By Christopher C. Carr, Esquire, Chester County Bankruptcy Attorney: Call (610)380-7969 or write him at cccarresq@aol.com today!
Introduction. What does this matter?
This exercise can be crucial to complete if you are a self filer (not recommended especially for a Chapter 13) but it is a very good idea to complete this exercise even if you have hired or plan to hire a bankruptcy attorney, because in this way you will be able to understand the general Chapter 13 process and strategy; double check his or her work-in a general sense at least – and also because it will make you aware of expenses and other offsets you might not otherwise focus upon, which could end up saving you money in the long run. This can also be useful to help you determine whether a Chapter 13 will be advantageous for you given your particular circumstances BEFORE you retain an attorney and then file, only to find out for example that you cannot afford the monthly payment and the arrears amortization! Bankruptcy will affect your credit and ability to borrow for at least 2 years, even if it is dismissed. Knowledge is power.
In general, it will help to remember that Part 1 of the analysis deals with repayment of secured debt (like car and home loans), whereas Parts 2 and 3 deal with unsecured debt (like credit cards, medical bills, etc) and to remember the “liquidation test” which says that the unsecured creditors cannot receive less in a Chapter 13 bankruptcy than they would have received in a Chapter 7 liquidation.
Part 1: Figuring Your Minimum Monthly Payment
Certain debts must be paid back in full through your repayment plan. This means that that the Debtor must propose a plan that pays off all of these debts within 36 months (if below the median income) or 60 months (if above the median income) regardless of income and expenses. These debts include:
- Priority Debts
Congress has decided that certain obligations, called priority debts, cannot be discharged in bankruptcy. Some examples of priority debts include back child support, alimony, and certain taxes. If you file for Chapter 13 bankruptcy, you must pay off these debts in full through your repayment plan. Enter the amount of all your priority debts in the Model[1] where indicated.
- Mortgage Arrears
If you are behind on your mortgage and want to keep your house, you must pay off all your arrears (existing at the time of your filing) through your repayment plan within the applicable plan period (see above) . Enter all applicable mortgage arrears in the Model where indicated.
If you plan to surrender your house, you don’t have to pay back the arrears in your bankruptcy. In addition, if you are only behind on your second mortgage (or other junior lien) and you intend to eliminate that lien in your Chapter 13 through lien stripping, don’t include those arrears in your payment calculation.
Be aware that certain jurisdictions require you to make your regular mortgage payment through your Chapter 13 bankruptcy. In these jurisdictions, your plan payment may be very large but you would not have to make a separate mortgage payment directly to the lender.
- Car Loans or Other Secured Debts You Want to Pay Off Through Your Plan
In most jurisdictions, if you are behind on your car loan (or another secured debt other than your mortgage) and want to catch up on your missed payments, you typically have to pay off the entire loan (not just the arrears) through your plan. Keep in mind that in certain jurisdictions, you may be required to pay off your car loans through your Chapter 13 plan regardless of whether you are behind on your payments or not. This is not the case in the EDPA where I practice.
Unless you intend to surrender the property or pay off these secured debts outside of bankruptcy (and your jurisdiction allows you to do so), enter the amount of your car loans and other secured debts in the calculator where indicated.
If you qualify to “cram down: your car loan or other secured debt, you only need to pay the lender the replacement value of the property through your repayment plan (not the entire loan balance). So include only the value of the vehicle (or other property) in the Model for all secured debts you intend to cram down.
- Administrative Fees and Interest Charges
Fees: Chapter 13 trustees get paid by taking a percentage of all amounts they distribute to creditors through your repayment plan. This percentage varies depending on where you live but can be up to 10% as it is in the Eastern District of Pennsylvania where I practice.
Interest: In addition, you typically have to pay interest on secured claims you are paying off through your plan. The required interest rate can vary depending on the type of claim and the rules in your jurisdiction. But in general, you can expect to pay the national prime rate plus 1% to 3%.
- Making Regular Monthly Payments on Loans. Keep in mind that if you want to keep your home, car, or other items securing debts, you’ll have to keep making your regular monthly payments during your plan period, unless the court requires you to pay off the entire balance through your plan. As mentioned above, some courts might require you to make these monthly payments through your plan. However, this is NOT the case in the EDPA, where generally speaking, the debtor pays arrears through the plan but is allowed to pay the monthly mortgage “outside” the bankruptcy, g. directly to the lender/servicer.
THE ABOVE COMPUTATION YIELDS JUST THE MINIMUM PLAN PAYMENT: “EXCESS” DISPOSABLE INCOME (PART 2): AND NONEXEMPT PROPERTY VALUE (PART 3) MUST BE ADDED:
So far we have only considered debts you are required to pay off in your repayment plan regardless of your income, expenses, and nonexempt property. The debts discussed above are used in calculating your minimum Chapter 13 plan payment. However, if you have disposable income or nonexempt assets, you will also have to pay back some or all of your nonpriority unsecured debts such as credit cards and medical bills. Depending on how much you have to pay your nonpriority unsecured creditors, your monthly plan payment can be much higher than the minimum payment calculated above. In fact many high income or equity rich debtors will end up with 100% plans…why would anyone file bankruptcy then you may ask well and there are several reasons:
- To take advantage of the automatic stay in bankruptcy and thus save the family home and/or other valuable assets from the auctioneers gavel.
