In Part III I discussed a basic formula for determining how much your Chapter 13 plan monthly payment could be. In this part I’m going to go into more depth about a few “hitches” that can affect both the amount of your plan payment, and the length of your plan.
Hitch #1 – Utah’s median income may affect length of your Chapter 13 plan.
Generally speaking, a Chapter 13 payment plan cannot be less than 3 years long (36 months), nor longer than 5 years (60 months). If your average monthly income over the six-month period prior to filing bankruptcy is below the median income for your state and family size, then you can choose 36 months or 60 months…or any number of months in between. The advantage of this is that you can increase or decrease your monthly payments according to your disposable income so that you have either a shorter plan period, or a shorter monthly payment than you would if you were forced to adhere to a certain plan length. (I’ll discuss why this is important below)
If, on the other hand, your average monthly income over the 6 month period prior to filing bankruptcy is above the median income for your state and household size, then you are required to make a 5 year plan.
Hitch #2 – You will have to commit all of your “disposable income” to your Chapter 13 plan payment.
When you enter a Chapter 13 plan, you will be required to commit all of your disposable income to your plan payments. As unfortunate as this sounds, there is a logic behind it. The thinking goes that if you are going to be enjoying the protection of the Bankruptcy Code, and you are preventing your creditors from accelerating payments, foreclosing liens, getting judgments, etc. Then you had better be paying them as much as you can afford – it’s only fair.
So when you fill out your petition you will be documenting your current income and your current expenses. The amount by which your current income exceeds your current expenses is your “disposable income”. If your disposable income is less than your proposed Chapter 13 bankruptcy plan payment, then your plan will not be confirmed. You’ll have to either adjust it, or convert your case to a Chapter 7 bankruptcy.
On the other hand, if your disposable income is greater than your proposed plan payment, then the trustee will most likely make you increase your Chapter 13 plan payment amount. This is one of the advantages to being under the median income level, and thus having the option to shorten the length of your plan up to 36 months. Since your total secured debts, attorney’s fees, and trustee’s fees are all you “have” to pay through a Chapter 13 plan, (“liquidation analysis” is a caveat to this as well, which will be discussed below) if your disposable income is greater than your plan payments would be under a 60-month plan, then you can simply shorten the plan to the point where your monthly payment is equal to your disposable income. That way you pay as little as possible (zero) to your unsecured creditors.
But if you have to have a 60 month plan because you are above median income, then you are going to end up paying every cent of your disposable income, and some of it is going to end up going to your unsecured creditors. What this means is that your Chapter 13 bankruptcy will “cost” you more than if you were below median income.
Hitch #3 – Liquidation Analysis
There is one final thorn that can become caught in your side when it comes to determining the amount of your Chapter 13 bankruptcy plan payments, and that is the rule of liquidation analysis. The rule is that, since your unsecured creditors in Chapter 13 are already being forced to accept little or no payment on your debt to them, it is unfair for them to be “worse off” than if you had filed a Chapter 7 bankruptcy case. I.E., your unsecured creditors in a Chapter 13 case must be paid at least as much as they would have been paid if you had filed a bankruptcy petition under Chapter 7.
Most Chapter 7 cases are “no asset” cases, meaning that there are no assets for the trustee to liquidate, and the unsecured creditors will not receive any payment on their debts. However, Chapter 13 bankruptcy is an attractive option for people who have equity in assets they’d like to keep possession of, such as cars and houses, so often times there are assets in Chapter 13 cases. So when you file a Chapter 13 plan, you have to do a “liquidation analysis” – you have to compute how much equity you have in your non-exempt assets and determine how much your unsecured creditors would receive if you were filing under chapter 7 instead of chapter 13.
By way of illustration, lets take our previous example of the person who is $3,600 behind on his mortgage. We figured that, over the life of his chapter 13 plan, he would have to pay just over $7,300. Lets assume that our imaginary client has a car that he owns “free and clear”, it is completely paid off. Lets assume the car is worth $5000. Now, if this person were to file Chapter 7 bankruptcy, he could exempt $3000 of the value for the car, but the other $2000 would go to his creditors. This person would either have to allow the trustee to sell the car, or he would have to “buy” the car from the trustee for the $2000 it is worth beyond his exemption. That $2000 would then be distributed to the hypothetical client’s unsecured creditors.
Thus, a liquidation analysis of this client’s situation would tell us that his chapter 13 plan would have to include at least $2000 for his unsecured creditors because they cannot be “left worse off than if he had filed under chapter 7.” Thus, his Utah Bankruptcy Attorney would be charged with giving him the unfortunate news that, instead of paying $7,300 over 60 payments, he’ll have to pay $9,300 over 60 payments; $155 per month instead of $122 per month.
In our hypothetical case, the $30 per month increase may not seem budget-breaking. But you can imagine how having lots of equity in something more valuable, like real estate, could mean a much higher plan payment.
Please consult a Salt Lake City bankruptcy attorney if you’re considering bankruptcy, and any of these 3 hitches sounds like it might apply to you. I’ve done my best to explain these complications quickly, but there are lots of nuances that I’ve left out!
As always, Click here to visit my website and contact me to discuss your financial trouble, I’m glad to help!