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How Are Monthly Payments Calculated in a Chapter 13 Repayment Plan?

May 29th, 2020 at 6:05 pm

TX bankrutpcy attorney, Texas chapter 13 lawyer, Being unable to meet your monthly debt obligations can be a serious source of stress. Many people in this situation turn to bankruptcy as a possible solution. For some people who have a steady income, a Chapter 13 repayment plan may be the best option. Often referred to as the “wage earner’s plan,” this type of bankruptcy allows individuals to repay all or a portion of their debts over a period of three or five years. Each month, a single payment is made to the bankruptcy trustee, who then distributes the appropriate amount to each creditor.

Chapter 13 bankruptcies are popular with individuals who have secured debt attached to certain items that they want to keep, like a house or a car. This is because a Chapter 13 bankruptcy allows individuals to distribute any past due payments into the repayment plan so they can get caught up. While the draw of a Chapter 13 bankruptcy is present, most peoples’ first question is, “How much will my payments be?”

Factors Affecting Your Payment

When you enter into a Chapter 13 repayment plan, you agree to pay a specified monthly amount to your trustee who will then pay your creditors. Your monthly payment amount depends on a variety of factors including your income, expenses, the amount of debt you owe, the types of debt you have, and the value of your property.

  • Income and expenses: Two of the biggest factors that affect the amount of your monthly payment are your income and your expenses. You must have a steady and reliable income to qualify for a Chapter 13 plan and provide the bankruptcy court with a record of your income from the past six months. You must also supply the court with your actual monthly expenses.
  • Amount of disposable income: Once you have your income and your expenses, your expenses will be subtracted from your income. The amount that remains is considered to be your disposable income. For many people, the amount of their disposable income is usually the amount that their payments are based on.
  • Value of Non-Exempt Assets: If you have assets that you want to keep, rather than liquidate, you have to factor in that cost as well. For example, a mortgage or a car payment would be added to your monthly payment amount. You also must factor in the amount of any other non-exempt assets that creditors would have received if you had filed for a Chapter 7 bankruptcy.

A San Antonio, TX Chapter 13 Bankruptcy Lawyer Can Walk You Through the Calculations

Bankruptcy can be confusing, no matter which process you choose. During a Chapter 13 bankruptcy, your monthly calculations will likely be calculated using a computer, but a skilled Boerne, TX Chapter 13 bankruptcy attorney can guide you through the process. At the Law Offices of Chance M. McGhee, we have been helping clients file for bankruptcy for more than 18 years. To schedule your free consultation, call our office today at 210-342-3400.

 

Sources:

https://www.thebalance.com/how-much-will-my-chapter-13-plan-payment-be-316209

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

 

Consumer Bankruptcy Changes in the CARES Act

April 13th, 2020 at 7:00 am

The massive $2.2 trillion coronavirus relief law also includes some legal relief for both Chapter 7 and Chapter 13 consumer debtors. 

 

If you’re thinking about filing a Chapter 7 “straight bankruptcy” case, the new CARES law may help, at least slightly. If instead you’re thinking about a Chapter 13 “adjustment of debts” case, the new law helps in more significant ways. That’s also true if you already are in a Chapter 13 case.

$1,200 Relief Checks Excluded as Income for the Means Test

To qualify to file a consumer Chapter 7 case you have to pass the “means test.” Part of that test is a rather complicated calculation of your “current monthly income.” That’s essentially the average of the last 6 full calendar months of income from virtually all sources. A single large payment—such as a $1,200 coronavirus relief payment—could pump up your “current monthly income” and make you fail the “means test.” Then you could be forced to file a multi-year Chapter 13 case instead of a 3-4 month Chapter 7 one.

The new CARES law solves that problem neatly. It simply excludes any coronavirus relief money from the definition of “current monthly income.” To be precise, the following is excluded:

Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A).

What Payments Are Included?

This statutory language is broad. It doesn’t refer only to the one-time $1,200 (or so) relief payments. It’s clearly broad enough that it could include other “Payments made under Federal law” related to the coronavirus national emergency. That is, other such payments may be excluded from “current monthly income” for purposes of the means test.

For example, CARES provides unemployment benefits of $600 per week extra beyond the usual state-calculated weekly amounts. (See our blog post last week about the unemployment benefits under CARES.) These $600 weekly extra benefits sure sound like they’re “Payments made under Federal law” related to [this] national emergency.” Since these $600 payments can last up to 39 weeks, they can amount to way more money than the one-time $1,200 payments. So if these $600 payments are also excluded in applying the means test, that would be quite significant.

But the law may not be clear on this. At this writing, CARES is just two weeks old. How it will be applied may shift quickly, as in so many things related to the pandemic. The law may well be applied somewhat differently in different parts of the country. Contact your local bankruptcy lawyer for current information as it applies to you.

