The Chapter 13 Plan Payment: What Is Your Ability to Pay?
The Chapter 13 Plan Payment that you monthly must make in a Chapter 13 bankruptcy in Michigan is premised, initially, on what you can afford to pay when your household’s necessary monthly average expenses are deducted from your household’s net, after-tax income. Whatever is left over after those expenses are deducted from your household income, that is your “net monthly income” and the amount that you must pay into your Chapter 13 bankruptcy payment plan.
So, for example, if your household, including earners who may not be part of your Chapter 13 bankruptcy, earns $2,000 per month after taxes and the household has $1800 per month in average expenses, the Chapter 13 Plan payment would be $200/month—less than a typical automobile loan payment.
However, there can be more to it than this.
The Chapter 13 Plan Payment: Complicating Factors
Your Chapter 13 plan payment can be adjusted from this basic “what’s left over at the end of the month?” formulation by a couple of different factors, however.
The Means Test & the Chapter 13 Plan Payment
The “means test” is one of those factors. The means test is primarily known as the test determining whether or not you are eligible to file for Chapter 7 bankruptcy based upon your household income. The means test looks back at the 6 months prior to the month in which you filed your bankruptcy petition (or plan to file it) to average up the gross, pre-tax income earned by all members of the household from all sources of income except Social Security. It then multiplies that 6-month average by 12 (months) to arrive at a theoretical annual income for your household. If that income is higher than the median income in Michigan or your state of residence for a household of your size, you are not eligible to file a Chapter 7 bankruptcy and must instead file a Chapter 13 bankruptcy.
In a Chapter 13 bankruptcy, the means test plays a further role. First, if your household is “above the median” in income, you will have to file a 60-month or 5-year Chapter 13 bankruptcy. (If your household is “under the median,” you can propose a Chapter 13 plan as short as 36 months.)
Second, if the means test determines that you have some “disposable monthly income,” or DMI, the amount of that DMI may require that pay a certain minimum amount to your unsecured creditors in your Chapter 13 bankruptcy in order for the Michigan bankruptcy court to approve your Chapter 13 plan. This may require that your monthly Chapter 13 Plan payment be a certain amount, possibly higher than simply what is left over after expenses are taken into account, in order to ensure that those creditors receive that amount.
In other words, if your means test says that you have X amount of DMI, you may have to “squeeze” your average monthly expense budget in order to arrive at a Chapter 13 plan payment that will have the required result.
This is, yes, another reason why the means teset, which was put into effect by the US Congress in 2005 is patently unfair: the deductions available in the means test to reduce your DMI bear only a passing resemblance to the “real life” expenses you actually have. Some of your “real life” expenses can be deducted in the means test; many cannot.
Your Assets & Your Chapter 13 Plan Payment
Your Chapter 13 plan payment can also be affected by the amount of stuff that you own.
One of the primary benefits of a Chapter 13 bankruptcy is that, unlike a Chapter 7 “liquidation” bankruptcy, none of your personal assets or property are taken and liquidated to pay off your creditors in a Chapter 13. Instead, in a Chapter 13 bankruptcy, your monthly plan payments fund the process rather than liquidation of your stuff.
However, if you have possessions of a fair-market dollar-value amount that you would lose to liquidation if you filed a Chapter 7 bankruptcy, this will have an effect upon the amount you have to pay into your Chapter 13 bankruptcy plan.
This is known as the “Best Interest of Creditors Test”, or the “Liquidation Analysis Test.” What this “test” says, basically, is that your unsecured creditors cannot receive less from your bankruptcy if you file a Chapter 13 than they would have if you’d filed a Chapter 7.
So, if you filed a Chapter 7 and we were able to protect all but $3,000 worth of your assets, the Chapter 7 Trustee (whose job is to do the actual liquidation) would require that you hand over that $3,000 worth of stuff to be sold off—or that your attorneys work out some sort of settlement with the Trustee to pay off the $3,000 rather than lose the property.
If you filed a Chapter 13 with that same $3,000 worth of unprotected property, no one would take the property from you, but you would have to pay enough each month in your Chapter 13 plan payment to ensure that your unsecured creditors, who are paid last in a Chapter 13 bankruptcy, have at least $3,000 to split between them.
Thus, again, your budget may have to be tightened in order to ensure that this properly occurs.
The Bottom-Line on the Chapter 13 Plan Payment
The bottom-line on your Chapter 13 plan payment is that it is a difficult number to arrive at until your bankruptcy attorney has received from you all of the documentation necessary to draft your bankrupcy petition and your Chapter 13 payment plan. Without pay-stubs and other documentation, the means test can’t be fully calculated. Without a list of your assets and their value that leaves absolutely nothing undisclosed, the liquidation analysis cannot be performed.
When the Michigan bankruptcy attorneys of The Hilla Law Firm, PLLC initially meet with you to discuss your potential Chapter 13 filing, we will give you a general idea of what your Chapter 13 bankruptcy is likely to look like—but each Chapter 13 is highly specific to each individual filing. We will work together over a period of days or weeks to produce a Chapter 13 plan payment that is affordable, effective, and meeting all of the complex criteria of the US Bankruptcy Court.
If you are a southeast Michigan resident and are considering filing for Chapter 7 or Chapter 13 bankruptcy, contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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