The three items that control your Chapter 13 plan payment.
We all want an affordable Chapter 13 plan payment. It is even better if you win great chapter 13 plan payments. If the plan is not affordable, a Chapter 13 will not work. To make Chapter 13 affordable, some people will file Chapter 7 first. If you discharge the unsecured debts first in Chapter 7, you do not have to repay debts you don’t owe later in Chapter 13. Lowering the debts you owe almost always lowers the payments. But even if you file a Chapter 20 which is a Chapter 7 followed by Chapter 13, some unsecured debts may have to be repaid in Chapter 13.
If a plan becomes unaffordable it is 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 plan. Then, you must decrease income and increase expenses to repay the minimum so your plan is easily affordable. I don’t mean to falsely claim expenses but you often forget expenses you must repay and also forget your income may decrease. You must base the plan on your lowest income and your highest expenses or it will eventually fail.
Debt-Based repayment. The plan must repay the 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, income taxes that are less than three years old, can also be 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 property you own. Sometimes the IRS will 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 the 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 debts must be paid up-to-date during Chapter 13. If the mortgage is mature or matures during Chapter 13, the loan must be repaid during Chapter 13. Most often, Chapter 13 must only bring the loan current.
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 secured 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 2020, two of our judges in the Western District will not review the plan if the plan repays over 50%. The other judge does not normally review the plan if it repays over 70%. If a plan repays 100% with interest, a debtor has protected any comaker. The debtor is also not required to file an annual budget and does not have to file the annual budget. Debtors with 100% plans do not turnover tax refunds and do not have to file the annual budget. They repay only the principle of the unsecured debts.
Asset-Based repayment. The plan must repay all a 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 a 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 a Chapter 13 has to repay the same to creditors. You are allowed to deduct for 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 which you may have forgotten to consider. I had one elderly couple which 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 300 per month and at the end of the plan, the home would be 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 go 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 which we forget and we have a common list of overlooked expenses. You normally cannot take a 22-year-old as a dependant expense unless the child is disabled and truly dependant. 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 want or necessity 25 years ago.
In our office, we often have to look for the expenses which would cause a Chapter 13 to fail so Chapter 7 can be justified. We also look for expenses so your payment in a Chapter 13 is low, affordable, and your Chapter 13 is more likely to be approved. Never file a Chapter 13 just to make your attorney richer. But you may need to file a Chapter 13 if:
1. Your income is well over 100,000 and you can afford to repay creditors
2. You filed a Chapter 7 within the prior 8 years and can not file another Chapter 7 at this time.
3. You are facing foreclosure and want to keep the home.
4. You are being sued for income taxes or student loans which would garnish income if you are not in a 13.
Be sure to hire an attorney who is working for your best interest and who reviews your budget to make it affordable. He will probably explain how to win great chapter 13 plan payments. Call Nick C. Thompson, Attorney at 502-625-0905.