A Chapter 13 can be cheaper than a Chapter 7. A Chapter 7 does not have to repay the priority and secured creditors. But every Chapter 13 plan must repay the Priority Claims and Secured arrearages in full. Since the interest and penalties can be repaid in part for these debts a Chapter 13 can be cheaper.
Basic Chapter 13 Bankruptcy plan calculations
However, unsecured claims can be repaid in 100% 70% 50% or even 1% and 0% plans. Bankruptcy law requires you to repay your disposable income into the plan. The percentage can increase for the 3 or 5 years you are in a plan. If you make over the average income for your size family you must file a 5-year plan. Persons who make less than the average income can file a three-year plan.
At 100% you do not need to file an annual budget in the state of Kentucky or turnover your tax refund. Many states require debtors to turn over the annual tax refunds. This is because it is income over and above your budget. If you are repaying in full there is no need to file the annual budget or to turn over the tax refund. Inheritances and personal injury settlements above the exemptions must also be turned over during the case.
At 70% almost all the judges assume the plan is proposed in good faith. If the plan is proposed in good faith the judge will not review the plan unless a creditor objects. In the Western district of Kentucky Judges Stout and Fulton assume at 50%. Judge Lloyd will require 70%. The benefit of this is that
Below 50% all our Western Kentucky Judges will review the case and if a debtor has; 1) luxury items, 2) inflated expenses or underestimated income the judge will increase the plan payments. A debtor may have a home mortgage or reasonable car expense. But a boat, motorcycle or expensive sports car may not be allowed in a 10% plan.
How to calculate interest on Bankruptcy claims
Unsecured creditors are normally repaid 0% interest and fees on their claims. In Kentucky, our state courts allow a 12% interest on judgments by statute but in Bankruptcy court even judgments on unsecured claims are paid 0%. This is a substantial saving. If you had to repay a judgment by garnishment in state court the debt could double every 5 years. But in bankruptcy court, you only repay the principle amount of the debt.
Secured creditors are normally only repaid 1 or 2% above the prime interest rate if they only have a lien on personal property. I have often negotiated liens at 0%. Mortgages, however, get their stated rate of interest at whatever is in the contract. If you have a 5 % mortgage it continues to be a 5% mortgage while it is in bankruptcy. The default or arrearage must be repaid plus any attorney fees and court costs which accrued prior to filing your bankruptcy.
Priority creditors get the interest they are allowed in their statutes. Priority debts include an income taxes less than 3 years old and state property taxes. The IRS statute gives a 12% interest rate, Kentucky gives a 12% rate to property taxes. Kentucky statutes allow a 12% rate for property taxes. Both Federal and State taxes are given the same consideration in repayment.
Feasibility A Sample Chapter 13 Bankruptcy Payment Plan problem
Feasibility. One of the major calculations you have to do in every Chapter 13 is that it must be feasible. That means it has to repay as much as a Chapter 7 would have. One of the common reasons for filing a Chapter 13 bankruptcy is that if it was filed as a Chapter 7 that property would have to be sold. You are allowed to keep close to 25,000 in equity for every person on the deed to the home in 2018. But if a husband and wife are on the deed they can keep 50,000 in equity but they can’t keep 125,000 in a Chapter 7 case and expect the Trustee to not sell the home. As a result, the 75,000 in excess equity has to be repaid in a Chapter 13 but the debtor would be able to keep the home. The debtor can deduct for the cost of the sale (about 12,000) and the fees the trustee would charge (about 10,000) but the Chapter 13 plan would still have to repay about 53,000 dollars. This may still be cheap if you are discharging a million in debt for 53,000.
How to Calculate your Chapter 13 Bankruptcy payment plan
Every Chapter 13 plan pays a fee to the trustee. This trustee is typically as much as 10% but in the Western District of Kentucky, it is only 4.5%. In many jurisdictions like Indiana, the Trustee may require you to pay the home mortgage payments through the Trustee. This makes his Chapter 13 practice much more profitable and punishes mortgage creditors. The justification for this claim by the Chapter 13 is that it allows him to supervise the mortgage company more and prevent abusive fee charging by the mortgage company. The mortgage creditors receive 95% of their charges if the Trustee is in a conduit state.
Kentucky is not a conduit state and your mortgage repayment is to the mortgage company directly. Your repayment of the mortgage starts in Kentucky the month you file. The plan payments also begin the month your file not when your hearing begins. To calculate your plan payment essentially look at your budget. You plan payment is what you have left after deducting your expenses from your income. We call this your disposable income. There must be enough left over to fund the plan and repay the secured arrearages and priority debts in full.
Common Chapter 13 Bankruptcy plan payment calculation problems
There is a floor in the calculation of a Chapter 13 plan payment. Every plan must:
- Cover what has to be repaid due to feasibility even if there is an early
- Must cover the Administrative, Secured and Priority expenses. Attorney fees are an administrative expense just like the Trustee fees are. In 2018 and Kentucky the attorney fees are 3750 for an uncontested Chapter 13. In Indiana, it is 4,000 and much of the country the fees are higher.
What remains above the administrative, secured and priority expenses is the amount available to the unsecured creditors. If you divide what is available to pay the unsecured creditors by the amount of the unsecured claims you get the plan percentage. Plan percentage = ((amount to be repaid to the unsecured)/(amount of the claims)) Counsel for the Debtor always wants this to be as close to zero as possible if he believes he can get a low plan percentage approved. If the payment is too high the client can’t afford it which is another feasibility problem. If the payment is too low it doesn’t cover enough.
The client normally wants a discharge at the end of the plan. Any debts which are cosigned may also need to be paid in full to protect the cosigner. Only debts paid in full protect the cosigner.