$1,200 Relief Checks Also Excluded in Confirmation of Chapter 13 Plan

Chapter 13 generally requires you to pay all of your “projected disposable income” into your 3-to-5-year payment plan. This monthly amount goes through the Chapter 13 trustee to your creditors under the terms of your plan. Then at the end of the plan you are usually debt-free (except sometimes for certain agreed long-term debts).

Your “projected disposable income” is based on virtually all your income, minus certain legally allowed expenses. The income side of this is your “current monthly income” as discussed above—based on your last 6 months of income. If that income would include a one-time coronavirus relief payment, it would greatly increase your “disposable income” and thus your required Chapter 13 plan payment.

The new CARES law solves that problem in a way similar to the above section about the Chapter 7 means test. Using the exact same language, it excludes any coronavirus relief money from the Chapter 13 definition of “current monthly income.” To again be precise, the following is excluded:

… payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

CARES, Section 1113(b)(1)(B).

As in the section above on Chapter 7, it’s not yet clear what federal payments are excludable. Besides the $600 weekly unemployment payments mentioned above, there may be other future coronavirus stimulus payments approved by Congress. Again, talk with your bankruptcy lawyer to get current information and advice.

Changes to Ongoing Chapter 13 Plans

During the course of a Chapter 13 you can change, or “modify” your approved payment plan under certain circumstances.  CARES added a new circumstance: if you are “experiencing or [have] experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” CARES, Section 1113(b)(1)(C).

The bankruptcy judge still has to approve the modified plan, after the usual notice to creditors and opportunity for objection. The modified plan must comply with the usual requirements. (“Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) shall apply to any [such plan] modification… .” CARES, Section 1113(b)(1)(C).)

It’s unclear what this all adds to the plan modification rights you already have, except for one huge change. The law has been clear for a long time: Chapter 13 plans cannot last longer than 5 years. CARES extended this to a new maximum of 7 years for applicable modified plans.

Although you’d think you would want to finish your plan as fast as possible, longer plans often allow you to reduce your monthly plan payments. It can give you more opportunities to preserve certain assets or collateral—keep a vehicle, save a home. Given the financial challenges so many of us are facing, this greater flexibility can make the difference between completing your case case successfully or not.  

Important: Applicability to Cases

First, the Chapter 7 means test change and the Chapter 13 plan confirmation change “apply to any case commenced before, on, or after the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(i). But those changes have a sunset provision—they are deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).

CARES was enacted on March 27, 2020. That means that these two changes apply to all cases filed any time before that date but only through March 26, 2021. Be careful about this deadline.

Second, the Chapter 13 plan modification change applies “apply to any case for which a plan has been confirmed… before the date of enactment of this Act.” CARES, Section 1113(b)(1)(D(ii). But, same as above, this change have a sunset provision—it is deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2).

So this change applies to Chapter 13 cases which had a confirmed plan before March 27, 2020, and then successfully modified its plans by March 26, 2021. Be careful about this deadline as well.

Notice that by this language this change does not apply to cases either not filed, or already filed but not yet confirmed, as of March 27, 2020. This means that people in these situations appear unable to take advantage of the 7-year provision.

Bottom line all these changes to the Bankruptcy Code are temporary, currently lasting only this one year. Then they will be deleted and the Bankruptcy Code will revert to its prior language. 

 

A Chapter 13 Plan to Pay Income Tax

December 30th, 2019 at 8:00 am

Here’s an example of a Chapter 13 payment plan to pay income tax, showing how you pay what you can afford and avoid some interest, penalties. 

 

Today we put the facts of last week’s blog post into a Chapter 13 plan, showing how it actually works. You’ll see how Chapter 13 saves you money and avoids stress as you pay off your priority income taxes.

The Example: The Tax, Interest, and Penalties

Assume you owe $10,000 to the IRS for income taxes from the 2016 tax year. That’s for the tax alone without the penalties and interest. Plus you owe interest of $1,200 (currently 5% annually), $2,000 for a failure-to-file penalty (which the IRS assesses  at 5% per month of being late), and $1,650 for a failure-to-pay penalty (calculated at 0.5% per month). So including the current interest of $1,200 and a total of $3,650 in penalties this $10,000 tax has turned into a total debt to the IRS of $14,850. And the interest and failure-to-pay penalty just keep on accruing.

As we showed two weeks ago, this relatively recent $10,000 income tax itself can’t be discharged (written off) in bankruptcy. You’d have to figure out a way to pay it after completing a Chapter 7 “straight bankruptcy” case. In a Chapter 13 case you pay that amount through your court-approved payment plan.

