How Much Do I Have to Pay In Chapter 13?
During a Chapter 13 bankruptcy you pay your creditors in accordance with your ability to pay. Some creditors receive 100% of the debt, and others may receive a small sum or nothing at all. The Bankruptcy Code establishes a priority of debt repayment.
Administrative claims must be paid 100% and include your filing fee, the trustee’s compensation (3% to 10% of each monthly payment), and your attorney’s fees. Other debts must be paid 100% during the debtor’s bankruptcy including alimony and child support, most tax debts, and mortgage arrears if you intend to keep you home.
The lowest category of debt repayment is unsecured creditors. The amount paid to unsecured creditors (e.g. medical bills, credit cards, and unsecured personal loans) is determined by several factors including (1) the amount of your nonexempt assets; (2) your disposable income; and (3) the length of your plan.
The length of your plan and amount of your disposable income are largely determined by the Bankruptcy Means Test. The Means Test was the subject of a recent United States Supreme Court case: Hamilton, Chapter 13 Trustee v. Lanning. The issue in Hamilton is how a bankruptcy court calculates your ability to pay creditors during the bankruptcy case.
The 2005 changes to the Bankruptcy Code included a requirement that Chapter 13 debtors commit all “projected disposable income” to the repayment plan. Confusion arose over whether Congress meant to determine this amount through a mechanical approach, by averaging the debtor’s income for the past six months, or whether the determination is “forward looking” and should consider the debtor’s future ability to pay.
Justice Samuel Alito, writing for an 8-1 majority, said the “forward looking” approach is correct. The forward-looking approach starts with the debtor’s average monthly disposable income for the past six months multiplied by the number of months in a debtor’s plan. This figure is ordinarily the debtor’s projected disposable income. However, in some cases, the Court has authority to review the debtor’s actual and present monthly income in order to calculate the debtor’s ability to pay debts during the plan period.
The Hamilton case will have great impact on Chapter 13 bankruptcy cases and places the power to determine a fair and affordable Chapter 13 payment plan in the hands of the bankruptcy court judges. If you are in need of bankruptcy relief, but fear that you will be forced to pay a monthly sum you can’t afford, get the facts from an experienced bankruptcy attorney. Bankruptcy is not a debtor’s prison and has helped millions get a fresh financial start.
Is An Inheritance Part Of A Chapter 13 Bankruptcy Estate?
Facts: Client is in the final few years of a 15% Chapter 13. He inherits ½ interest in a home worth about $85,000 and $50,000 in stocks. He only has about $20,000 of total unsecured debt left in his bankruptcy. His Chapter 13 payments are only $200 per month. The Trustee filed a motion to increase his plan to 100%. Result: Debtor sells stock and pays off his Chapter 13 at 100%.
At first glance, the bankruptcy statues would lead you to believe that any inheritance acquired by the debtor at least 180 days after the filing is the debtor’s property. Section §541 describes property of the estate and mentions only those inheritances acquired within 180 days after filing a petition – 11USC §541(a)(5)(A).
However, Section §1306(a)(1) states that property of the estate includes everything listed in §541, and all property acquired by the debtor after the filing of the petition but before the case is closed. Compare that to Section 1327(b) which states “confirmation of a plan vests all of the property of the estate in the debtor”. Further, §1327(c) says that property vesting in the debtor is “free and clear of any claim or interest of any creditor provided for in the plan” (11USC §1327(c)).
Basically, in order to reconcile §1306(a)(1) and §1327(b) and (c), and to capture newly acquired property for the purposes of the bankruptcy estate, Courts rely on §1325(b) –the plan must provide that all of debtor’s “disposable income” be applied to make payments, and then §1329 is used as authority for the Trustee to modify a debtor’s plan after confirmation. The basic argument is that although property vests within the Debtor pursuant to §1327(b), a windfall will be captured for the creditors on a motion to modify under §1329. Is an inheritance this late into a Chapter 13 “disposable income” under §1325(b)? I would think that property excluded by §541, or property otherwise exempted from the estate would not be, but case law seems to result in the opposite analysis.
A few debtor friendly cases indicate use of the ‘best interest of the creditors’ analysis under 11 USC §1325(a)(4) – basically are the creditors better off than they would be under Chapter 7? And in Chapter 7, creditors would most likely not be entitled to an inheritance received over 180 days past the filing date. However, in spite of the Code, Courts have increasingly held that the Chapter 13 estate includes gifts, inheritances, and windfalls that are acquired after the filing. There are several cases where acquiring property (like lottery winnings – see In re Koonce, 54 BR 643 (Bankr DSC 1985), law suit settlements, insurance settlements, inheritances– see In re Nott, 269 BR 250, 257, 258 (Bankr. MD Fla 2000) and In re Euerle, 70 BR 72 (Bankr DNH 1987), large gifts or loans – see Doane v Appalachian Power Co, 19BR 1007 (Bankr WD Va 1982)) has forced Debtors to pay more to their creditors than originally planned for in the Chapter 13. In a recent case in the Western District of Kentucky, a Motion by filed the Trustee resulted in a debtor turning over $205,431.43 to complete his plan at 100% because he won the lottery.
