Chapter 13 bankruptcy – The Best Repayment Plan

What is Chapter 13 bankruptcy?

Chapter 13 Bankruptcy is the kind of bankruptcy where you don’t repay the debt because you can’t. It’s technically called “reorganization bankruptcy” because they’ll you’re reorganizing your debts. But what does that even mean? It means that, in general, Chapter 13 bankruptcy isn’t about paying all the minimum payments anymore, plus all that interest, forever.

Chapter 13 bankruptcy instead asks, again, generally, “what can you afford to pay?” And that is your one simple payment, for all your debts.

In short, Chapter 13 bankruptcy lets you pay a fixed payment for a fixed time. And then you’re done.

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    Chapter 13 Eligibility

    Qualifying for Chapter 13 Bankruptcy

    Cash Flow

    How does someone qualify for Chapter 13 bankruptcy? In sum, you need to have cash flow, or what we in the bankruptcy attorney profession call a budget surplus. How do you know if you have a budget surplus? Easy. Can you afford to pay some or all of your credit card minimum payments each month? If so, you have budget surplus and can (and probably should) do a Chapter 13 bankruptcy.

    There are other barriers to Chapter 13 bankruptcy, but most people can leap these hurdles rather easily.

    Chapter 13 Debt Limits

    There’s a limit to exactly how much debt a Chapter 13 bankruptcy can handle. This is called the Chapter 13 debt limits. If you’re like most people, you’re way under these limits. But it still comes up, particularly in Southern California where a Los Angeles bankruptcy attorney has to deal with expensive real estate, and often a rental house or investment property (or two).

    For unsecured debt, the bankruptcy debt limit is $419,275, and for secured debt, it’s currently $1,257,850.

    These Chapter 13 debt limits change every three years, and are valid until April 1, 2022, when they’ll change again.

    Let’s figure out your Chapter 13 bankruptcy payment now.

    Warning: While the basic concept of Chapter 13 bankruptcy is easy to understand, they’re notoriously difficult to prepare and navigate all the way to discharge, with a lot of details, twists and turns and pitfalls. To make matters worse, if a case fails (as many do when not with a skilled lawyer), BAPCPA has put in penalties for repeat filers. Don’t do this at home. Let a professional bankruptcy attorney be your guide.

    Calculating the Chapter 13 Payment

    So, let’s say you’re doing a Chapter 13 bankruptcy. What’s your payment amount? This is more art than science, and experience is the best teacher. However, if pressed, and grossly oversimplifying, the Chapter 13 bankruptcy plan payment is whatever’s left after living.

    Slightly longer: a good starting point for the Chapter 13 plan payment is average gross monthly income, minus reasonable payroll deductions, and necessary and reasonable living expenses.

    “Grossly oversimplifying, the Chapter 13 bankruptcy plan payment is whatever’s left after living.”

    It’s as simple as that, and as complicated as that.

    Income Challenges

    What if the hours you’ve worked on your paycheck vary, and lately you’ve been getting overtime? Or you did get overtime but now it’s gone? Does that count? Yes, and no. What about 401k contributions, or that cash deducted into your credit union’s saving account? Spouse’s income; they don’t want to file bankruptcy? Or the fiancé you’ve been together with for seven years… does their pay count?

    The Issue of Expenses

    It might seem fairly straightforward to use your monthly expenses, but issues come up with things that fluctuate, items that are brand new for which there’s no history, and those things that we pay just once a year. Generally, we average, but each case is different. We look backwards to get an idea of the record, but are also projecting forward to what you will be spending. This is a balancing act, and isn’t just what you actually spend, but also what’s reasonable and shows good faith.

    Good Faith Chapter 13 Plan

    Section 1325 of the Bankruptcy Code requires that a Chapter 13 plan be filed in good faith. There are lots of factors that can prove or disprove good faith, but one of them is the reasonableness of the expenses. You don’t need to eat ramen noodles every night for dinner, but you can’t dine out nightly either. Example: an unmarried college student thousands a month on food and drink is not reasonable, even though pizza every night helps that person study.

