One of the most common questions by someone considering Chapter 13 bankruptcy is how much is my monthly payment and how long is the repayment plan?
The base length of repayment in a Chapter 13 bankruptcy plan first depends on the income of the debtor or debtors. This is a starting point and defines the minimum amount of time normally required for each case. Lawyers refer to this as the Applicable Commitment Period or the ACP. Each state has a median income amount determined by family size. For example, in Kansas, the median income for 1 earner is $4,330 per month while $7,741 is the median monthly income for a family of 4. If household income is below the median the ACP is 3 years. This means the plan must run for at least 3 years or until all creditors can be paid in full during a shorter period, whichever happens first. If household income is above the median then the ACP is 5 years. This means the plan must run 5 years unless all creditors can be paid in full during a shorter period.
There must be a plan payment in a Chapter 13 bankruptcy. The amount of the monthly payment in the bankruptcy plan may include the amount to retain secured property (i.e. house or car), the interest rate to those secured creditors, attorney fees, and must include any priority tax claims. The payment must also include the amount of Disposable Monthly Income of the debtor for the Applicable Commitment Period.
In an above median case the Disposable Monthly Income is generally determined by a formula outlined in the Means Test. This formula uses as a base your Current Monthly Income (based on your last 6 months of income) and then subtracts your withholdings (taxes and social security), secured claims, priority claims, any health insurance, medical expenses, retirement contributions and basic expenses that are determined by the Internal Revenue Manual. The above median debtor is therefore limited in certain basic expenses such as rent, vehicle operation expenses, utilities, household operations, food, clothing, etc. If the above median debtor wants to depart from these expenses they can attempt to do so by filing a special motion to deviate from the Means Test.
For a below median case the disposable monthly income is generally determined by looking at your gross income and subtracting out your withholdings and other expenses as above. The main difference is that the IRS guidelines for monthly expenses are not used to determine the appropriate dollar amount of your household expenses. For example, if the IRS guidelines say that rent is $800 in a given area but a below median debtor has rent of $900, the latter number will be used when calculating Disposable Monthly Income. There is still a reasonableness requirement for your basic expenses and the court can look to see if they are necessary in a below median case.
In a below median case if the plan proposes to pay for items through the plan such as car loans, tax debts, attorney fees, trustee fees and administrative costs then they need to show that their budget can support such a payment. If it would take $20,000 to cover these items in full, and they debtor has $500 available after covering their basic household expenses, then the case will need to fun 40 months (40 x $500 = $20,000) to pay all the items in the plan. This is true even if there are $40,000 of unsecured credit cards, which will be discharged at the end of the case despite not being paid anything in this example.
If on the other hand it only takes $10,000 to satisfy the car loans, tax debts, attorney fees, trustee fees and administrative costs outlined in the prior example and the debtors still have $500 available then in theory they could pay off the required items in the plan within 20 months. However the ACP is 3 years (36 months) and once the items in the plan are paid for the debtor was continue to make payments of their Disposable Monthly Income to the plan for another 16 months. Those funds, an additional $8,000, would then be paid out to the claims filed by the $40,000 of unsecured credit card claims.
The basic idea in bankruptcy is that you should pay your unsecured creditors something if your budget shows that you can afford to do so during the first 3 years of a below median case. If you do not have any money available, then you are generally not required to pay them even though you are making a payment to other creditors.
Having discussed the basic manner in which disposable monthly income is determined we now turn to what is required for a below median debtor to stretch their case beyond 3 years. The facts of In Re Engel (https://www.ksb.uscourts.gov/sites/ksb/files/opinions/REN_19-11273-47_0.pdf) will be discussed and illustrate this situation and how if below median income earners or households show good cause and good faith, the court may extend payments beyond 3 years, but no longer than 5, and whether a fixed amount of time for the case must be stated.
The Engles owe three secured creditors and administrative priority claims. They owe MidAmerica Auto Finance $14,800 secured by a 2014 Chevrolet Cruz. They also owe Auto Choices LLC $1,912 secured by a 2005 Dodge Stratus. In addition, they owe RNR Tire Express $479, secured by the four tires on the Stratus.
If they attempted to pay these debts under a 3 year plan their payments would be $675. The Engles budget after accounting for their basic expenses did not appear to support the $675 payment. The Engles only have $432 of net disposable income they can use to make a plan payment.
The Engles proposed to repay these creditors over a longer period of time with language in the plan stating they could extend the term “as necessary” to repay these creditors. Here, a payment of all the Engles disposable income will result in almost a 5 year term. There was no definite amount of time set for the plan to run but it would pay nothing to the unsecured creditors.
The trustee stated 2 reasons for his objection to the plan but in reality there are 3 distinct objections. First that the plan was not feasible. Second that the debtors failed to state sufficient cause for the debtors to extend their plan beyond 3 years. Third, the plan did not set a specific duration or period of time for the extension of the plan.
Does this mean that they can not file a Chapter 13 and be forced into a Chapter 7? Or does it mean they will have to surrender some secured property and lower the payment to get within the 36 months requested by the trustee? Possibly neither.
This part of the objection is an afterthought. The court pointed out that the debtors would not be able to meet the requirements of a $675 payment over three years per their budget. They could make the lower payment in an extended case. If the court allowed the extension of the plan to make the lower payments then the feasibility objection would be overcome.
In Kansas, no definite number of payments is required
The court recognized that the trustee’s real issue is that there is no finite number of payments proposed. The court notes that there is no requirement for a finite number of months but that modifications may extend “the time” for payments as long as it is not longer than 5 years from the date of first payment. While other courts may require a plan specific time period, the Kansas Form Plan does not require a specific number of payments. The court also rejected the trustees argument that the effort required by the trustee’s office to track these types of plans was overly burdensome.
Good Cause to extend the plan
In Engel, the debtors want to extend their plans because they can not afford to pay the secured obligations under a 3 year term and need more time. An extension past the 3 year mark for a below median debtor must be completely voluntary and the debtor must show good cause for the extension. Showing good cause depends on the facts of the case and there is not much case law addressing this issue. Colliers treatise suggests that “extensions up to the five year maximum should be allowed without difficulty in these circumstances, since without them the debtor may be unable to obtain effective relief under chapter 13”.
What it means for other cases
In Kansas you can file a plan in a below median case and stretch that plan out if you have cause to make a lower payment over a longer period of time. You should make sure that if the plan needs to be extended that your budget matches up with the proposed payments and that it is clear what you are doing. This is a common strategy used by attorneys to get a payment that can be more easily handled by the debtor. You do not have to specify exactly how long the case will run as long as you state that it will run long enough to make the “necessary” payments under the proposed plan.
Filing a bankruptcy is a complex choice. The options in Chapter 7 and Chapter 13 are difficult to manage when you begin to apply the facts of a given case. If you have any questions about what would happen if you were in need of a bankruptcy please don’t hesitate to give us a call. We have bankruptcy attorneys in Wichita, Topeka, Lawrence, and Overland Park and we are available to talk on the phone, over the internet, or in person. Please give us a call today.