Chapter 13

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Chapter 13 (AKA Bill Consolidation)

A Chapter 13 bankruptcy case is a payment plan. You will propose a plan, and the Bankruptcy Court will confirm (approve) it. You will make monthly payments to a standing Chapter 13 trustee, who will in turn pay your creditors in proportion to the claims they file with the Court.

Only individuals (people) with regular income may file under Chapter 13. In addition, the total of your non contingent, liquidated debts must be less these amounts:

· Unsecured debts: $383,175

· Secured debts: $1,149,525

The rules for deciding whether debts are non-contingent, or liquidated, or secured can be tricky. Plus, the maximum dollar amounts for Chapter 13 keep changing. You should seek the advice of a competent bankruptcy attorney if the total amount you owe to all your creditors exceeds the debt limits.

In general, you must pay all your disposable monthly incomes to the Chapter 13 trustee. Disposable income is what is left every month after paying your reasonable and necessary living expenses. Payments that you have been making on credit cards or other unsecured debts (including student loans) do not count as expenses when calculating disposable income. The Chapter 13 trustee will often object to your plan if he or she thinks that any of your living expenses are excessive, unreasonable, or just too high. Or the trustee may insist that you back them up with records because the trustee just does't believe you spend that much.

Your plan payments must also total enough to cover the following:

· The amount needed to cure defaults on your secured debts. This amount dosen't include debts secured by property you intend to surrender;

· The amount of legal fees you still owe your attorney;

· The amount of all priority debts or claims. This usually means tax liabilities or support obligations;

· Depending on the jurisdiction, some bare minimum amount to unsecured creditors, who must receive at least as much as they would receive if you were filing a Chapter 7 case instead (some jurisdictions, by the way, will let you get away with paying zero to unsecured creditors, assuming that this is all you can afford to pay, i.e., your best efforts). This minimum payment is essentially the value of your non-exempt property, minus the amount of your priority debts. Very often, this is zero also. If your Current Monthly Income is above median for your State, however, you must compute your monthly disposable income on a seven-page form called the means test (Official Form B22C). Explaining how this is done is too complicated for a basic explanation like this web page, and because courts around the country, and even within the same jurisdiction, have different opinions about how it should be done. Your general unsecured creditors must get at least that much too. Sometimes the number computed under the first formula (non-exempt property, minus priority debts) is larger, and sometimes the means test (I like to call it the mean test) number is larger;

· Up to a 10% commission for the Chapter 13 trustee (he gets paid by you, not the government). What we actually do is add up the other components of the plan, and divided by 90. The resulting number is just right to give your creditors what they are due after deducting the 10 percent commission.

If your disposable income is not large enough to cover these five items, your plan is probably not feasible, and probably won't pass muster with the trustee or bankruptcy judge. Adios Chapter 13! More often, you'll work with your lawyer to identify assets that can be sold to realize cash for funding the plan, or other assets that can be surrendered in order to reduce your secured debt and cure payments.

It's generally to your advantage to have any past due income taxes treated as priority debt when you file for bankruptcy. That's because the rules require you to pay a certain minimum to all of your unsecured creditors (both priority and non-priority), and you'd rather the money go to taxes that you're going to have to pay someday no matter what. The only exception would be if you owe so much in back taxes that you can't possibly pay it all off within five years. Unless the exception applies to you, you should file all tax returns that are due before filing a bankruptcy case. Remember that you can file a return without paying the tax at the same time (the IRS will generally just send you a bill!).

Informational Links:

American Bankruptcy Institute

National Association of Consumer Bankruptcy

USC Title 11 -Bankruptcy

Personal Bankruptcy Information

Bankruptcy Law Network

Start Fresh Today, Inc

Life After Bankruptcy