Chapter 5 Can You Propose a Plan the Judge Will Approve?

• Library: Chapter 13 Bankruptcy (Nolo) (2020 Ed.)

CHAPTER 5: Can You Propose a Plan the Judge Will Approve?

Repayment Plan Calculations: An Overview

If Your Current Monthly Income Is Less Than Your State's Median Income

Step 1: Calculate Your Base Income

Step 2: Subtract Your Expenses

Step 3: Subtract Your Priority Debts

Step 4: Subtract Secured Debt Arrearages

Step 5: Subtract Debts Secured by Liens

Step 6: Compare Your Disposable Income to What Your Creditors

Would Get If You Filed Chapter 7

Step 7: Subtract the Trustee's Fee

If Your Current Monthly Income Is More Than Your State's Median Income

Step 1: Calculate Your Disposable Income

Step 2: Determine What Your Creditors Would Get If You Used Chapter 7

Understanding Property Exemptions

Your Bankruptcy Estate

Property That's Not Part of Your Bankruptcy Estate

Value Your Property

Applying Exemptions

Before you are allowed to proceed with your Chapter 13 bankruptcy, the judge must approve your repayment plan. As explained briefly in Ch. 3, your plan will be approved if it shows that you will have enough steady income to:

• pay certain types of debts in full over the life of your plan, and
• pay your nonpriority, unsecured creditors at least what they would have received if you had filed under Chapter 7.

The plan must also show that all of your "projected disposable income" (as defined by the bankruptcy laws) will go toward paying your remaining debts for the duration of your plan.

How long your plan must last and how much money you must devote to it depends on whether your current monthly income, which you calculated in Ch. 4, is more or less than your state's median income. If your current monthly income is less than the median income for your state, you can propose a three-year plan and use your actual expenses to calculate your disposable income.

If your current monthly income is more than the median income for your state, your plan must last five years, and you must use expense amounts set by the IRS (which might differ from your actual expenses) to calculate your disposable income. In essence, this means that you will probably have to devote more money to your plan for a longer period.

RELATED TOPIC

If you haven't calculated your current monthly income, go back to Ch. 4. Ch. 4 explains how to come up with this figure and compare it to your state's median. You'll need to know your current monthly income—and whether it is more or less than your state's median—to figure out whether you can come up with a confirmable repayment plan.

This chapter will give you a fairly accurate idea as to whether you can propose a repayment plan that meets the legal requirements. If you decide to go ahead with a Chapter 13 bankruptcy, your attorney (or your attorney's software) will do the fine-tuning to come up with your repayment plan.

SEE AN EXPERT

Talk to a lawyer if you can't make the numbers work. This chapter will help you determine whether you can come up with a plan the judge will approve if you decide to file for Chapter 13. If the numbers don't work out, it's a good idea to talk to a lawyer before you give up. An attorney could be able to provide a different slant on the numbers you provide in the form and the choices you make when completing this chapter.

Repayment Plan Calculations: An Overview

Upon first glance, this chapter might look intimidating. It asks you to fill in a long form and requires you to come up with numerous income and expense figures. Our advice: Don't sweat the details yet. The purpose of the chapter is to get a rough idea as to whether you have enough income, given your expenses and debts, to propose a plan that will work within the law. The forms are pretty self-explanatory (and we provide instructions). You'll eventually need to provide your attorney with this information, so it doesn't hurt to run through it here. If you don't have an exact figure for something, enter your best estimate.

Below, we've provided an overview of how these calculations work—so you can see the big picture as you go through the details. Or, you can use the overview below to rough out some numbers before you visit an attorney, and skip the details altogether.

Start with your current monthly income as you computed it in Ch. 4.

Subtract living expenses. This is where you compare your income to your state's median income. If your income is below the state median income (as determined in Ch. 4), you get to subtract your actual living expenses (as long as they are reasonable). If your income is above the state median income, you must use set dollar amounts dictated by national and local IRS standards. You are allowed to include certain additional living expenses that are not covered by the IRS expense standards.