The Tax and Interest vs. the Penalties

In either a Chapter 7 or Chapter 13 case the $1,200 in accrued interest has to be paid in full as well. The interest continues accruing nonstop during and after a Chapter 7 case. The difference is that interest effectively stops accruing under Chapter 13. You don’t have to pay any interest beyond the case filing date as long as you successfully complete your case.

The situation is usually the same with any penalties that accrue beyond the bankruptcy case filing date. Under Chapter 7 the penalties continue to accrue, during the case and after it’s completed. Penalties keep getting added on until the tax is paid in full. But under Chapter 13 the penalties generally stop accruing. This is true as long as the IRS did not record a lien on this specific tax before you filed the Chapter 13 case.  (Prior-recorded tax liens create a number of complications that we don’t get into here.)

So, in a Chapter 7 case (or outside of bankruptcy altogether) you’d have to pay the full $14,850 of tax/interest/penalties. Plus the interest and penalties would continue to accrue until you finished paying off the entire debt. If you’d pay it off slowly in an extended monthly payment plan, the additional interest and penalties would be substantial. Conceivably you could end up paying around $20,000 for the $10,000 tax.

In contrast, in a Chapter 13 case you may only pay the $10,000 tax plus prior-accrued $1,200 of interest. Assuming no tax lien and a successfully completed 0% Chapter 13 case, you’d be paying about $11,200 instead of as much as $20,000. (In a 0% case there’s no money for the general unsecured debts.)

The Chapter 13 Plan

To keep this explanation as straightforward as possible, assume you owe this IRS tax debt and only other simple debts. That is, all your other debts are “general unsecured” ones. They are not secured—such as a vehicle loan, home mortgage, and a debt with any other collateral. They are not special, priority debts like unpaid child support or other recent tax debts. Chapter 13 is actually often very good at handling multiple secured and priority debts. In fact it’s often the very best tool if your situation is complicated with such other tough debts. But for the sake of this example we focus on how Chapter 13 handles this single income tax debt.

So assume you have a lot of medical bills, credit cards, and/or other general unsecured debts—say $90,000 total. Your prior accrued income tax penalties of $3,650 are also general unsecured debts, so now the total is $93,650. This plus the 2016 tax-plus-interest amount of $11,200 means you have just under $105,000 in debt. Here’s how a Chapter 13 plan with these debts could look like.

You and your bankruptcy lawyer would put together your monthly budget. Let’s say that after subtracting you and family’s reasonable living expenses from your monthly income, you’d have $385 per month left in “disposable income.” That would not even come close to paying monthly payments on your $105,000 or so of debt.

The Great Result Here

But this $385 amount would be enough—just enough—to pay off your IRS debt in full in just 3 years. $385 for 36 months is enough to pay off the $10,000 base tax, plus the $1,200 in already accrued interest. It would also pay a relatively modest amount of Chapter 13 trustee’s fees (generally a set percentage of whatever you pay into your payment plan) and your own attorney’s fees (whatever you didn’t pay before filing your case). The law usually allows (indeed requires) these “administrative costs” to get paid before the general unsecured debts receive anything.

So in this example $385 per month for 36 months would pay off the $11,200 priority portion of your tax debt. ($10,000 + $1,200.) But beyond that there would not be any money for the general unsecured debts. This means there would be nothing for the $3,850 in prior accrued tax penalties.

As a result all of your “disposable income” during the 3 years of the plan would go just to pay the tax and prior interest. (Plus the mandatory “administrative costs.”)  Then after the 36th month of payments, your Chapter 13 plan would be finished. At that point all of your general unsecured debts would be legally discharged. This includes the $3,850 in prior tax penalties. In addition, the IRS would then wipe off its books any penalties and interest that would have accrued since the date of your Chapter 13 filing.

After only paying the $10,000 tax plus $1,200 in prior interest, you’d owe the IRS nothing. You’d also be free and clear of all the rest of your debts. After paying only as much as your budget allowed for 3 years, you’d have a completely fresh financial start.

 

The Chapter 13 Plan

July 24th, 2017 at 7:00 am

Chapter 13 revolves around your payment plan, which you propose based on your budget, and possibly negotiate with creditors and the trustee. 

 

In our last two blog posts we introduced Chapter 13 “adjustment of debts” bankruptcy. We explained how to qualify for it and how it can buy you extremely valuable time. Today we get to the heart of this option: the Chapter 13 payment plan.

The Length of the Plan

A Chapter 13 case almost always requires a 3-to-5-year payment plan. That may sound like a long time, but the length itself is often an advantage. That’s because your Chapter 13 plan often has you paying special debts that you want or need to pay, and the more time you have the less you have to pay each month. That makes achieving your plan goals easier and more realistic.

