Chapter 13 Bankruptcy
Chapter 13 Bankruptcy
In previous blogs, I have written introductory information about the basic process in chapter 13 bankruptcy. In this next series of articles, I will discuss some of the issues surrounding chapter 13. In order to file chapter 13, you must be an individual with regular income. There are limits to the amount of debt you can have and still be eligible to file chapter 13. As of April 1, 2013 the limits are now $1,149,525.00 for secured debt and $383,175.00 for unsecured debt. These numbers are adjusted every three years. If you are close to these numbers, be sure and contact our office to get the current applicable limitations.
Chapter 13 Bankruptcy-What is regular income?
Regular income has been interpreted to include earned wages, commissions, public assistance, social security, alimony, pensions, even payments from friends or family if they are expected to continue during the bankruptcy period. You must have enough income to pay the proposed payments under your chapter 13 plan. Anticipated, future income may not be enough for a chapter 13 bankruptcy, however, someone whose income varies from year to year, is likely to be acceptable.
Chapter 13 Bankruptcy-Unsecured Debt
In looking at your chapter 13 bankruptcy, we will need to make sure that the amount your unsecured creditors receive under your proposed plan would be roughly equal to the amount they would receive in a chapter 7 bankruptcy. The idea behind this is so that unsecured creditors are treated the same whether under chapter 7 or chapter 13.
When we develop your chapter 13 payment plan, we will commit all of the income over and above what is needed for you and your family’s support. This is considered “disposable income.” All of your disposable income will be committed to paying your unsecured creditors over the payment plan period (not more than 5 years). We will base your disposable income on the calculation of your current monthly income. Disposable income does not include child support or foster care payments.
In determining your disposable income, you are required to base it on your monthly income the 6 months prior to filing bankruptcy as opposed to your actual current monthly income at the time we file. When we discuss the timing of filing your bankruptcy case, we may decide to delay if your actual monthly income is much lower than the last 6 months. We can petition to modify your plan if your income is lower during your plan period than we originally anticipated. We are also able to include appropriate deductions such as secured debt payments, car allowances, or other special circumstances.
How long will your payment period be in a chapter 13 bankruptcy?
Each state has established a “median” income based on the Census date for that state. If your monthly income is below the state’s median income, then you are required to pay for up to 3 years. If your monthly income is above the state’s median income, then you are required to pay for up to 5 years. If your income rises during the payment period above the median income of your state, you will not be required to change your payment period to 5 years.
If your income increases significantly during the payment period, theoretically, it is possible for the trustee or an unsecured creditor to petition to modify your plan based on the increase. In reality, however, neither the trustee nor the creditor would have access to this information. Most often modifications are requested by individuals filing bankruptcy and are usually the result of a loss of income during the chapter 13 plan.
Can you finish paying your unsecured creditors early?
If you have disposable income that is designated to go to your unsecured creditors, you can continue to pay over the 3 or 5-year period. However, you can also choose to complete you plan payments earlier.
Chapter 13 Bankruptcy-Priority Unsecured Creditors
Bankruptcy laws are written in such a way that debts are grouped into three different categories. Secured debt is when you have pledged property as collateral and the lender has the right to repossess the property if you fail to pay the loan. Unsecured debt is usually credit card debt, unpaid medical bills, and any other debts where the lender must go to court and get a judgment against you before taking any of your property. The third general category is priority unsecured debt.
Congress created the category of priority unsecured debt when it enacted the bankruptcy laws. Essentially lawmakers decided that certain unsecured debts should take priority over other unsecured debts. These include, but are not limited to, domestic support payments (child support or alimony), unpaid taxes (although not all tax claims are given priority), and administrative expenses and attorneys fees.
Taxes and domestic support payments are not discharged at the end of your bankruptcy payment plan. Because of this, we will make sure and build into your plan, the payment of your priority unsecured debt before any unsecured debt is paid. Credit cards and unpaid medical bills, for example, are discharged when you’ve completed your chapter 13 plan. Thus it is important that we ensure your priority unsecured debts that are not dischargeable are paid before those debts are paid.
As part of the bankruptcy process, creditors must file priority claims. If they fail to file a claim you are not required to pay it. However, to ensure that your priority non-dischargeable debts are paid before your unsecured debts, we will work with you to file a claim on behalf of the creditor.
Because government entities are not able to compute what tax you owe unless you file tax returns, you are required to submit tax returns for the 4 years prior to filing your bankruptcy petition. The deadline for filing these prior year returns is the day before the meeting of creditors. If you were not required to file a tax return, you will not have to file one just because you are in chapter 13 bankruptcy. The trustee can extend this deadline for up to 120 days, which also means the meeting of creditors is delayed. If you are having trouble completing your tax returns we can also request an extension of 30 more days beyond the 120.
You will also need to continue to pay your domestic support payments that are due after your bankruptcy petition is filed. If you become delinquent on these payments, you will be denied confirmation and your case can be dismissed or converted to a different chapter. We are required to certify that at the end of your chapter 13 payment plan that you have paid any support payments in order to receive a discharge.
In the next article, I will discuss more chapter 13 bankruptcy issues including the feasibility of your plan and how we can deal with your home.