Before the court will confirm your Chapter 13 repayment plan, you must show that your payment represents your best effort at paying back creditors. It’s also called the disposable income test because you must demonstrate that you’re paying all of your disposable income into your Chapter 13 plan. After you file your repayment plan, the bankruptcy trustee appointed to administer the case and your creditors will review it to make sure it complies with all bankruptcy laws and requirements. Your repayment plan must be approved by the court before finalized. You’ll show that you are using your best effort to repay creditors if you’re paying your disposable income (or more) to non-priority unsecured creditors (such as credit card companies) in your plan. Your disposable income is the amount that remains after deducting allowed living expenses and mandatory payments, such as secured and priority debt payments. Secured debts are guaranteed by collateral, such as a mortgage or car payment. Priority debts are those that are sufficiently important to move to the front of the payment line. Examples include domestic support obligations and tax debt. You’ll pay your disposable income toward your remaining debt (non-priority unsecured debt, like credit card balances and medical bills).
What Will I Pay Non-priority Unsecured Creditors?
When completing the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period form, you’ll provide your average monthly income for the six-month period before filing for bankruptcy. You’ll then compare your average income against the median state income for a household of the same size. How much you’ll pay non-priority unsecured creditors will depend on whether your income is above or below the state median. You’ll find your state’s most recent median income figures on the U.S. Trustee’s website.
If Your Income Is Below the State Median
You won’t be required to calculate a monthly disposable income figure. Your plan payment will be based on your budget. The bankruptcy court will usually approve your Chapter 13 plan even if you’re paying little or nothing to your non-priority unsecured creditors. Also, your plan can be only three years long instead of five.
If Your Income Is Above the State Median
Using the Chapter 13 Calculation of Your Disposable Income form, you’ll calculate your disposable income by deducting the following from your income:
• living expenses using national and local standards, as well as some actual amounts
• secured payments, such as mortgage or car payments (and any arrearages), and
• priority debts, such as past-due domestic support obligations and some tax debt.
The amount of disposable income that you have each month is the minimum you’ll have to pay to your non-priority unsecured creditors over five years.
Why Will I Pay More If I Own Significant Property?
The analysis doesn’t stop there. When deciding whether to confirm your repayment plan, the judge will look at another factor whether your creditors are getting as much through your Chapter 13 plan as they would if you filed for Chapter 7 bankruptcy. In Chapter 7 bankruptcy, the trustee sells all non-exempt property (assets that you can’t protect with a bankruptcy exemption). The funds get used to pay priority creditors first, and then, if anything remains, are divided among the non-priority unsecured creditors. By contrast, you’ll get to keep non-exempt property in Chapter 13 bankruptcy. But, your creditors aren’t going to allow you to get a windfall. To ensure your creditors receive as much as they would in Chapter 7, you must pay the greater of the following:
• your total amount of priority debt plus your disposable income, or
• the value of your non-exempt property.
Disposable Income in Bankruptcy
Disposable income is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income. Your disposable income will determine whether you qualify to discharge (wipe out) debt in Chapter 7 or Chapter 13 bankruptcy. When you claim your deductions, you’ll be able to use the actual cost of some expenses. For others, such as the allowance for food, clothing, and housing, you’ll use the national and local standards.
Here’s a list of some of the deductions you’ll be allowed to take:
• food and clothing
• housing and utilities
• transportation costs
• involuntary payroll deductions
• life insurance
• court-ordered payments, such as family support
• certain education costs
• childcare expenses, and
• health care costs.
To determine your disposable income, you’ll complete one of two forms, depending on the chapter you intend to file (each chapter allows for similar deductions). In a Chapter 7 case, you’ll complete the Chapter 7 Means Test Calculation form. You’ll deduct allowed expenses to find your disposable monthly income. Next, you’ll multiply that amount by 60 months. If the figure exceeds the maximum amount currently allowed (which will be listed on the form), you won’t qualify for a discharge. Additionally, you might not qualify if your disposable income is sufficient to pay 25% or more of your unsecured, non-priority debt (such as credit card balances, medical bills, and personal loans). In a Chapter 13 matter, you’ll fill out the Chapter 13 Calculation of Your Disposable Income form. The amount that remains after deducting expenses is your monthly disposable income. You’ll pay that number to your unsecured, non-priority creditors each month over the course of your three- to five-year repayment plan. Because each case is different, determining whether you qualify for bankruptcy (as well as completing the appropriate forms) can be challenging. When in doubt, contact a knowledgeable bankruptcy attorney.
Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $394,725 and secured debts are less than $1,184,200. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s wilful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counselling from an approved credit counselling agency either in an individual or group briefing. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counselling. If a debt management plan is developed during required credit counselling, it must be filed with the court.
How Chapter 13 Works
A chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court:
• schedules of assets and liabilities;
• a schedule of current income and expenditures;
• a schedule of executor contracts and unexpired leases; and
• a statement of financial affairs.
The debtor must also file a certificate of credit counselling and a copy of any debt repayment plan developed through credit counselling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. The debtor must provide the chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). A husband and wife may file a joint petition or individual petitions. In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must compile the following information:
• A list of all creditors and the amounts and nature of their claims;
• The source, amount, and frequency of the debtor’s income;
• A list of all of the debtor’s property; and
• A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household’s financial position. When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. In some districts, the U.S. trustee or bankruptcy administrator appoints a standing trustee to serve in all chapter 13 cases. The chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors. Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a consumer debt from any individual who is liable along with the debtor. Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 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. 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. Between 21 and 50 days after the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the debtor files. During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan. If a husband and wife file a joint petition, they both must attend the creditors’ meeting and answer questions. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors’ meeting. The parties typically resolve problems with the plan either during or shortly after the creditors’ meeting. Generally, the debtor can avoid problems by making sure that the petition and plan are complete and accurate, and by consulting with the trustee prior to the meeting. In a chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed file a proof of claim. After the meeting of creditors, the debtor, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on the debtor’s chapter 13 repayment plan.
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on consumer debts. This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.
Chapter 13 Bankruptcy Laws: Your Disposable Income
In Chapter 13 bankruptcy, you must devote all of your disposable income to your Chapter 13 repayment plan. Through the plan, which lasts either three or five years, you pay 100% of certain debts and a portion of other types of debts. Keep in mind that even if you can fund a Chapter 13 plan with your disposable income, you still have to pay your unsecured creditors at least what they would have received had you filed for Chapter 7 bankruptcy. If you can’t do that, your plan won’t be confirmed. Determining your disposable income for purposes of your repayment plan can be tricky business. And the calculation is different depending on whether your income is more or less than the median income in your state. Here are the basic rules.
Calculating Current Monthly Income
To determine your current monthly income in Chapter 13 bankruptcy, you take your average monthly income for the six-month period prior to filing for bankruptcy. You must include gross wages, salary, tips, bonuses, overtime, commissions, income from the operation of a business, rental income, income from interest, dividends, and royalties, pension and retirement income, unemployment compensation, income someone else contributes to your household on a regular basis, and income received from other sources.
Chapter 13 Lawyer
When you need financial relief, call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506