Whether a plan has to be at least 3 years long vs. 5 years depends on two main factors. First, your income plays a major role. Without explaining this in detail here, relatively lower income results in a minimum 3-year plan. Higher income results in a 5-year plan. 

Second, even if your minimum plan length is 3 years, you may want to stretch it out longer. You’d do that to reduce how much you pay each month into the plan. 

Your Chapter 13 Plan

Your plan is a blueprint for how you will deal with your debts for the 3 to 5 years of your Chapter 13 case. It must meet a list of requirements. See Section 1322, “Contents of plan,” of the U.S. Bankruptcy Code.

The core of the plan states how much you will pay to ALL of your creditors each month, and who gets paid from that amount. There are other provisions in the plan that don’t directly involve money. We’ll cover these in more detail in upcoming blog posts.

The Plan Approval Procedure

You and your bankruptcy lawyer prepare and then present your Chapter 13 plan to the bankruptcy court. This is usually done at the same time as your lawyer electronically files your case. But sometimes the plan is filed a week or two later, especially if your case was filed in a hurry.

Your creditors receive a copy of your plan and are allowed limited kinds of objections to it. If your plan follows the legal requirements the creditors usually don’t have much room for objection.

The Chapter 13 trustee also has a role in determining whether the plan meets the appropriate rules. The trustee suggests changes, usually in the form of objections. Usually these are resolved informally between the trustee and your lawyer. They often involve only minor tweaks in the plan terms, so that it’s still meeting your intended goals.

The bankruptcy judge resolves any disagreements about the plan between you and your creditors, or between you and the trustee, as needed. This usually happen quite quickly, although can delay the approval of your plan for several weeks.

The approval of a plan is called its confirmation, and usually takes place at a confirmation hearing. Your lawyer usually attends, but you almost never need to. The confirmation hearing usually happens about two months after your lawyer files your case. But it can be postponed (“adjourned”) once or even more often if there are objections which take time to resolve.

The judge approves your plan by signing a confirmation order. Your confirmed plan plus the confirmation order together largely govern your relationships with your creditors throughout the rest of your Chapter 13 case.

Next…

In our next blog post we’ll cover how a Chapter 13 plan deals with the different categories of your debts.

 

A Simple Example of Passing the Means Test

July 5th, 2017 at 7:00 am

 We show by example how the means test works, when a person qualifies for a Chapter 7 case simply by income.  


An Example is Worth a Thousand Words

You have to pass the means test to qualify for a Chapter 7 “straight bankruptcy. In a recent blog post we said that the easiest way to pass the means test is by your income. If your income is low enough you pass without having to look at your allowed expenses or special circumstances.  Let’s see how this works by way of an example.

Our Example—The Facts

Jeremy and Allison need bankruptcy relief. Their bankruptcy lawyer has recommended that they file a Chapter 7 case based on their circumstances. They have decided to do so.

They are both employed and get paychecks twice a month, on the 1st and 15th of the month. Jeremy has a gross income of $2,750 per month and Allison $3,250 per month.

They have two children who live with them in their home in Indiana.

“Income” for the Means Test

For purposes of the means test you count virtually all sources of incoming money (other than from Social Security). But you count only money received during the 6 FULL CALENDAR months before filing the Chapter 7 case.

Allison and Jeremy want to file their case during July. So they look at the income they’d received during the period from January 1 through June 30, the 6 full calendar months before. That’s 6 times $3,250 for Allison, or $19,500, plus 6 times $2,750 for Jeremy, or $16,500, or a combined $36,000. Multiply that by 2 to get an annual income of $72,000.

The Median Income for Your Family Size in Your State

Allison and Jeremy would pass the means test the most easily if their income, as just calculated, would be no larger than the median income amount for their family size in their state.

The median income amount for a group of people is similar to their average income amount, but not quite. It’s the amount at which half of the people have a greater income and half have less.

So for Jeremy and Allison, the median income is the amount at which half of the families of four people in Indiana have more income and half have less. How do they find out that amount?

It’s provided online by the U.S. Trustee. Here is a table showing the most current information of this writing. (This table is updated every few months so check here for more current median income tables.)

Notice that the median income for Jeremy and Allison’s family size and state is $77,566. Their income as calculated above, at $72,000, is less than this median income amount.

Conclusion

As a result Allison and Jeremy pass the means test simply on the basis of their income. They and their lawyer don’t need to go through the process of figuring out and deducting all their allowed expenses to find out if they pass the means test. Their income is low enough. It’s presumed that they don’t have enough money left over to pay a meaningful amount back to their creditors.

