For people behind on their mortgage payments and looking to keep their home, or people who make too much money to file Chapter 7, Chapter 13 can be a good solution. As we described in an earlier post, Chapter 13 involves paying your disposable income to creditors over a three or five-year period. Whatever isn't paid during that period is discharged (wiped out). But to figure out whether this makes sense, the question for many clients is: how much disposable income do I have to pay in my Chapter 13 payments? Here are a few guidelines.
1. Your payment plan is based on your projected disposable income. To figure out your Chapter 13 payment, first we figure out your projected income. Your income over the past six months can a starting point for this calculation, but if you've recently taken a pay cut, or you know you won't be receiving the same amount of overtime, we need to bump your income downward.
2. Next, we subtract all reasonable and necessary expenses. To get from just-plain-income to disposable income, we need to subtract your expenses. Here we look at all the expenses that are necessary to take care of your family's needs, such as food, rent/mortgage, car payment, utilities, etc. We also look at things that you know you will be spending , such as car repairs, home maintenance or dental work. Then we look at things you should be spending on, but haven't because you've been in financial trouble. This can include health insurance and other medical expenses, 401(k), life insurance, etc. If there's something that's not on our list of ordinary expenses, that doesn't mean we can't deduct it, as long as it's reasonable and necessary. Once we count all these expenses, we subtract them from income and we get an idea of your disposable income.
3. Our job is to fight for your way of life. The Trustee evaluates the reasonableness of your expenses, trying to cut them down so that there's extra money for you to pay to your creditors. Our job is to protect the money that is necessary for you to take care of yourself and your family. So we ask for two things: 1) verification of your expenses, so we can prove that you actually need to spend that money; and 2) information on why your expenses are reasonable and necessary. For example, one client had an $800 monthly bill for auto fuel. This seems exorbitant, until we realized that the client drives a gas guzzler and lives 60 miles from where he works. If we can explain to the court why an expense is reasonable, there is a better chance it will be allowed.
4. The plan must pay off certain required debts. Your Chapter 13 payments must be large enough to make certain required payments. For example, if you are trying to get current on a mortgage, your total plan payments must cover the amount of your mortgage arrears. Plan payments also must cover any secured debt (car loans) that end within the plan period. Also, plan payment must cover any priority debt, such as some tax debt or government penalties within the plan period. If the total plan payments are enough to pay all of these required debts over the plan period, your plan can survive.
5. The plan must be in the "best interests" of your unsecured creditors. If you have unexempt property that you are looking to protect in a Chapter 13, your Chapter 13 payments must be at least the value of your nonexempt property. In other words, in Chapter 13 your unsecured creditors can't receive any less in the plan than they would have received in Chapter 7 if your nonexempt property was liquidated.
These rules can be tricky, and Chapter 13 almost definitely cannot be done without the assistance of an experienced bankruptcy lawyer. Give us a call if you want to run a scenario by us.