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Archive for the ‘commitment period’ tag

Filing Chapter 13 in December (or January!) May Greatly Shorten Your Case

December 17th, 2018 at 8:00 am

Do you need a Chapter 13 case? WHEN you file it can mean the difference between a payment plan that takes 3 years and one that takes 5.  

 

In two blog posts last month (November 12 and 19) we showed how filing bankruptcy by the end of December 31 might allow you to file a Chapter 7 “straight bankruptcy” case instead of being forced into a Chapter 13 “adjustment of debts” one. You could have your debts discharged (legally written off) within just 3 or 4 months under Chapter 7. Otherwise you may have to go through a 3-to-5-year payment plan under Chapter 13. Besides likely costing much more, you’d only discharge your remaining debts if you successfully completed your payment plan.

But What If You Need a Chapter 13 Case?

The benefits of Chapter 7 won’t matter much to you if you need a Chapter 13 case in the first place.

Yes, Chapter 13 takes so much longer than Chapter 7.

And Chapter 13 is much riskier. Most Chapter 7 cases—especially one in which the debtor has a bankruptcy lawyer—get completed successfully. Chapter 13 comes with longer odds. A lot can happen in the 3 to 5 years that they usually take. Chapter 13 is a flexible tool, one that you can often adjust to changing circumstances. But the truth is that a significant percentage of them do NOT get completed successfully.

Notwithstanding the extra time and risks, Chapter 13 could still be by far the best tool for you.  That’s simply because it can accomplish many things that Chapter 7 can’t. For example, Chapter 13 can:

  • give you time to catch up on home mortgage and/or property taxes
  • buy you time and save you money if you owe lots of income taxes, especially if you owe on more than one tax year
  • give you time to catch up on child or spousal support while protecting your income, assets, and license(s) from suspension while doing so
  • allow you to keep assets that are otherwise not protected in a Chapter 7 case
  • lower your monthly vehicle payments and reduce the total amount on the loan
  • hold off on student loan payments and collection until you qualify for an “undue hardship”

And these are just some of the ways that Chapter 13 can deal with your creditors more powerfully than Chapter 7.

A Shorter Chapter 13 Payment Plan

So, what if you’ve learned that you really need a Chapter 13 case? What if you also learned that filing your Chapter 13 case in December instead of January would allow you to finish your case in 3 years instead of 5 years? Or what if that was true if you filed your case in January instead of February?

Paying into a Chapter 13 payment plan for 2 years less could save you many thousands of dollars. Plus, that would get you out of bankruptcy 2 years sooner. You’d be that much ahead of the game in rebuilding your credit.  You’d have the emotional relief of finishing and getting on with life sooner

Here could filing a Chapter case a month sooner shorten the case so much? Here’s how.

Your Last-6-Full Months of Income Determines How Long Your Chapter 13 Lasts  

Our blog post of November 12 described an unusual way of calculating your income for the Chapter 7 “means test.” (That’s a test to qualify for filing a Chapter 7 case.)   That way of calculating income also determines whether your Chapter 13 plan lasts a minimum of 3 years or 5.

Income is calculated as follows:

1) Consider almost all sources of money coming to you in just about any form as income…. .  Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case.

The 6-month amount is multiplied by 2 for the annual “income” total to be compared to the “median income” for your state and family size.

When you combine the above two considerations, monthly changes in your “income” can make a big difference.  That’s especially true if your money coming in is more than usual in either December or January.  (That would most often be from more overtime, a seasonal job, a monetary gift from family, and/or an employer’s bonus.)

Because of the way “income” is calculated there’s a higher risk that it would be larger than the “median income” for your state and family size. If it is larger, then you must pay your Chapter 13 case for 5 years instead of 3 years.

What’s My Applicable “Median income”?

The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. Here’s a table showing the “median family income” amounts for cases filed on or after November 1, 2018. It shows the amount for each state, by family size. (The amounts are adjusted about three times a year; see this webpage to see if there has been an update.)

(For the actual steps used in this calculation, see the official form, Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period.)

So if your “income” as calculated above is larger than your applicable “median family income” than your Chapter 13 case gets pushed to 5 years.  If it’s smaller, your case can last as short as 3 years. (That 3 or 5 years is the “commitment period” referred to in the official form in the paragraph above.)

If your “income” is larger because of unusual money you received in December and/or January, it may make sense to file your Chapter 13 case in either December or January so that the income of that month would not count. (Remember, that’s because you only count income of the PRIOR 6 FULL calendar months before the filing date.)

In next week’s blog post we’ll put all this into an example to make better sense of it for you.