 

No Means Test If You Have More Business Debts than Consumer Debts

June 26th, 2017 at 7:00 am

You only have to pass the means test if you have “primarily consumer debts.” If you have more business debts, skip the means test.  


The Consumer “Means Test”

Our last blog post introduced the “means test.” It’s used to see if you qualifying for Chapter 7 “straight bankruptcy.” If you don’t qualify, you may instead have to file a Chapter 13 “adjustment of debts” case requiring a 3-to-5-year payment plan.

But the means test only applies to consumer bankruptcy cases. Otherwise you can skip the means test.

The official Voluntary Petition for Individuals Filing Bankruptcy form asks the following two questions:

16a. Are your debts primarily consumer debts? Consumer debts are defined in 11 U.S.C. § 101(8) as “incurred by an individual primarily for a personal, family, or household purpose.”

16b. Are your debts primarily business debts? Business debts are debts that you incurred to obtain money for a business or investment or through the operation of the business or investment.

If you answer “no” to the first question (and usually “yes” to the second question), than you skip the means test. This can be a significant advantage because you may otherwise not qualify under Chapter 7.

How this Exception Fit’s into the Purpose of the Means Test

The purpose of the “means test” is to only allow you to go through a Chapter 7 case if you don’t have the “means” to pay a meaningful amount of your debts to your creditors. If your income is no more than the “median income” for your family size in your state, the law assumes you don’t have the “means” to do so. Next, if your income is more than the median amount, then your allowed expenses are carefully reviewed to see if you do have enough “means” left after your expenses.

When Congress created the means test, it decided to apply the test only to individual consumers, not to businesses and business owners.

The mechanism that Congress used to divide between consumers and business is the phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”

Not “Primarily Consumer Debts”

If the total amount of all your consumer debts is less than the total amount of all your non-consumer (business) debts, your debts are not “primarily consumer debts.” If so, you can avoid the “means test.”

Section 101(8) of the Bankruptcy Code defines a “consumer debt” at as one “incurred by an individual primarily for a personal, family, or household purpose.”

As you add up your consumer and non-consumer debts, realize that you may have more business debt than you think for two reasons.

First, debts that you would normally consider consumer debts might not be. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit. (Note the explanation to the question in the bankruptcy petition quoted above, that business debts include both those incurred in funding the business and in operating it.)

Second, some of your business debts may be larger than you think. For example, If you surrendered a leased business premises or business equipment you would likely be liable not just for the missed lease payments owed at the filing of the bankruptcy but also potentially for the string of future contractual payments, depreciation, and other possible charges.

Through a combination of these two considerations, your total business debt may be much more than you expected. So you might have more business debt than consumer debt.

Conclusion

You may not be in a position—given your income and the expenses you’re allowed—to pass the means test. If you have ANY business debts, be sure to ask your bankruptcy lawyer to see if you qualify for this not-“primarily consumer debt” exception.

 

The Chapter 7 Means Test

June 23rd, 2017 at 7:00 am

You have to pass the means test to qualify for a Chapter 7 case. It’s often an easy test to pass but one with some crucial twists and turns. 


The Purpose of the “Means Test”

You need to qualify to file a Chapter 7 “straight bankruptcy” case. The “means test” is the main step in qualifying. Its purpose is to not let you file a Chapter 7 case if you have the “means” to pay a meaningful amount to your creditors. If you do, then usually you would instead have to go through a Chapter 13 “adjustment of debts” case.

A consumer Chapter 7 case generally “discharges” (legally writes off) all or most of your debts. And it does so in a process that usually takes only 3 or 4 months.

In contrast a Chapter 13 case requires you to pay as much as you can reasonably pay to your creditors over a 3 to 5 year period. That usually means that under Chapter 13 your creditors get paid at least a portion of what you owe them. Often that portion is small, and sometimes most of your creditors actually get nothing. But the point is that Chapter 7 is SO much faster and easier. IF it’s the right option for you, you want to be able to qualify. And that means passing the means test.

Usually Easy, but Watch Out for the Twists and Turns

The reality is that most people who want to file under Chapter 7 can pass the means test. And most of those who pass do so quite easily.

Here’s why. There are a number of steps to the means test. But if you pass it on the first easiest step, then you’re done. You don’t have to go through the other more complicated steps.

This first step—the “median income” step—is relatively straightforward. But it has its own oddities—its twists and turns.

The “Median Income” Step

The idea behind this first step is that if your income is low enough, you have no money for creditors. You don’t have the “means” to pay a meaningful amount to the creditors.

If your income is low enough you pass the means test simply on the basis of your income. You don’t have to compare your income to your expenses to see if you have enough left over to pay to your creditors. (That’s the second step of the means test, if you don’t pass at this median income step.)

