What You Keep In Chapter 13

Just because debtors can keep their upscale trappings and their toys bought on credit doesn’t mean they should.

Still, I share my colleagues excitement over the 9th Circuit’s recent decision in Welsh.  

The appeals court held that a debtor wasn’t guilty of bad faith in proposing a Chapter 13 plan that kept and paid for items like their ATV’s that were non essential, at least in the eyes of the bankruptcy trustee.

You can keep extras

The Welsh debtors proposed to pay on their existing secured debt for a third car their daughter drove; a house expensive by local standards; 2 ATV’s; and a recreation trailer.

The 9th Circuit said that was fine in light of the way Congress fashioned the means test that was added to bankruptcy law in 2005.

I’m delighted to have a clear statement that Chapter 13 relief is open to people with upscale houses or wheels.

To overlay the means test with the subjective inquiry of is this house too grand? or should a debtor get to keep his boat? just defeats the objectivity that the means test was supposed to implement.

Our economy isn’t well served if the trustees and courts can impose their personal standards on how well a debtor can live and qualify for relief in bankruptcy.  That would be a recipe for chaos in the bankruptcy courts.

It would be particularly ironic if the very lenders who lobbied (and paid) Congress so hard for bankruptcy laws that made it harder to get a discharge found the law applied to make willing borrowers stop paying on secured debt.

But should you keep everything?

But just because paying for a second home or an RV is permitted in Chapter 13, that doesn’t mean that bankruptcy attorneys should acquiesce.  Often the strain of paying for those extras is what landed individuals in a bankruptcy lawyer’s office in the first place.

One of bankruptcy’s real strengths is the opportunity for a financial do over:  a chance to escape the consequences of bad decisions.

Sure, in a perfect world, we’d all like to keep those things that make life nicer or more fun.  But how does the associated expense play into the bigger financial picture?

The big financial picture

My first question to clients inclined to keep the toys or the marginal investment property is  what do you have saved for retirement?  

Shoulder to shoulder with the student loan crisis is the systemic under-preparation of Americans for a dignified and independent retirement.

 Chapter 13 is a chance to make better financial choices.  What the debtor who commits to paying for all the encumbered “stuff” through a Chapter 13 plan doesn’t grasp is that the secured debts are paid first.  If the plan craters mid way and there is other non dischargeable debt, like taxes or family support, the lender on the toys has gotten paid, but Uncle Sam hasn’t.

So, a rousing cheer for the 9th Circuit, and down with the life-style police in bankruptcy robes. But let’s not lose sight of the big picture about financial stability and a real fresh start, when deciding what you keep.

Image courtesy of Wikimedia