Chapter 13 Bankruptcy Plan & Plan Payment
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Calculation of the Chapter 13 Bankruptcy Plan and Plan Payment
Kansas City bankruptcy attorney Mark Wortman is experienced in chapter 13 bankruptcy and overseeing your payment plan. Once it is determined that Chapter 13 is the appropriate type of bankruptcy to file, the bottom line question that all debtors want to know the answer to is “how much is the payment going to be”? Unfortunately, in most cases it is very difficult to pinpoint exactly how much the payment is going to be at the outset, and the usual process is that a final payment amount will not be determined until after the section 341 meeting of creditors. However, prior to the filing of the case, the bankruptcy attorney can make an estimate of the plan payment. The key word is “estimate” as many times the plan payment will change prior to, or even after, confirmation of the plan. The calculation of the plan payment and initial plan payment involves many steps, outlined as follows:
Determination of Plan length
The length of the Chapter 13 plan must be between 3 and 5 years. If the debtor’s income is under the state median income, meaning that the debtor chose Chapter 13 for reasons other than making too much money, then the plan can run for as little as 3 years (36 months), but could extend all the way to 5 years (60 months), or anywhere in between. The main factor in a below median plan is the amount of the plan payment. Since the chapter 13 plan is a total sum of money paid to creditors over a period of time, some debtors may choose to have a smaller monthly payment spread over more months, while others may prefer to have a larger payment over a shorter term. The total amount paid is the same, it is a matter of duration. This choice is not available in an above median case, as the Chapter 13 plan must run for 5 years (60 months), and there is very limited ability to modify that duration.
Proofs of Claim
Another factor that can affect plan length is the filing of proofs of claims from creditors. In order for any creditor to receive a dividend from the trustee, they must file a proof of claim with the Court. Many times the creditor’s proof of claim differs from what the debtor scheduled and used in the plan payment estimate, and when this occurs the bankruptcy attorney must either object to the claim, move to amend the claim, or amend the Chapter 13 plan. Also, many times creditors file no proofs of claim at all, which after a certain period of time, will cause them to be excluded from receiving any dividends from the trustee. The failure of creditors to file claims greatly reduces the total amount of debt to be paid from the chapter 13 plan payments, and this could cause the plan to either run shorter than estimated or cause the creditors who have filed claims to receive a greater dividend. All of these events will usually occur after the initial plan estimate and may change the plan payment.
The type of claim filed can also be a factor. Secured claims, priority claims, bankruptcy attorney fee claims, and trustee fees are paid in full before any distribution to unsecured creditors. Unsecured claims will receive a “pro rata share” of any remaining funds. Secured claims typically include any debt that has a collateral, such as a home or vehicle. Priority claims include domestic support obligations, taxes or penalties owed to a governmental entity that are entitled to priority under the law (not all taxes are priority obligations), unpaid wages or salaries earned within 180 days prior to filing the bankruptcy case, contributions to an employee benefit plan, certain security deposits, and some other, less common priority debts.
The type of debt that must be paid, and the subsequent proof of claim, will affect the plan payment as, regardless of income factors, there must be enough money in the plan to pay all of the secured claims, trustee fees, attorney fees, and priority debts. The total of these claims is the minimum payment in any case.
Types of Chapter 13 Plans
100% Dividend Plan
A 100% dividend plan means that the debtor has sufficient income to pay 100% of their debts. A 100% dividend plan may run shorter than 5 years depending on the filed and allowed claims.
0% Dividend plan
A 0% dividend plan means that, although chapter 13 plan payments are being made, unsecured creditors receive no dividends from the trustee. As discussed above, the trustee must first pay secured claims, priority claims, trustee fees, and attorney fees. If the debtor’s budget or means test calculation is such that there is no disposable income available for unsecured creditors, then they will receive no money from the Chapter 13 plan payments. Even if unsecured creditors receive nothing from the trustee, they will still be discharged at the end of a successful plan completion. It is possible under this type of plan to complete a Chapter 13 bankruptcy in Missouri or Kansas without paying any creditors.
