TO: PROFESSOR.
FROM: STUDENT
RE: Farragut Bankruptcy Matter
DATE: October 28, 2013
The Farraguts are a wage earning couple with two children and a combined annual income of $60,000 per year. There is little hope of this income increasing in the near future according to the clients. The two children attend private school at an unknown cost.They own a home reportedly worth $250,000, and two mortgages totally $700,000. The two mortgages require a house payment of $6,000 monthly. The couple owns a 2005 Ford Mustang, on which nothing is owed, and a Cadillac Escalade on which they make $550 monthly payments. They also have a leased vehicle with payments of $400 per month.
One of the children has an ongoing medical problem and the family’s requisite health insurance is through a private carrier. Their medical bills are in excess of $20,000. Susan has unpaid school loans and other bills, which are impossible for the family to pay, including 20 credit cards. Recently, the couple made a $1,000 on their American Express card, but not on any others.
The couple does not desire to lose their home nor give up their credit cards at this time. They would like to gift one of their cars to Susan Farragut’s sister and downsize their Cadillac, but they will not settle for a used car and cannot afford a downpayment for a new one.
The Farraguts each have a small pension and $10,000 in mutual fund, and $3,000 in a joint savings and checking accounts. These funds are all apparently in a revocable trust. They are expecting a $5,000 tax refund which they intend to pay some bills.
There are two types of bankruptcies that this couple could consider. The first is a Chapter 7, or liquidation type bankruptcy which could eliminate many of their bills, but there are income and asset limits set by law which may be a problem. The Farraguts own bank accounts, investments, cars, and a home, which are over the limits of a Chapter 7 bankruptcy according to the law. Then there is the Chapter 13, or “wage earner” bankruptcy which would allow them to keep more assets and under which they would pay their bills under the supervision of the bankruptcy trusteeset up as a court approved payment plan.
When considering a Chapter 7 plan, the Farraguts are wage earners, and do have a home. But the home would not be exempt according to the Washington homestead exemption of $125,000. Although their pensions are exempt under the Washington exemptions, their mutual funds and tax refund would not be exempt. There is no value given for their cars, but the state allows for two vehicles with a value of $6500. They do not want to give up these assets which would, under a Ch. 7 bankruptcy, have to be forfeited.
Under a Ch. 13, priority debts must be paid in full, but they are such debts as taxes and the bankruptcy fees. The couple does not seem to owe any priority debts, except they would have to pay the bankruptcy fees. The median income in the State of Washington for two people is $83,270, and the Farraguts are under the median income allowed by law, which means that they would have to pay their debts within a three year period. It would be beneficial for them to file a Ch. 13 in order to save their home and other assets. However, this may be a problem for the Farraguts.
Individuals may use a chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. 11 U.S.C. § 1322(c). The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the chapter 13 filing.
There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding. (3) Secured claims are those for which the creditor has the right take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor, such as the credit card debts and medical bills. However, the Farraguts want to keep their credit cards which would be difficult considering the huge amount of cards and the amount owed.
If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive at least the value of the collateral. That would apply to the Cadillac Escalade. Payments to certain secured creditors (i.e., the home mortgage lender), may be made over the original loan repayment schedule (which may be longer than the plan) so long as any arrearage is made up during the plan. This is the part which may be impossible for the Farraguts, taking into account their other monthly expenses.
The Ch. 13 payment plan does not necessarily have to pay all of the unsecured claims, such as the Farragut’s medical bills and credit card bills, in full as long as the debtors pay (in the payment plan) all of their reasonable disposable income over an "applicable commitment period." Also, the unsecured creditors, such as the credit card companies receive at least as much under the plan as they would receive if the debtor's assets were taken and sold, and distributed under chapter 7. 11 U.S.C. § 1325. In a Chapter 13, "disposable income" is income (other than child support payments received by the debtor) minus the regular amount it takes for the family to live, and also includes 15% for charitable contributions. This means the rest of it has to go into the payment plan. The length of time the payment plan would be spread out depends on the debtor's current monthly income. This time period must be three years if current monthly income is less than the state median for a family of the same size. This would apply to the clients in question, since they are approximately $20,000 under the median of about $83,000. They would have to then, complete their payment plan within three years.
It is my opinion that the Farraguts do not, and will not have enough disposable income to meet the payments of a three year Chapter 13 bankruptcy. They have a gross monthly income of $5,000 and their house payments alone are $6,000. This does not take into account their normal household expenses such as food and clothing. They intend to keep their secured item (Cadillac) and want to continue with their credit cards. They tried to trade in the Cadillac but they owed too much on it to use it for a down payment.
Once they paid their monthly living expenses the Farraguts would not have enough money left over to pay anything on a court approved Ch. 13 payment plan. Even if the credit cards and medical bills were paid off at “pennies” on the dollar, they could not pay anything and keep their house and car.
They should consider a Chapter 7 bankruptcy plan and face the unfortunate circumstance that they cannot afford three cars, a $6,000 mortgage, 20 credit cards and private schools and health insurance payments. In a Ch. 7 plan, they would likely lose most of their assets because they could not pay for the house and cars. However, depending on what the Cadillac and Mustang were worth, they may be able to keep them if the “yard sale” price would be under the exemption limit of $6500 for two cars. However, their medical bills and credit card bills would be eliminated, as would anything else they owed on the house or the car, if they gave them up. They would almost be “starting out fresh.” They might be able to “reaffirm” or keep paying on their secured debts if it was reasonable to do so, however, at a gross monthly income of $5000 and a house payment of $6,000, but perhaps a lower amount could be negotiated. The family would likely not lose their household goods, books, or anything like that, because of the exemptions. But, their extra investment monies would be turned over to the trustee to be distributed to their creditors.
Aside from the U.S. Codes used above, I referenced the following: