From Our Perspective: Chapter 13 Bankruptcy Saved Client From an Ex-Spouse’s Demands & Debt

Robinson & Henry’s knowledgeable attorneys give their professional insight in “From Our Perspective” where we take a closer look at successful outcomes achieved by our attorneys. We’ll also share our legal expertise on other cases and legal issues in Colorado.

In this episode, Robinson & Henry Bankruptcy Partner Elizabeth German explains how Chapter 13 bankruptcy gave our client a second chance, and helped a Dad get back on track.

Our client was buried in debt after a tough divorce and job loss. While the client found hope and financial stability through Chapter 13 bankruptcy, life threw him another curveball. When our client lost his job again, he temporarily fell behind on his bankruptcy repayment plan. This type of hiccup calls for the invaluable guidance of an experienced bankruptcy attorney. Liz worked with the court to have our client’s repayment plan modified and get him back on track. 

Now, our client is nearing the finish line. He’s on track to receive his discharge, has resolved some child support issues, and avoided having his wages garnished. Our client is on the road to building a brighter financial future, free from the burden of overwhelming debt.

Past results afford no guarantee of future results; each matter is different and must be judged on its own merits. Facts are those of an actual Robinson & Henry litigation case. 

 

Question: Liz, thank you for joining me. Tell me more about our client and why they needed your help?

Liz: This individual who had a very messy divorce and he got stuck with a very significant amount of child support obligation. He had a job loss and got behind, and the ex took him back to court for contempt for the back due child support.

He had found a new job. With that order, he was going to be subject to a 25% wage garnishment, which would have left him unable to pay his normal living expenses. We decided to file a Chapter 13 plan of reorganization because one of the benefits is that child support arrears, along with things like taxes or mortgage arrears, you can basically reformulate a payment plan to catch those back up over a five year period, which is going to allow you to be able to then pay your normal living expenses and have a one finite payment for your debt.

Another benefit for him was that we could roll other types of unsecured debt. He had a little bit of credit card debt, a little bit of tax debt. By formulating one payment per month for the 60 months, we were able to take care of all of that debt and it allowed him to not have the wages garnished by the ex and to become current on that child support obligation.

Question: Why was Chapter 13 bankruptcy the best option for the client in this case? 

Liz: A Chapter 7, unfortunately, would only put a temporary stop on the debt collection for what we call a priority debt, which is child support. It’s going to be paid back. You cannot discharge it in bankruptcy. Chapter 13 made more sense to allow him to recover the money that he didn’t have when he had lost his job and to not be in violation of the contempt order and not have that 25% per paycheck garnishment per paycheck.

Question: How do you work with clients to create a Chapter 13 repayment plan that’s manageable for their situation? 

Liz: Some repayments are based upon people’s income if they otherwise wouldn’t qualify for a Chapter 7. We look at things like their income and their expenses and we say, What do you have leftover to put towards the debt? Some, in his instance, are going to be based upon the numbers that were presented.

For example, if you have a set amount of tax debt, you have a set amount of child support arrears, and then we do an analysis to make sure within his budget he could afford it. If he otherwise wouldn’t have had income, he wouldn’t have been able to afford those payments. On the front end, before we file anything as part of our analysis, we look at income, assets and then ability to make that repayment, whether it’s based upon a finite number that has to be repaid or what that budget would show.

Question: How did you address any challenges that came up during the repayment process for a client?

Liz: He was about three years into a five year repayment when unfortunately he lost his job again, and fell behind again on the post-petition payments to the ex. She again took him into court, and he took another agreement. Then that unfortunately caused him to fall behind to the trustee.

We were able to modify his plan and redo the budget to get the trustee and the ex to allow for some of those post-petition payments to be recovered and put back into his plan to keep him on track so he didn’t have to start all over. 

Question: How do you help clients protect their assets in a Chapter 13 bankruptcy case?

Liz: In a Chapter 13, that is one of the main reasons you might file. If you had a home with equity that exceeded the state allowance of what we call the homestead exemption, if you had a car that exceeded it, if you had a business because the court for each state has set standards called exemptions of what people can and can’t protect.

In Chapter 7, you would otherwise risk losing those. When we meet with someone, we ask them in a questionnaire about all of the assets, “What do they owe, what are they worth?” And then we analyze that. If they do exceed that, we would make the recommendation for a Chapter 13. Because in essence, what you’re doing is you’re buying back the equity over the allowed amount over a period of time so that they’re not selling it out from under you like they could in a Chapter 7.

Question: What was the outcome for the client in this case? 

Liz: Client is just about to receive their discharge and has paid successfully all the payments except for the final payment on the Chapter 13 plan. He’s in good standing with the domestic support obligation, has gotten out of the contempt citation, now is not facing any wage garnishment, and will shortly get their discharge.

Question: What advice do you give clients regarding the impact on their credit score or financial future when it comes to Chapter 13 bankruptcy? 

Liz: There is a lot of misinformation about bankruptcy in general, and especially Chapter 13, because it is so nuanced and specific to people’s cases. The biggest takeaway generally would be that even though you may be in a 3-to-5-year repayment, that’s not going to impact the time that your credit can rehabilitate.

It’s generally going to be about a year and a half to two years in either chapter of bankruptcy. Once you file that, you’ll see a bounce back in your credit score, and it’s not going to impact for that whole period of time your ability to get financing for things like a car loan. You do have to wait two years for a mortgage, but that’s the same in any bankruptcy that’s an FHA (Federal Housing Administration) lending guideline. You’ll be able to start rehabilitating getting credit cards and starting on that road to financial recovery within that first year and a half to two years.