Disposable Income 36/60 Plan
This is the type of Chapter 13 plan that pays money to unsecured creditors. Disposable income is determined primarily by the Chapter 13 means test and current income and expenses, but each case is different and other factors may apply. A starting point, however, to determine if this is the appropriate type of plan is whether or not there is a disposable income amount under the means test calculation. If so, that is called the “DIP” amount, and that amount is multiplied by 36 months for an under median plan and by 60 for an above median plan. That total sum is the amount that is paid to the unsecured creditors only. It is not the total amount of the chapter 13 plan payment as secured creditors, priority claims, trustee fees, attorney fees, and other factors must be considered. The exact amount paid to individual creditors out of the DIP will be some percentage of the total debt owed, but that percentage depends on the total amount of the debt and the filed an allowed claims. Regardless of the percentage of debt paid to a creditor, upon successful completion of the plan the remaining debt is discharged.
Liquidation Analysis Plan
The Liquidation Analysis plan is the Chapter 13 plan used when there is non-exempt equity in property. See exemptions for more information. A debtor may file Chapter 13 because they have too much equity in property, or otherwise have non-exempt assets. Under a Chapter 7 bankruptcy, the debtor would lose the property to the trustee for administration. But in this type of Chapter 13 plan, instead of losing property, the debtor pays to the trustee the equivalent of the total non exempt property, over a term of 36 to 60 months, as discussed previously. This is another minimum amount that must be paid in any Chapter 13, if such non-exempt property exists, regardless of the debtor’s income, expenses, or means test disposable income. However, if the debtor does have disposable income under the means test, if that disposable income is sufficient to pay the value of the non-exempt assets, then no amount must be added to the disposable income plan. However, if there is greater value in the non-exempt assets than the disposable income, then the “money pot” for the creditors must be based on the value of the non-exempt assets. It is important to remember, that even if the plan is a liquidation analysis, there must still be sufficient funds to pay all secured claims, priority claims, trustee fees, and attorney fees.
A Chapter 13 base plan is a plan that is between 36 and 60 months and is calculated by multiplying the number of months in the “base” by the monthly plan payment. This type of plan is less common and often used for special circumstances, such as when a debtor is in a below median Chapter 13 but wishes to lower the payment by extending the term.
Chapter 13 Means Test
If the debtor’s Current Monthly Income (see Chapter 7 Means Test for definition of CMI) is greater than the state median income, then the Chapter 13 means test applies and the chapter 13 plan will run 5 years. The debtor’s CMI figure is reduced by various deductions, some of which are set national or local standard figures and some are debtor’s actual expenses. The disposable income amount calculated by the following formula, if any, will be the amount of money that must be paid to unsecured creditors only. It does not equal the chapter 13 plan payment, as there must be sufficient additional payments to pay all secured claims, priority claims, trustee fees, and attorney fees. The means test calculation is generally considered as a starting point for the chapter 13 plan payment calculation. CMI is reduced by the following:
Deductions under Standards of the IRS
Available at www.justice.gov/ust
Additional Allowed Expense Deductions
Debt Payment Deductions
Additional Deductions to Determine Disposable Monthly Income
Analysis of Current Monthly Income and Earning Capacity
Another factor that must be considered in determining the chapter 13 plan calculation is the current income and expenses of the debtors. This is differentiated from the means test calculation in that the means test looks at income for the 6 month period preceding the month of filing, with the inclusion of the combination of actual expenses as well as IRS standard guideline expenses. The current monthly income and expense calculation, shown on schedules I and J of the bankruptcy petition, reflects the income and expenses on the date of filing of the petition, with no consideration given to IRS guideline expenses. If there is a “current” disposable income amount shown on schedule J, this can, in one way or another, affect the total plan payment. Also, if the debtor’s income is under the median, then the means test does not apply and the plan payment is determined in large part by the current disposable income.