As part of your living expenses, you will also subtract installment payments on secured debts. These are your monthly payments on debts secured by property you plan to keep, like your mortgage or car note. Add up the monthly payments that will come due during your plan and divide the total by the number of months in your plan.

TIP

Reduce installment payments with a cramdown. You might be able to reduce the amount of a secured loan to the replacement value of the property. (See "Special Chapter 13 Features: Cramdowns and Lien Stripping" in Ch. 1 for details.) Doing so could significantly reduce the amount of your installment payments on that loan.

Subtract priority debts. Your priority debts (listed in Ch. 3) must be paid off in full through your plan. Total up the remaining balance on all priority debts and divide by the length of your plan (36 months if your income is less than the state median, 60 months if your income is more than the state median).

Subtract secured debt arrearages. Your plan must propose to pay 100% of arrearages on secured debts if you want to keep the property. For example, you must pay off mortgage arrears through the plan. Total up your arrearages and divide by 60 to get the monthly deduction for a five-year plan, or 36 for a three-year plan.

Subtract debts secured by liens. You have to pay off some liens by the end of the plan. To learn which ones, see Step 6 below. Total up these liens and divide by the length of your plan.

Subtract payments to unsecured creditors. You must pay your unsecured, nonpriority creditors at least what they would have received had you filed for Chapter 7 bankruptcy. To get a rough estimate of what this figure will be, start with the value of your nonexempt property, subtract the trustee's commission and costs of sale, and divide the total by the number of months in your plan length.

Subtract the trustee's commission. You must pay the trustee a percentage of your plan payment, usually 10%. To get a rough estimate, add all of the above items in this list and multiply the total by 0.1 (10%) to get the commission.

TOTAL. The resulting number is a rough estimate of what you would have left after making your monthly plan payment under Chapter 13 bankruptcy. If you get zero or a negative number, you might not have enough income to fund a plan.

If Your Current Monthly Income Is Less Than Your State's Median Income

If your current monthly income is less than your state's median income, you can propose a plan that lasts for three years or less. However, the court can authorize a plan lasting up to five years, if necessary. Because certain debts must be paid off in full in a Chapter 13 plan, debtors often need a longer plan period so they can afford the monthly payments. For example, if you owe a $20,000 arrearage on your mortgage, a three-year plan would require monthly payments of at least $555. If you stretched out those payments over five years, you would owe only $333 each month.

SKIP AHEAD

This section is only for those whose current monthly income is less than their state's median income. If your income—as calculated in Ch. 4—is equal to or more than the state median, skip ahead to "If Your Current Monthly Income Is More Than Your State's Median Income," below.

Step 1: Calculate Your Base Income

Your base income is the amount you will use to determine whether you have sufficient income to fund a Chapter 13 plan. Your base income is simply your current monthly income (your average gross income over the six months before you filed for bankruptcy, as calculated in Ch. 4) less any child support payments, foster care payments, or disability payments you receive for a dependent child, as long as those amounts are necessary for the child's care.

Current monthly income (from Ch. 4):		__________
Child support, foster care, or disability payments:	-	__________
Base income:	=	__________

If Your Actual Income Is Different From Your "Current Monthly Income": Hamilton v. Lanning

The income figure you use in this section, although labeled "current monthly income," actually describes your average monthly income over the last six months. (The same is true if you calculate your income under the next section, "If Your Current Monthly Income Is More Than Your State's Median Income.") And yet, bankruptcy law says you must put all of your "projected disposable income" toward your repayment plan (unless you plan to pay your unsecured creditors 100% of what they are owed). So what happens if your "current monthly income" doesn't match your actual or projected income? For example, what if you recently lost your job or your hours were greatly reduced? Or what if you received a one-time bonus or payout in the previous six months that you won't receive again (which would inflate your "current monthly income")?

In 2010, the U.S. Supreme Court in Hamilton v. Lanning (130 S.Ct. 2464 (2010)) endorsed a "forward-looking approach." It held that when calculating a debtor's projected disposable income, the court can account for changes in the debtor's income or expenses that are "known or virtually certain at the time of [plan] confirmation."

If your income has changed substantially from your "current monthly income" calculation, the court can...