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By Mike Wallace, Bankruptcy Attorney, serving clients in all of East Texas, including Lufkin, Nacogdoches, Palestine, Jacksonville, Tyler and other surrounding communities
I am asked the question so often: “How does a Chapter 13 bankruptcy work?”, I thought I would attempt to give the basics of a Chapter 13 case.
First, Chapter 13 cases are typically for those persons who have secured debt that needs to be reorganized (e.g. Vehicle payments that are behind, mortgage payments that are behind or taxes owed to the Internal Revenue Service). Individuals with student loan debt, which is always unsecured, can also benefit tremendously in some circumstances from a Chapter 13 bankruptcy.
There are other instances that are suitable for a reorganization of debt, but this is an attempt to simplify.
A Debtor in Chapter 13 must make payments to the Chapter 13 Trustee for a period no less than 36 months and no longer than 60 months. The length of the plan is referred to as the commitment period. The amount of the payment is determined based on a very specific budget that is prepared.
First, a net income is determined by taking the gross pay of a Debtor and deducting all of the normal deductions that are deducted from the Debtor’s pay by the employer.
Then all of the expenses for the Debtor on a monthly basis are deducted from the net income.
The monthly expenses that are generally deducted from the net pay would be as follows: mortgage or rent; utilities; auto insurance; home insurance and taxes (assuming the same are not escrow in your mortgage payment); food expense; health, life and medical insurance that is not already deducted from wages; cable or satellite television; phone expenses (land and/or cell); clothing; out-of-pocket medical and dental expenses, including prescriptions; transportation costs (includes gas, vehicle registration, service and maintenance costs); childcare; charitable contributions and trash pickup.
These expenses are for the purpose of an illustration and you might have some additional expenses that are deductible from your net income.
One thing that has to be taken into consideration when calculating net income is any income tax refund that you might receive.
An income tax refund should be thought of as an over payment of your wages to the internal revenue service. If you are receiving a refund, then this refund must be included back into your net income.
For example, let’s say that you are to receive a tax refund in the amount of $2,400.00 for a given tax year.
This refund will add $200.00 to your monthly net income ($2,400.00/12 months=$200 per month).
Once the monthly net income has been calculated and the monthly expenses are deducted therefrom, the amount that is left over for the sake of this illustration is referred to as disposable income.
As a side note, a Debtor in a Chapter 13 case that is drawing Social Security payments, can include the amount received in their net income in order to make a Chapter 13 plan of reorganization feasible (more on that subject in a moment), but if the income is not needed it does not have to be included.
The disposable income is the amount that is paid to the Chapter 13 Trustee on a monthly basis. For the sake of illustration, let’s say that you are behind on mortgage payments in the amount of $5,000.00 and you owe $10,000.00 on an automobile that needs to be paid off in your plan of reorganization.
That is $15,000.00 that has to be paid to the Trustee during the commitment period.
To simplify this illustration I have not included attorney’s fees or any interest that might have to be paid. To make a plan of reorganization feasible to pay the $15,000.00 during the commitment period, the Debtor must have enough disposable income.
Again, for the sake of illustration let’s say that the commitment period is the maximum sixty (60) months. This means that the Debtor must have $250.00 of disposable income being paid to the Trustee.
If the Debtor only has disposable income of $200.00/month, then a feasible plan cannot be proposed.
On the other hand, if the Debtor in this illustration has disposable income of $400.00/month, then there is up to $150.00/month that is available to pay any unsecured debt (e.g. credit cards, medical bills, payday loans and signature loans).
Currently, in the Eastern District of Texas the Chapter 13 Trustee allows a Debtor to keep up to $100.00 of disposable income that does not have to be dedicated to the Chapter 13 plan of reorganization.
If the Debtor in the above illustration is not required to be in a Chapter 13 for 60 months and they have $400.00 available in disposable income, then the commitment period could be shortened.
The gross income of a Debtor determines whether they are required to be in a sixty (60) month commitment period, or can be in for the shortest period available of thirty-six (36) months.
All of the above information is for illustration purposes to allow a better understanding of Chapter 13 bankruptcies. Every situation is different and there are special rules that come into play in any given Chapter 13 case.
For example, manufactured homes that are not part of a Debtor’s real property can receive special treatment in a Chapter 13, as well as automobiles that were purchased more than 910 days ago.
If you have additional questions about Chapter 13 bankruptcy or any other financial situation that you might find yourself in, then give me a call at (800) 867-1583 and we can discuss your situation at no obligation to you.
As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation. Bankruptcy, as many other areas of the law, can be very case or fact specific. I pride myself on giving you the answers to your questions that are based on your individual circumstances.