    I had a potential client at a consultation who insisted that they spend $2,000 a month for food and $500 for their pet insurance premiums. That may be true, but is it reasonable?  A judge will decide, but it’s my job to ring the alarms about the potential (and probable) risk of an Chapter 13 trustee objection to these sort of expenditures.

    What Factors Decide the Chapter 13 Plan Payment

    Some Los Angeles bankruptcy attorneys say they can tell someone their Chapter 13 bankruptcy plan payment at the consultation. This Los Angeles bankruptcy lawyer says otherwise. There are too many variables that can push the payment up, or down, and these factors aren’t known until we get a chance to start due diligence on a particular case.

    Yes, generally, the payment is whatever you can afford, after average income minus reasonable expenses. Living comes first, and then what’s left goes to debt. What does someone earn, and what are their average expenses? How can an attorney know this during a 30-45 minute case evaluation? And that’s before other variables enter the equation… again, things that really aren’t known at the quick consultation.

    Chapter 13 plan payments are also influenced by what debt must be paid back through the Chapter 13, and other factors which merit serious consideration. This includes things like:

    1. house arrearages
    2. priority tax debt
    3. liquidation analysis
    4. B22 result and minimum to the unsecured creditors
    5. car being paid through the plan in cramdown
    6. student loans being paid directly or not
    7. total amount of general unsecured debt
    8. Factors from U.S. v. Lanning

    This is not an exhaustive list, but each factor can create a floor or ceiling for the Chapter 13 plan payment.  One thing that they have in common is this: after doing thousands of bankruptcy consultations, these variables are usually not known for certain at the consultation.  This creates uncertainty and anxiety, and understandably so.

    Some bankruptcy lawyers try to appease potential clients at their first meeting by predicting the plan payment, and that’s understandable. As you see, there are many factors in play. But predicting a payment is providing a known when there are variables that are still unknown at the consultation.

    Even the most experienced bankruptcy attorney can’t always know for certain your current monthly income based upon the last six months, let alone all the deductions and allowable expenses to calculate your projected disposable income. Some tell people what they want to hear, not what they need to hear. Sometimes, caution is the best path.

    We like certainty, the known. A good bankruptcy attorney can generally fall back on, “the payment will be affordable, as it’s the result of your average income minus reasonable living expenses, with some exceptions.”

    Chapter 13 is Better than Debt Consolidation or Paying Them Yourself

    Protected from Lawsuits

    With debt consolidation companies, you rarely get to finish paying because you get sued first. The credit cards aren’t getting paid what you agreed to, and they don’t just let that slide. They’ll give you a lawsuit for the balance, the debt settlement company can’t protect you, and you have to file bankruptcy anyway.

    Chapter 13 bankruptcy protects you and your cosigners from any debt collections whatsoever, including lawsuits and foreclosures. It’s a protected shield where you’re completely safe, providing peace of mind.

    Freezing Interest

    Chapter 13 freezes your balances, which gets you off the hamster wheel of paying interest only forever.  When you file a Chapter 13 bankruptcy, the companies have to submit their current balance, and that’s the maximum they’ll ever get. Of course, if you can’t afford to pay their balance, you just pay what you can. Outside of bankruptcy, you’re just paying interest only, forever. This ends that, and provides a set finish line.

    More Affordable Payment

    Chapter 13 is more affordable. With debt settlement or debt consolidation companies, they have to try to appease the various credit card companies by trying to reduce their minimum payments. Similarly, when you pay them yourself, each minimum payment is decided as a percentage of your balance. And you struggle.

    With Chapter 13 bankruptcy, the payment is usually whatever you can afford. This is independent of what the credit card companies want, and has nothing to do with their balances. You just pay what you can for a set time, and then you’re done. The rest is forgiven.