How low does your income need to be to pass the means test at this first step?

It can’t be more than the current median income amount for your state and your family size.

Median income is somewhat like the average income but not quite. It is the income amount at which half the people of the population have a lower income while half of the people has a higher income. The median income amounts for each state and family size are updated usually two or three times a year. The most recent update as of this writing was effective as of May 1, 2017. Tables of these median income amounts are published and made available.

“Income” Isn’t What You Think

“Income” has a very special and specific meaning here. To see if your income fits within your applicable median income amount, you need to know this meaning of “income.”

First, consider only money you received during precisely the SIX FULL calendar months before the filing of your bankruptcy case. For example, assume you are filing a Chapter 7 case on any day in the month of July. Then, you only count money you’d received from January 1 through June 30 of that year.

Second, we purposely said “money” instead of “income” here. That’s because you include virtually all money you received during the applicable six-month period from virtually all sources. It’s not just employment income, or money that’s taxable and shows up on your income tax return. Include essentially all sources of funds, except those received through any kind of Social Security benefit.

Once you have the total 6-month “income” amount, multiply it by 2 to get the annualized amount of “income.” Then compare that amount to the one for your state and family size in the published table.

Timing of Filing Often Changes Your “Income”

With this particular definition of “income,” whether you are above or below median income can change by the month. That’s especially true if you occasionally get money in irregular amounts and/or with irregular timing. Examples would be inconsistent child support, an annual or quarterly bonus from work, or any kind of lump sum distribution like a disability settlement or from a vehicle accident.   

An unusual payment can artificially inflate your “income” for the means test. A gap in usual payments can deflate your “income.” These can either push you temporarily above your applicable median income or below it. Because the impact is doubled (when you annualize the 6-months of income), even a moderate change can effect whether you pass this step of the means test.

The Rest of the “Means Test”

If your income is more than your applicable median income, you go to the second step of the means test. This involves a comparison of your income and allowed expenses to come up with your “disposable income.” The twist and turn here is in calculating your allowed expenses. We’ll get into that in our next blog post.

 

What If I’m Too Far Behind on My Rent?

February 10th, 2017 at 8:00 am

In a Chapter 13 “adjustment of debts” you have much more time to get current on your residential lease agreement than under Chapter 7. 


The Challenge under Chapter 7

Our last blog post showed how Chapter 7 “straight bankruptcy” can help you keep your home or apartment lease. Mostly it clears away other debts so that you can better afford your rent payments. Hopefully, if you’re already behind on those payments, it’s easier to catch up when you no longer have other debts.

But the disadvantage with Chapter 7 is that, if you are behind, you have very little time to catch up. Most of the time you need to get current within a month or two after filing the case. That’s because Chapter 7 cases are completed very quickly, giving you only brief protection against your landlord.

This short timetable presents a major challenge because usually you’re cash poor when you file bankruptcy. Often you’re pushed into bankruptcy because of a cash-depleting event like is a paycheck or bank account garnishment. You may be behind not only on rent but also on other obligations like utilities or rental insurance. That could additionally put you in breach of your lease agreement. Plus you may also be behind on other very important obligations like your vehicle loan or child support.

The short break you get from collections under Chapter 7 is often just not long enough to catch up on rent. That’s particularly true if some of your debts are of the type that Chapter 7 doesn’t discharge (legally write off).

The Chapter 13 Solution

The broad overall advantage of Chapter 13 is that it buys time. And that’s true with a residential lease agreement on which you owe late rent payments. Instead of having only a couple months to catch up, under Chapter 13 you have many months, or even possibly a couple years, to do so.

That’s potentially reason enough to file a Chapter 13 case, even though it takes several years instead of several months. The longer length gives you the advantage of more time to catch up on the rent.

An Example

The difference between Chapter 7 and 13 here is best shown by an example.

Imagine that you are two months behind on a home rental of $1,500 per month, or $3,000 behind. You also owe the IRS income taxes for 2014 in the amount of $10,000. Your paycheck was just garnished by the IRS, leaving you worse than broke. You’re also 5 months behind on your $500 monthly child support. Your ex-spouse just turned you over to the support enforcement agency to force you to pay up. And your landlord just informed you it’s about to file an eviction proceeding.

In spite of all this you desperately want to stay in your rental. It’s in a great location for your work and your kids’ schools. Besides, you’d have no way to come up with the first and last month’s rent for a new place. Your bad overall credit record and now your bad rental record would make qualifying for a new place very doubtful. So you understandably want to keep yourself and your family where you are now if at all possible.

