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A Chapter 13 Plan to Catch up on Past-Due Support

February 3rd, 2020 at 8:00 am

Here’s an example of a Chapter 13 payment plan to pay past-due child and/or spousal support, showing how you can catch up safely and sanely

 

Today we put what we explained in the last three weeks of blog post into a sample Chapter 13 plan. It shows how powerfully Chapter 13 helps you if you owe past due child and/or spousal support. A Chapter 13 filing protects you from the aggressive collection of overdue support, immediately and as long as needed. And through the Chapter 13 payment plan you get a reasonable and even peaceful way to catch up on support.

The Example

Assume you’ve fallen behind on both child and spousal support because your income was interrupted. You owe $6,000 in past-due support. You’re back at work so you can now pay your ongoing monthly support but have no way to catch up. You have too many other debts.

Your ex-spouse’s support enforcement agency is poised to garnish your wages for the past-due support. If they did so you wouldn’t be able to pay your vehicle loan payment and you’d lose your vehicle.

Assume that the divorce decree requires you to pay $900 in monthly child support and $600 in monthly spousal support, $1,500 total, for 5 more years. So the $6,000 in past-due support represents 4 months of missed payments.

You got a good deal on the vehicle loan. So the vehicle is worth about as much as you owe on it—$10,000. Your monthly payments are $425 per month, with 25 more payments to go.

Besides the $5,000 in past-due support and the vehicle loan, you owe $95,000 in other debts. These other debts are all unsecured credit cards and medical bills—“general unsecured debts” under bankruptcy law. If you pay the monthly payments on the credit cards you have no money left for the medical debts, much less the $1,500 in ongoing support payments. You are in a very tight financial box.

Chapter 13 gets you out of that box fast, and solves these problems permanently.

Your Chapter 13 Budget and “Disposable Income”

Filing a Chapter 13 case stops the collection of past due support immediately. See our blog posts of 2 and 3 weeks ago about this works and the conditions you must meet. See the blog post of last week about how the Chapter 13 plan gives you a safe and flexible way to catch up on the support. Today’s example brings all this together.

In a Chapter 13 case you and your bankruptcy lawyer put together a monthly budget of your income and expenses. That budget gives you money to pay your ongoing monthly support as well as you own reasonable expenses. See Subsection 1325(b)(2)(A)(i) of the U.S. Bankruptcy Code.

The amount left over is your monthly “projected disposable income.” See Section 1325(b)(1)(B)  of the Bankruptcy Code.

The way this works is your monthly expenses exclude any debt payments. Your expenses DO include the $1,500 in child and support payments since that’s a required ongoing expense. But your expenses don’t include any money for the past-due support since that part is a debt.

Your expenses for determining your disposable income also don’t include the $425 vehicle loan payment. That is of course a debt as well.

Assume that after subtracting all of your monthly expenses (including the $1,500 in support) your monthly “projected disposable income” is $500. You commit to paying that amount to all of your creditors for the following 3 years in your Chapter 13 payment plan.  

The Chapter 13 Plan

Paying $500 per month for 3 years would in most situations be enough to take care of all your debts. This includes the $6,000 in past-due support. At the end of 3 years you would have paid off the vehicle loan, caught up on the support, and be free and clear on all your other debts.

How could this be when you owe $425 per month on just your vehicle loan? And what about the $95,000 in credit card and medical debts? How could just $500 per month over 3 years cover ALL of these debts?

This is possible for the following main reasons. Chapter 13 usually allows you to:

  1. Delay paying the past-due support until your plan pays certain other debts first—here the vehicle loan.
  2. Pay the general unsecured debts only as much as you have disposable income to pay them. The rest is forever written off (“discharged”).

In this present example $525 per month for 36 months provides a total of $18,900 to pay on all the debts. About $10,665 of that would go to the $10,000 vehicle loan (the extra amount being interest). $6,000 would go to pay the past-due support.

That leaves $2,235. The Chapter 13 trustee (who receives and distributes your $525 payments) gets a fee. In this case assume 5% of every dollar that flows through the plan, or $945 here.

That now leaves $1,290. Your bankruptcy lawyer gets paid out of your plan to the extent you didn’t pay him or her in advance. Most or all of that $1,290 would like go to your lawyer.

This leaves nothing for the $95,000 in general unsecured debts. In many circumstances that’s allowed. It’s called a 0% Chapter 13 plan—paying the general unsecured debts 0% of the debt amounts.

The Result Here

In this example you could stop paying all your debts when you filed your Chapter 13 case. Support enforcement would immediately stop as to the past-due support. All other collection of debts would stop as well. You would have a budget enabling you to take care of all your reasonable and necessary expenses. That would include your ongoing monthly support obligations. You would protect your vehicle loan and your vehicle.

After 3 years you’d have paid off your vehicle loan, caught up on support, paid all expenses of the Chapter 13 case, and paid nothing on the general unsecured debts and yet no longer owe anything on them. This is an incredibly good result.