- to avoid garnishments (which can be very embarrassing and even cause job loss) or repossession of autos, boats, RV’s, etc.
- To avoid liens arising in their property because of lawsuits, tax liens and the like.
- To force mediation and a mortgage modification (in some jurisdictions)
- To avoid creditor dunning
- Because instead of having to pay back all the debt at once, they can schedule it, and,
- to avoid losing a drivers license, professional privileges (e.g. inability to practice medicine, law, dentistry, etc.) or even going to jail for nonpayment of alimony, support , etc.
Part 2: Calculate Your Disposable Income and enter the excess:
As part of your Chapter 13 computations, you must complete Form 22C — Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income. This form is also referred to as the Chapter 13 means test and is used to determine how long your plan will last and how much you must pay nonpriority unsecured creditors in your bankruptcy. Visit the U.S. Court’s website at www.uscourts.gov to find the most recent version of Form 22C.
If your average income for the six months preceding your bankruptcy is less than the median income for a similar household in your state, you are not required to fill out the entire form and will typically pay little or nothing to nonpriority unsecured creditors in your plan. However, if your income is above median, you must follow the instructions on the form to determine whether you have enough disposable income to pay back some of your nonpriority unsecured debts.
After completing the Chapter 13 means test, if you end up with a positive monthly disposable income figure, add that to your minimum plan payment calculated above because you must pay this amount towards your nonpriority unsecured debts each month.
Note: Why the means test result can vary significantly from the Petition, Schedule J. The concepts of income and expenses for the Means Test differ from the income and expenses reported on Schedules I and J. Schedule I lists the debtor’s current income, while the Means Test requires an average from the last six months with Social Security Benefits excluded. Likewise, on the expense side, expense categories are different on the Means Test and Schedule J. Schedule J lists the debtor’s actual current expenses while the Means Test uses IRS standards (which are often much lower than the actual expenditures) for some expenses, and actual for others. Moreover, Schedule J allows the attorney more discretion in listing other types of expenses, whereas the Means Test doesn’t allow you to fill in unlimited “other” expenses.
Part 3: Finally, Add the Value of your Nonexempt Property
Chapter 13 bankruptcy requires you to pay your nonpriority unsecured creditors at least as much as they would have received if you had filed a Chapter 7 bankruptcy. This is known as the “liquidation test” but essentially means that you must pay an amount equal to the value of your nonexempt property. If you can’t exempt all of your property, divide the value of the nonexempt portion by the number of months in your repayment plan and add it to the minimum monthly payment calculated above.
Nonexempt Property Example: Say for example that you have equity in your home of $100,000 (a rarity in this day and age but quite common few years ago). Your state allows you to take the federal homestead exemption and it is higher than the state version, if a choice is allowed in your state. you can currently exempt $22,975 (or $45,950 if you are married and jointly filing bankruptcy) under the federal homestead exemption. Husband and wife, using the federal exemption, are then left with $54,050 in nonexempt debt and have a 60 month plan. They then must add $900.83 to the plan payment computed above.
Law Offices of Christopher C. Carr, MBA, P.C., is a quality bankruptcy and debt relief practice, located in Valley Township, west of Coatesville, Pennsylvania, where Attorney Christopher Carr, a Chester County bankruptcy attorney, who has over 30 years if diversified ;egal experience, concentrates on serving the residents of and businesses located within Western Chester County and Eastern Lancaster County, Pennsylvania, including the communities in and around Atglen, Bird in Hand, Caln, Christiana, Coatesville, Downingtown, Eagle, Exton, Fallowfield Gap, Honeybrook, Lancaster, Lincoln University, Modena, New Holland, Parkesburg, Paradise, Ronks, Sadsbury, Thorndale, Valley Township, Wagontown & West Chester, Pennsylvania. If you reside or do business in the area and need assistance with a legal issue, please call Mr. Carr at (610)380-7969 or write him at cccarresq@aol.com today!
[1] This article assumes that you are using a Bankruptcy Plan Model (Model) that calculates the minimum plan payment for you. Some Models will also compute the Means Test for you. For an easy to use estimator go to http://www.alllaw.com/articles/nolo/bankruptcy/chapter-13-plan-payment-calculator.html. However, remember that this will just yield the Minimum payment. To this you must add Your Excess Disposable Income and Nonexempt Property Value Parts 2 and 3 below, if applicable.
Christopher Carr, Esq. on Debt Relief 