If You Didn’t File Bankruptcy

Without filing bankruptcy, assuming you have no way of coming up with the $3,000 back rent, you would likely be evicted within a few weeks. In the meantime, the support enforcement agency can take very aggressive collection actions against you. That could include the suspension of your driver’s license, as well as any occupational or professional license. You could maybe work out a monthly payment plan with the IRS. But given the other extreme financial pressures on you it’s highly doubtful that you could reliably stick to any commitment.

You’d be evicted and continue to overwhelmed by debt. This is not a pretty picture.

Under Chapter 7…  

A “straight bankruptcy” would not likely help enough to save your home.

You’d get a 3-4 month break from the IRS’s collections. But you would not discharge (legally write off) that $10,000 tax debt because it’s not old enough to qualify. So very quickly you’d be back in their crosshairs.

The Chapter 7 filing wouldn’t give you ANY break from the support enforcement agency’s garnishments and potential license suspensions.

Somehow in the midst of all that you’d need to have quick access to the $3,000 in back rent. Maybe you have so much in other debts that not paying them would free up tons of money every month. But most people filing bankruptcy have already stopped paying a lot of their debts, so that likely wouldn’t help enough.

Chapter 7 simply doesn’t help most people in these kinds of situations enough.

Under Chapter 13…

Filing instead an “adjustment of debts” case would much more likely let you to stay in the home.

Your Chapter 13 filing would immediately stop all collections by the IRS, the support enforcement agency, and the landlord. And that stopping would likely last for the full 3-to-5-year length of the case. Your budget would determine how much you would realistically pay to ALL of your creditors each month. That monthly “Chapter 13 plan payment” would be divided among your creditors. It would pay the IRS, support enforcement, and the back rent before and instead of paying any other debts.

As a result, you would eventually completely catch up on the rent, likely within a year or two. (And you’d pay each new month’s rent on time as well, as provided in your budget). In the same way you’d also eventually bring your child support current, and pay off the income tax debt. To the extent that you’d have any “disposable income” beyond that, it would go to your remaining debts.

So, at the end of your Chapter 13 case you’d be current on your rental and child support, and you’d have paid off the income taxes. To whatever extent you didn’t have enough “disposable income” for the other debts, they would be discharged.

You would have succeeded in staying in your home, and be debt-free.

 

Objecting to a Proof of Claim to Defeat a Creditor

January 2nd, 2017 at 8:00 am

If your liability dispute with your creditor spills into your Chapter 13 case, the bankruptcy court may be a good forum to fight it out.

 

Our last three blog posts were about objecting to a creditor’s proof of claim in a Chapter 13 case. Today we look at situations when this is the most important part of your case.

Bringing a Liability Dispute to the Bankruptcy Court

It’s not unusual that a dispute with a single creditor forces a person into bankruptcy. Often it’s just one otherwise ordinary creditor which is more aggressive than the others, suing you ahead of the others, and then garnishing your paycheck or bank account.

Sometimes it’s not just any extra-pushy creditor, but rather one that you’ve been fighting for quite a while. The fight you are having with that creditor may be the main reason why you filed bankruptcy.

Maybe you were in a serious vehicle accident, and did not have enough insurance coverage. You are being accused of causing the accident but don’t believe you were its primary cause. Because of major injuries to others you potentially owe hundreds of thousands of dollars.

Or you operated a business that looked promising for a while but then failed. You were accused of mismanagement by a partner or investor and were sued. Fighting this lawsuit has drained you financially.

Or perhaps you were accused of unduly influencing a parent or other family member to change his or her will. That turned into a contentious lawsuit against you.

The attorney fees and other costs of fighting the dispute have pushed you over the financial edge.

You’re in a Chapter 13 Case

Assume you either didn’t qualify for Chapter 7, or you needed the special tools of Chapter 13 to deal with special debts like your home mortgage or income taxes. So you’re in a Chapter 13 “adjustment of debts” case.

When a Single Creditors’ Proof of Claim Amount Makes All the Difference

As we discussed in recent blog posts, sometimes the amount of debts you have does not change how much you need to pay into a successful Chapter 13 case. But often it does matter. Your main adversary before you filed the Chapter 13 case may still try to make you pay too much to it through your payment plan. Or that adversary may even jeopardize your ability to have a successful case.

For example, your financial circumstances may require you to pay 100% of your debts in a Chapter 13 plan. If so your liability on a large claim could substantially increase how much and/or how long you’d have to pay. Assume you could otherwise finish your plan in 36 months by paying $750 monthly into your plan. An additional $18,000 proof of claim by your adversary could force you to pay that $750 monthly for two additional years. An even larger claim could force you to pay more than you could reasonably pay each month. If that proof of claim resulted in more debt than you could pay in 5 years, Chapter 13 would cease to be an option.

One way to solve these problems is to object to this adversary’s proof of claim.

