasons, some by bad judgment and others by bad luck. The recession around us wasn’t caused by any action of an individual, yet individuals are among its chief victims.
But the fact that the operation of Chapter 13 in some locales is less than optimal should not blind us to the positives of using the law to escape perpetual economic servitude.
Image courtesy of XOZ.
Cathy Moran, Esq.
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