To keep house, keep paying Chapter 13 bankruptcy

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Dear Bankruptcy Adviser,
I am currently paying into a Chapter 13 bankruptcy. The monthly Chapter 13 plan payment is outrageous. We inherited a two-bedroom house along with two other siblings. One sibling lives in the house. I have four dependents that live with me in a rented house. The inherited house is paid in full and there is equity. The bankruptcy trustee says our payment is that high because of that equity. I understand if we lived in that house (meaning there would be seven people in a two-bedroom house) our payment would drop, but does this sound right? Does the court not understand seven people can’t live in a two-bedroom house?
— Mike

Dear Mike,
You are asking a very common and reasonable question I get asked every time in similar cases.

Here are the facts as I understand them. You own a valuable asset. Outside of bankruptcy, you are allowed to sell that asset, giving you some of the equity as profit. However, you or the other members of your family do not want to sell the property.

The problem is you filed bankruptcy, and bankruptcy has some unyielding rules. There are two types of bankruptcy, Chapter 7 and Chapter 13.

In a Chapter 7 bankruptcy, a trustee is assigned your case and reviews your list of assets, determining what you can and cannot protect. If the trustee determines you have an unprotected asset, you would have to either surrender the asset or pay the trustee to protect the asset. In your case, you would have to pay the trustee to protect the equity or surrender the property. Even if others are on the title to the property, the trustee can request the other owners to buy out your interest or force all owners to sell the property to access your interest.

This is why you are paying money back in a Chapter 13. A Chapter 13 bankruptcy allows you to pay back that which you could not protect in a Chapter 7. You are given the opportunity to make a monthly payment to the court. Had you filed a Chapter 7, the trustee would have required you to pay up to protect the equity in the house. Because you did not want to lose the house, you are paying that amount back in the Chapter 13.

An example would best illustrate this issue. Say you have $30,000 in credit card debt and $30,000 in home equity that cannot be protected. If you file Chapter 7 bankruptcy, the trustee would make you either sell the house or give him or her $30,000 to pay your credit cards. However, in the Chapter 13, you will pay back that $30,000 over the next three to five years. This protects the equity in the property and satisfies your obligation to pay back the creditors.

In some cases, you might not have to pay back all your creditors. You could have $30,000 in home equity you cannot protect, but $50,000 in credit card debt. You would have to pay back only the $30,000 and could eliminate the other $20,000 after completing your three- to five-year Chapter 13 organization plan.

The fact that seven people can or cannot live in the house is completely irrelevant. The issue is black and white. If you have something that cannot be protected, you must either lose it or pay to keep it. In your case, you are paying to keep it … no matter how high the payment.

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