Real Estate Mortgages
The treatment of a residential real estate mortgage can affect the amount of the Chapter 13 plan payment in both Missouri and Kansas. In all cases where debtor’s have a mortgage and they wish to keep their home, they must continue to make the regular mortgage payment in addition to the Chapter 13 plan payment. If the mortgage is one that will extend beyond the life of the plan (over 5 years), and most are, then they can be paid directly to the creditor and will stay outside of the plan, provided that the mortgage is current on the date of filing. However, if the debtor is behind on the mortgage on the date of filing, then the amount of those arrearages, along with interest, must be included in the Chapter 13 plan and paid in full during the life of the plan. Also, in this scenario the regular mortgage payment must be paid through the plan, which will substantially affect the amount of the plan payment, but the debtor will not have a separate mortgage payment, thus greatly increasing their disposable income budget.
For the rare situation where a mortgage can be paid off with the bankruptcy in a 36 to 60 month plan, the total amount of the mortgage, along with interest either at the contract rate or the Chapter 13 local rule rate, will be divided by the number of months of the plan and will be added to the total of any other claims being paid by the plan.
Student loans are treated differently depending on the terms of the loan, and they may also affect the final Chapter 13 plan payment. Student loans are not dischargeable in bankruptcy, so they must be dealt with in some way in a Chapter 13. If a student loan will extend beyond the life of the plan, generally meaning that the student loan will not be paid off within 5 years, then it is treated as a long term debt, and can remain outside of the plan. The terms of the loan will not be affected by the bankruptcy and the debtor will pay the loan as if they had not filed bankruptcy.
However, for student loans that would be paid during the life of the plan, generally meaning that they are short loans with a 5 year or less term, then they must be included in the plan and paid in full. The amount of the Chapter 13 payment would increase based on the total amount of the loan divided by the number of months in the plan, including interest. Arrearages on student loans are treated in the same way, they must be paid in full on a pro-rata basis.
Nearly all vehicle loans must be paid by the Chapter 13 plan, and will be included in the Chapter 13 plan payment. There are a few exceptions, but Chapter 13 debtors can be reasonably sure that they will no longer be making their car payments, as they will be paid by the trustee. Chapter 13 does offer some benefits for auto loans, depending on the date of purchase and the interest rate on the loan.
For a vehicle loan that was incurred within the 910 (roughly 2.5 years) day period prior to the filing of the Petition, the entire balance of the loan must be paid over the period of the chapter 13 plan, including interest. The effect on the monthly chapter 13 payment would be calculated by dividing the total amount of the debt, with interest, over the number of months of the plan. Even though the same amount of debt is being paid, the chapter 13 bankruptcy eliminates the monthly car payment from the debtor’s budget, and the interest rate can be reduced to the Chapter13 local rule interest rate, thereby saving the debtor some money on the vehicle.
For a vehicle loan that was incurred outside of the 910 day period prior to filing (over 2.5 years), then the debtors may be eligible to “cram down” the vehicle loan to the actual value of the vehicle, rather than the loan balance. This can be very beneficial to debtors who owe more on their vehicles than they are worth, as they can effectively “strip” the unsecured portion of the loan and just pay the value of the vehicle over the term of the plan.
Vehicles can also be surrendered in the Chapter 13 bankruptcy, where the debtor returns the vehicle to the creditor and the loan is treated as a general unsecured claim. The creditor would then only receive a dividend from the trustee if there are sufficient funds to pay unsecured creditors, as discussed above. There is no requirement that the loan be paid if the vehicle is surrendered.
Regardless of the treatment of the vehicles in the Chapter 13 plan, upon successful completion of the plan, retained vehicles are paid off and the debtor’s own them free and clear.
Contact Mark A. Wortman, an experienced Kansas City Bankruptcy Lawyer practicing in Missouri and Kansas. Our Kansas City bankruptcy law firm handles Business and Individual Chapter 7 cases as well as Consumer Chapter 13 reorganization cases in the Western District of Missouri and the District of Kansas.
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