Failure to File a Proof of Claim on Time

If you believe you don’t owe an adversary anything, you’d still list the disputed claim in your schedule of creditors. Otherwise you lose the opportunity to discharge (write off) that disputed claim.

Your adversary has a limited time to file a proof of claim with the bankruptcy court. If it fails to do so on time, you don’t have to pay it anything in your Chapter 13 case. The claim is then discharged without any payment at the successful completion of your case.

But it’s not likely that your adversary would mess up like this.

Objection to a Proof of Claim

More likely, your adversary would file a timely proof of claim. That claim would stand and you’d have to pay it under the terms of you plan unless somebody—usually you—objects to it.

If you object, and your adversary doesn’t respond, the claim would be paid according how you state in your objection. So if your objection states that you owe nothing at all on the claim, again you would pay nothing.

It’s not unheard of that your adversary would simply not respond to your objection. Just like you, it may be tired of paying attorney fees, likely now also to a bankruptcy specialist. Your bankruptcy documents filed under oath may reveal to your adversary better than ever before that you have no pot of gold and so it’s wasting its time and money chasing you.

Responding to Your Objection

If your adversary does respond to your objection, the bankruptcy court could potentially decide whether you have any liability on the claim, and/or its amount. If a lawsuit on this was already pending in another court when you filed bankruptcy, the bankruptcy court may require the liability dispute to go back to that prior court to determine your liability.

Even so, for the reasons mentioned above there’s usually less incentive for your adversary to keep fighting you as aggressively as before.

Conclusion

If you are in a Chapter 13 case which is affected by how much debt you owe, your main adversary may mess up and fail to file a proof of claim. Or if it does file a proof of claim but you object to it, your adversary may fail to respond. Even if this adversary does jump through all the procedural hoops, its prospect of paying additional costs and a receiving a limited payoff usually forces it to be more pragmatic and settle the dispute.

 

Creditors Paid Nothing under Chapter 13

December 19th, 2016 at 8:00 am

Chapter 13 payment plans usually have you pay something to all of your creditors. But not necessarily. Certain creditors may get nothing. 

 

Our last blog post was about the “discharge”—the permanent write-off—of debts through a Chapter 13 “adjustment of debts.” This discharge happens at the end of a successful case, which usually takes 3 to 5 years.

Misconceptions about Chapter 13

Although 3 to 5 years may sound like a long time, the length can actually be a big advantage. You have more time to catch up on or pay off debts that you either want to or must pay. So what seems like a disadvantage could actually be an advantage. 

There are lots of other misconceptions about how Chapter 13 works. That’s partly because it is such a flexible option. Chapter 13 cases can be very different from each another, with each addressing the unique circumstances of each person. So that leads to some confusion, as you hear about something in one case that may have little or nothing to do with how Chapter 13 would work for you.

One misconception is related to an objection often raised about Chapter 13: why pay my creditors all or part of what I owe them when I could just discharge those debts entirely in a Chapter 7 “straight bankruptcy” case?

Actually, often in Chapter 13 you pay some creditors nothing at all. Sometimes even all of your creditors receive nothing, expect those you want or need to pay.

A Standard Chapter 13 Case

In maybe the most standard kind of Chapter 13 case (if there is such a thing!), you pay certain special debts in full and you pay other more ordinary debts only a percentage of what you owe, and often only a small percentage. The special debts you pay are often those secured by collateral you want to keep. So you may be catching up on a home mortgage arrearage or “cramming down” a vehicle loan. Oher special debts are ones that can’t be discharged in Chapter 7. Examples include recent income tax debt or unpaid child or spousal support.

Then your remaining “disposable income” goes towards the rest of your debts. Usually you pay those “general unsecured” debts only whatever’s left over. If the special debts you are paying in full are relatively small and your “disposable income” left over each month is relatively large, you could pay a relatively high percentage of what you owe on the “general unsecured” debts. But more often you don’t have much money left over and so you end up paying just a drop in the bucket of what you owe on those debts.

Debts Paid Nothing

So how could you pay nothing at all on certain debts in a Chapter 13 case? Here are four circumstances that would happen:

  1. No money available for “general unsecured” debts because ALL of your “disposable income” is spent on your special debts.
  2. A creditor does not file a proof of claim on the debt, or does not do so on time. So you don’t pay anything on that debt.
  3. Your bankruptcy lawyer objects to a creditor’s proof of claim. Then the creditor either fails to respond on time or you prevail on that objection.
  4. At some point in your Chapter 13 case your circumstances significantly change. So your lawyer converts your case into a Chapter 7 one, discharging all or most of your debts in full.

We’ll cover each one of these in our next 4 blog posts. This will give you a better idea how Chapter 13 really works.

 

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