We all want Chapter 13 plan payments that are affordable. Simply stated, if the plan is not affordable, Chapter 13 will fail sooner or later. To make Chapter 13 affordable, some people file Chapter 7 first. They do this because if you discharge unsecured debts first in Chapter 7, you do not have to repay discharged debts later in Chapter 13.
Lowering the debts you owe almost always lowers the payments. But, even if you file a “Chapter 20” which is Chapter 7 followed by Chapter 13, you might then have to repay some unsecured debts in Chapter 13.
How to Win Great Chapter 13 Plan Payments
⎆ The Three Items that Control Your Chapter 13 Plan Payment
If a plan becomes unaffordable, it’s sometimes possible to lower payments or suspend them and catch up later. But to modify a plan or get the lowest payments, you first must understand what the repayment minimum is for your situation. Three items drive the amount you have to pay back. Disposable income, non-exempt assets, and secured or priority debt may increase a plan payment. It isn’t as simple as just decreasing income and increasing expenses to make your payment low. You never falsely claim expenses, but you often forget expenses you must repay and forget your income may decrease. You must base the plan on your lowest income and your highest expenses or it will eventually fail.
1. Debt-Based Repayment • The Plan Must Repay Priority and Secured Debts
There are three types of claims in Chapter 13. These are the priority, secured and unsecured claims. The most common priority claims include income taxes that are less than three years old, child support, and alimony. Priority debts, like income taxes that are less than three years old, can also be secured debt. The IRS may place a lien on the property and become a secured debt.
When the assessment on your income taxes is complete, a silent and special lien automatically goes into effect ten days after the assessment. This silent lien is against all the property that you own. The IRS can also record a lien on a home at the courthouse.
Essentially, any income tax debt less than three years old is a priority debt that must be repaid in full during Chapter 13. Your goal is to turn priority debts and secured debts into dischargeable unsecured debt. This turns debts that can’t be discharged or which have to be repaid into debts that don’t have to be fully repaid.
Only secured and priority debts must be paid up-to-date during Chapter 13. So, if the mortgage is mature or matures during Chapter 13, the loan must be repaid during Chapter 13. Most often, Chapter 13 only has to bring mortgages current.
2. Income-based Repayment • The Plan Must be the Debtor’s Best Effort to Repay
When we file Chapter 13, the debtor promises to use his best efforts to repay the plan. This plan must fully repay priority and secure debts. But it may repay zero to unsecured debts. Whether it repays 100% or 0 is based on the debtor’s ability to repay.
If your plan pays a high enough percentage, a judge may not review your plan. As of June 2021, two of our judges in the Western District will not review the plan if the plan repays over 70%. The other judge does not normally review the plan if it repays over 50%. If a plan repays 100% with interest, a debtor has protected any comaker.
The debtor is also not required to file an annual budget or turn over tax refunds if his plan is a 100% plan. They repay only the principle of unsecured debts.
3. Asset-Based Repayment • The Plan Must Repay all that Chapter 7 Would have Repaid
Another factor that can increase payments is if the debtor has too many assets. Your exemptions allow you to retain the property. Chapter 13 must repay what Chapter 7 would. This is often called the liquidation or feasibility issue. If Chapter 7 would have repaid $5,000 to the creditors from the sale of the property, then Chapter 13 has to repay the same to creditors. However, you are allowed to deduct what the property would cost to sell and what the trustee would have charged for selling the property.
⎆ Making a Chapter 13 Plan Affordable
You are allowed to deduct from your income expenses for daycare, retirement, which you have been contributing to for some time before filing, and several expenses that you might forget to consider. I had one elderly couple who needed to replace the roof furnace and air conditioner during their plan. By producing receipts for these repairs which would be needed, we reduced their plan payment to $300 per month, and the plan allowed major home repairs. Then, at the end of the plan, the home is ready to see them through retirement.
Often a debtor’s budget does not have an auto payment. Because there is no auto payment, the plan payment may be higher. I often have to point out it is far better to have a new car payment of 500 and a 300-dollar Chapter 13 plan payment than it is to have no car to get to work and an 800-dollar Chapter 13 plan payment to repay credit cards. I can not ethically advise someone to buy a car on credit just before filing. But I can advise him how he can’t get to work without a car and needs one.
There are many expenses that we forget, and we have a common list of overlooked expenses. You normally cannot take a 22-year-old as a dependent expense unless the child is disabled and truly dependent. You can take private school as an expense if the school is needed for a child’s disability.
⎆ Special Budget Considerations in Chapter 13
One of our judges looks at the telecommunications expense and expects it to be below 5% of your net income. The telecommunications expense is the combined cell phone, internet, and cable expense. Some families are losing cars and homes because the communications expense is as high as a car or home mortgage. It is illogical to lose a home or auto because of an expense for something which did not even exist as an average household necessity 25 years ago.
In our office, we often have to look for the expenses which would cause Chapter 13 to fail so Chapter 7 can be justified. We also look for expenses, so your payment in Chapter 13 is low and affordable, and your Chapter 13 is more likely to be approved. Never file a Chapter 13 just to make your attorney richer. But you might need to file a Chapter 13 if one or more of the following fit your situation:
- Your income is well over $100,000, and you can afford to repay creditors.
- Because you filed Chapter 7 within the previous eight years, you cannot file another Chapter 7 until 8 years have passed.
- You are facing foreclosure and want to keep the home.
- You are being sued for income taxes or student loans which would garnish income if you are not in a 13. Chapter 13 stops this for 5 years. After that, the student loan collection attorney has often had the case dismissed and has moved on to another case.
If you are considering bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start planning your bankruptcy. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.