When discussing the different options to deal with various debt and creditors with my clients, chapter 13 is a common topic. A chapter 13 bankruptcy, commonly called a reorganization, allows a person or married couple to propose a single payment that will cover most, if not all, debts owed to creditors over a period of time. There are many advantages of approaching debt in this manner, including modifying interest rates on secured debt, paying less than is owed on some secured debts, stopping interest on unsecured debts, and discharging (not legally having to pay) a (sometimes very large) portion of unsecured debts. The most common question is always the same: how much will the chapter 13 payment be and will I be able to afford it.
For our firm to understand how much the chapter 13 payment will be, we have to perform three tests. If these three tests are met, and the plan is otherwise submitted in good faith, the court will confirm the plan absent any objections from creditors. The first test is the “liquidation” or “best interests of the creditors” test. This test simply states that unsecured creditors in a chapter 13 must get at least what they would get should the debtor file a chapter 7 bankruptcy, commonly called a liquidation. If all the debtor’s property is exempt (which is the case the vast majority of the time), then the unsecured creditors would have received nothing in a chapter 7 and therefore we only look to the two remaining tests to determine the payment amount.
The next test is the “feasibility” test. This test simply states that there must be at least enough funds proposed in the plan, over a period of time, to pay the debts that must be paid in full in the chapter 13 bankruptcy. These debts may include, but are not limited to, secured debts such as most car loans and mobile homes, non-dischargeable tax debt (though some tax debt can be discharged), certain debts that include co-signers, domestic support obligations, and legal fees. Long-term debts, such as a mortgage, do not have to be paid off in the plan. So long as there are enough funds to pay these debts, including the trustee fee for administering the case, then the plan is feasible. In the majority of cases, we then look to the third test, usually in conjunction with the feasibility test, to determine the payment.
The third test most commonly directly determines the chapter 13 payment if the other tests do not come into play. This test states that the person or married couple must submit all disposable income into the plan over the plan period. While this can sometimes be a complex calculation, it basically looks at the gross amounts made each month less allowable payroll deductions (or net income), and subtracts reasonable expenses necessary for the person or family to live. The expenses that can be counted are wide ranging, but can include utilities, home and vehicle maintenance, transportation, medical expenses, food, education, personal care, clothing, and insurance. This amount must be contributed to the plan each month to meet this test.
Chapter 13 is one of the more complex areas of bankruptcy law, and this blog should only be referred to for general information as each and every situation is different. This information is a general overview, and exceptions do exist. Peace Law offers free, confidential consultations to look at all options to deal with your unique financial situation, up to and including chapter 7 and 13. Call one of our offices or fill out our contact form to schedule yours today.