 

Bankruptcy Timing and the Holidays: Filing in January to Qualify for Chapter 7 or Shorten Chapter 13 Case

December 28th, 2015 at 2:00 am

Think about filing bankruptcy in early 2016 if you had some extra source of money in mid-2015.

 

Some people can take advantage of the peculiar way that bankruptcy law calculates “income” for purposes of the “means test” by filing their Chapter 7 case with the right timing. Doing so could qualify them for Chapter 7 when otherwise you may not.

Others can take similar advantage of the way “income” is calculated for purposes of determining their Chapter 13 “commitment period”—the minimum length of time they have to pay into their court-approved payment plan. With the right timing their commitment period would be 3 years instead of 5 years.

Today, after reminding you briefly how “income” is calculated for these two purposes, we’ll give you an example how a January bankruptcy filing could save you a great deal of money.

The Purposes of the “Means Test” and “Commitment Period“

The “means test” determines to a large extent whether you can file a Chapter 7 “straight bankruptcy,” lasting only about 4 months, or instead must file a Chapter 13 “adjustment of debts,” which usually lasts 3 to 5 years.  The means test is intended to figure out if you have the “means” to pay your creditors a meaningful portion of what you owe. If so, then you would be required to do so through Chapter 13 instead of just quickly discharging (legally writing off) the debts through Chapter 7.

The “commitment period” calculations determine, as mentioned above, whether your Chapter 13 payment plan must run 3 years or instead 5 years. If the latter, that can mean paying thousands of dollars more to your creditors. It can also mean delaying when you can start repairing your credit.   

“Median Income”

The “median income” for your family size in your state is similar but not the same as the average income. Median income is the amount at which half the people for your family size in your state have income of less than that amount and half have more than that amount.

The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. For cases filed November 1, 2015 and for several months thereafter, those state-by-state amounts can be found here.

Qualifying for a Chapter 7 case by passing the means test turns to a large extent on whether your “income” (as calculated for this purpose) is no more than the “median income” for your family size in your state.

Qualifying for a 3-year Chapter 13 case (instead of a 5-year one) turns effectively on whether your “income” (calculated the same as for the means test) is no more than the “median income” for your family size in your state.

The Calculation of “Income”

For these two purposes “income” is calculated as follows: first, virtually all money received is included, not just taxable employment income (except for Social Security); and second, that money received is counted only during precisely the last 6 FULL calendar months before the date of filing bankruptcy. This means EXCLUDING any money received at any point BEFORE that that six-month period.

So sometimes it makes a huge difference to wait to file bankruptcy until more than 6 months has passed after you receive some money that pushes you above the median income amount.

An Example

Here’s how this works.

Consider Henry, living alone, in a state in which the applicable median income is $48,000 for a family of one. He received a salary of $3,900 per month through all of 2015, each paid on the last day of the month. That totals $46,800 for the year.

Henry also received a mid-year bonus from his employer in the amount of $2,500 on June 30, 2015.

If he filed a bankruptcy case anytime in December 2015, Henry’s “income” would be calculated as follows:

1) the six full calendar months for counting “income” would be June through November 2015 (June 1 through November 30);

2) employment income during that time was $3,900 times 6 months = $23,400;

3) add the $2,500 IRA contribution, for a total of $25,900 in income during that 6-month period;

4) multiply the $25,900 by 2 for an annualized income amount of $51,800;

5) since that is more than the applicable $48,000 median income for Henry’s family size in his state, he does not pass the income portion of the “means test” so he may not qualify for Chapter 7; if he filed a Chapter 13 case he could not do a 3-year payment plan but would rather have to pay for 5 years.

However, just as soon as January arrives, Henry’s “income” becomes less than the $48,000 median income amount. Here are the calculations:

1) the pertinent six-month period moves ahead by a month, so now it would include July 2015 through January 2016 (July 1 through January 31);

2) employment income during that time was the same $3,900 times 6 months = $23,400;

3) Don’t include the bonus received on June 30, 2015 because that’s now outside the six-month period;

4) multiply $23,400 by 2 for an annualized income amount of $46,800;

5) since that is less than the applicable $48,000 median income, now Henry has less “income” than the median amount.

As a result, by waiting to file his bankruptcy case not in December 2015 but rather in January 2016, Henry can much more easily qualify for Chapter 7 by passing the “income” portion of the “means test.” And if he chooses to file a Chapter 13 case instead, the minimum length of his payment plan would be 3 years instead of 5 years.

 Notice that under these facts Henry could wait literally just one day, from December 31 to January 1, for the big difference described here.

 

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