    Postconfirmation Chapter 13 Issues

    Now, let’s say you’ve found a skilled and compassionate Los Angeles bankruptcy attorney, and the Chapter 13 bankruptcy that you proposed together is approved.  Congratulations! The case is now confirmed. Make your payments according to the Order Confirming the the Chapter 13 case and there will be a discharge in no time.

    However, life happens. Things change in your situation. And often — not always — there can be more work to be done. The good news: your bankruptcy attorney can help you.

    Can I change the Chapter 13 plan payment during the bankruptcy?

    Yes, if you lose that overtime, that renter moves out, your mortgage increases, or some other change in circumstance, there is a way to ask the court to change your payment. This is supposed to be a fair process, and you’re supposed to be paying your best efforts. If the budget factors at the beginning of the case change, your payment can change.

    Do I get to keep my tax refunds during the Chapter 13?

    It depends. Remember, you’re supposed to be using your best efforts to repay your debt. So let’s say you’re repaying only 10% of your credit card debt in the Chapter 13, and then on April 15 you get a $12,000 tax refund. The trustee will expect that be turned over to her to repay more debt.

    Why? Because you intentionally made your monthly income $1,000 lower in this example. If your W4 and withholdings were set up right, you’d be paying more monthly, a higher percentage of debt would get repaid each month, and it’d be break-even at tax time.

    Can I buy a car during the Chapter 13 bankruptcy?

    Yes, with court permission. The whole point of bankruptcy is to get you out of debt, so getting more debt needs approval. The good news is this can be granted with good justification, and in greater Los Angeles, we need cars to get to work. So, that’s a good cause.

    Note: Chapter 7 bankruptcy is another of the type of bankruptcies that an individual consumer may consider. However, it’s not for everyone. Chapter 7 is a swift machete, where a Chapter 13 bankruptcy is more like a scalpel.

    What this means is: even if you qualify for Chapter 7 (and many people don’t), it comes with its own set of drawbacks. Chapter 7 bankruptcy really does take things, and just because your coworker filed and didn’t lose anything doesn’t mean you won’t.

    Also, transfers of assets or money become major problems, and in the age of Zelle showing up on your bank statements, the Chapter 7 trustee will count and/or go after those funds. Same with the debt you repaid to mom before you filed bankruptcy; mom can be sued for that money, making for a very uncomfortable Thanksgiving.

    May I sell my house during the bankruptcy or pay it off early?

    Yes, again, with permission. The real issue here is who gets the home equity, especially if you’re only paying 25% of your credit card debt in the Chapter 13 bankruptcy? This is a jurisdiction-specific issue, and it depends what the Chapter 13 plan and the Order Confirming Chapter 13 Plan say.

    Notwithstanding Black v Leavitt, in the Los Angeles County area, the revesting in our our form plans say that 100% of the debt would have to get paid first before the debtor gets paid equity. Same with paying the bankruptcy off early: it’s not 100% of the (in our example) 25% in the order confirming, but 100% of the unsecured debt.

    Your situation may vary, but it’s often better off to stay in the bankruptcy until the discharge, and then discharge the (again, just using the example in this section) other 75% of debt, have the case be over, and then sell the house.

    Other things

    This is just a sampling of things that can come up in a Chapter 13 bankruptcy. But the general point is, a Chapter 13 can be flexible, as long as everything is disclosed and approval is sought were needed.

    Closing Thoughts on Chapter 13 Bankruptcy

    This article is about 2,000 words long, but really, it only scratches the surface about Chapter 13 bankruptcy. There’s a lot more that can be said about its twists and turns. It’s not for the faint of heart, and truth is, many bankruptcy attorneys won’t touch Chapter 13 cases.

    However, we’ve successfully prosecuted hundreds of Chapter 13 bankruptcies to discharge. Anyone can file a 13, but to get a high percentage of those filed to discharge compared to others who file in our district is what sets us apart. You want a qualified guide with skill and experience in this field. Let’s sit down and discuss your situation, and go over your options.

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