Other Possibilities

In many circumstances Chapter 13 gives you results this good as to your past-due support and otherwise. But in other circumstances Chapter 13 is extremely helpful yet not as perfect results. For example, your case may take longer than 3 years—it can be as long as 5 years. You may have to pay general unsecured debts something instead of nothing, sometimes even a significant percentage. This blog post has been long enough so we’ll look at such other scenarios next week.

 

Catching up on Support through Chapter 13

January 27th, 2020 at 8:00 am

Chapter 13 gives you a powerful, reasonable, flexible, and even calm procedure for catching up on your past-due child or spousal support. 

 

The last two weeks we’ve shown how Chapter 13 can stop the collection of unpaid child and spousal support. First we talked about how this benefit is much better than Chapter 7 can provide. Then we focused on the ongoing conditions you must meet to keep up this protection.

But there’s a second benefit of Chapter 13 that deserves attention. It doesn’t just stop the collection of unpaid support. Chapter 13 provides a powerfully flexible way to catch up on that support debt.

Why This Is a Huge Benefit

Whatever child or spousal support you owe at the time of your bankruptcy filing, you can’t write off (“discharge”). It’s among the relatively few kinds of debts that bankruptcy does not discharge under any circumstances. See U.S. Bankruptcy Code Sections 523(a)(5) and 101(14A). So you have to pay it, whether you file bankruptcy or not. Whether you file Chapter 7 or 13 or any other kind of bankruptcy.

So this is a debt you have to pay. The issue is what is the easiest, most financially sensible and low-stress way to do so. 

As we discussed in our blog post 3 weeks ago, Chapter 7 doesn’t help much. It doesn’t stop the collection of unpaid support at all. You’re on your own catching up on any unpaid support.

Chapter 13 does stop the collection of unpaid support immediately, and continues to protect you as long as you meet some ongoing conditions.  What Chapter 13 also does is provide you the tool to pay off the support debt. That tool is a court-approved payment plan for all your debts, based on what you can actually afford to pay. That payment plan enables you to catch up on your support debt over time. The plan works into your budget all your other debts—especially other debts very important to you. So you can catch up on your support at a sensible pace without being hounded about it.

How the Chapter 13 Payment Plan Works

How could this possibly work in real life? Consider the following:

  1. The Chapter 13 payment plan is based on your actual income and reasonable expenses.
  2. The plan prioritizes debts in a way that’s generally in your favor.
  3. Other debts sometimes get your money ahead of the support debt, usually to your benefit.
  4. You have 3-to-5-years to catch up on all your unpaid support debt.

We’ll take these four one at a time.

1. Based on Actual Income and Expenses

The Chapter 13 payment plan usually involves a single monthly payment to all of your creditors. (Although sometimes a special debt is paid separately, like a home mortgage.) That single monthly payment is based on what you can actually afford to pay. It’s based on your actual income and reasonable expenses. The income is a projection based on your very best estimate of how much you’ll make each month. The expenses try to cover all your expenses, including ones that don’t happen every month. (For example, vehicle maintenance and repairs, and medical expenses.)

The point is to determine how much you can truly and reasonably afford to pay monthly in a sustainable way. It should not cause you anxiety. You should feel confident that you can fulfill your payment plan.

2. Prioritizing Debts

A Chapter 13 plan basically divides debts into those you must pay in full and those you pay only as much as you can afford to pay. 

The unpaid support debt is in the first category. This category may also include other such must-pay debts like recent income taxes. It can also include secured debts like vehicle or mortgage obligations.

The second category usually includes all other debts—your “general unsecured” debts. These you usually pay only as much as you can, if there’s any money left over for them at all.

So Chapter 13 lets you focus your limited financial resources on those debts that you need to pay. And it gives you an extended time to pay them, so that you can afford to do so.

3. Paying Other Debts Ahead of Support

Outside the protection of Chapter 13, arguably no debts come ahead of unpaid support. That’s because the law makes the support enforcement collection tools so powerful.

But within the protection of a Chapter 13 case and plan, those aggressive collection tools are tamed. So you don’t necessarily pay an unpaid support debt first in the plan. You may have other debts—especially a secured debt or two—that you can pay first. So if you are behind on your mortgage, or doing a cram-down on your vehicle loan, you can often pay these ahead of your support debt.   If you owe other “priority” debts like recent income taxes, your plan usually pays your support debt along with such other important debts.

With Chapter 13 you’re not at the mercy of these important creditors. Your court-approved payment plan gives you a great way to deal with them all, including the support.  

4. Pay Off Unpaid Support by Case Completion

As mentioned, you have as long as 5 years to catch up on your unpaid support. Your official plan does need to include enough money to accomplish that (and everything else that must get paid). And you do need to fulfill the terms of that plan successfully to the end. Of course if you have an ongoing support obligation you have to keep paying that. (It will be included in your monthly expenses.)

Then by the end of your payment plan you will be current on your support. You’ll have paid off or gotten current on all your other special debts. Whatever you haven’t paid on your general unsecured debts will get discharged. And you’ll be free and clear of all debts.

 

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