I imagine basic public policy concerns might be behind most of these Court rulings, but isn’t a Chapter 13 supposed to give the debtor a fresh start? It seems like under the Code, any property acquired after the filing should be property of the debtor giving him complete right to control the property. And if so, why is it considered disposable income? Are real property and stocks considered “disposable income”? Why is a debtor penalized for falling into good fortune after filing a Chapter 13? After all, this is not property that was committed to funding the plan. Shouldn’t post-petition acquisitions be used for post-petition obligations? What if Debtor’s case was converted to Chapter 7? Then the property would not be part of the estate – he could keep the inheritance and the creditors wouldn’t even get their promised 15%. Would the conversion be considered in “bad faith” after the Trustee’s motion has already been filed? Hmmm.
Question: What Should I Do If I Can’t Afford To Pay An Increased Credit Card Payment? Should I Contact A Debt Consolidation Company Or Consider Filing A Chapter 13 Reorganization Bankruptcy?
Before you take any affirmative steps to reorganize your debt with a debt management company or file for bankruptcy, you should sit down and work up a detailed financial budget for you and your family so you know how much disposable income you have each month to apply towards your credit card debt.
When you have completed your budget, contact your credit card companies directly and see if you can get them to agree on changing the terms of the repayment of the debt. Unfortunately, most credit card companies will not change the repayment terms unless you fall at least three months behind. Of course, if you stop making your payments, your credit score will drop significantly.
If you are unable to negotiate directly with your creditors, then consult with an attorney to consider all of your options including hiring a debt management company or filing bankruptcy.
A common question we receive in our offices is “what’s the difference between private debt consolidation and filing Chapter 13 and which is better?” Though the concept is nearly the same, there are many important differences. If you’re interested in maintaining a good credit rating and you don’t want your debt problems to become public record, then private debt consolidation may meet your needs. Private debt consolidation, however, can’t give you guaranteed court protection from your creditors. Creditors can still proceed with legal action against you to collect their debts. On the other hand, Chapter 13 offers significantly more protection to you and your family, allowing you to pay your creditors a percentage of the debt owed (often as low as ten percent) and discharges the remaining balance. And perhaps best of all, creditors cannot repossess or foreclose on your property.
What’s best for you will naturally depend on your specific debts, personal priorities and income status.
Chapter 13 Debtors Need To Be Able To Live On A Tight Budget If They Are Paying Their Creditors Less Than A 70% Dividend In The Western District Of Kentucky.
Typically, a Chapter 13 is filed by an individual or couple because their income exceeds the amount necessary to be able to qualify for total relief under Chapter 7. Chapter 13 can also provide debt relief but it requires the debtor to pay creditors some dividend back based on the disposable income left over after paying normal household bills. In the Western District of Kentucky, the courts are taking a careful eye to the debtor’s budget for the purpose of making sure that no money is spent unwisely in order to maximize disposable income that gets paid to unsecured creditors. According to the courts, attorneys now have the duty to advise their clients to reject expensive service contracts in order to switch insurance plans, internet and cable services, child care, cell and home phone service if a better deal exists. If your clients are retired, the courts feel that a cell phone is not a necessary expense and may disallow it from the budget. What dollar amount can you allow for food in the budget? According to the IRS guidelines which the courts are supposed to follow, you can spend $752.00 for food for a family of 4. However, in the Western District of Kentucky, for Chapter 13 budget purposes, you may be limited to spending $600.00 a month for food for four people which is $5 a day per person. Not hardly a lot if you are having to pay $2.32 for your kids school lunches through the Public School System.
This type of budget scrutiny by the court begs the question of whether it is worth it to have both adults in a household working outside the home creating a higher income that disqualifies them for Chapter 7 immediate relief. Rather, these hardworking couples can either deal with their creditors on their own or file a Chapter 13 plan to repay their debts. Unfortunately, if the couple elects to file a Chapter 13 and actually pay their creditors something, they may be subjected to the budget constraints set by the court for five years. It seems that the families who are trying to do the right thing by having both adults work are being punished unfairly by having to submit to a bare-bones budget in order to pay back more of their debt in a Chapter 13. I wonder if the family who chooses to create less income and have one parent stay home with the kids got it right – the opportunity to be a more involved parent, the opportunity to live with whatever budget they can afford, and the opportunity to pay no debt back through Chapter 7 relief.