Chapter 13 is known as a “payment plan” or “reorganization” bankruptcy for individual debtors.
The purpose of a Chapter 13 is to repay as much to creditors as you can over a three to five-year period.
The big picture answer
First, think big picture.
You have income, and you have expenses. The difference between the two is your disposable income. It’s what’s left over each month. With a Chapter 13, you commit that income to the plan. Above median income debtors must pay into that plan for five years. Below median income debtors are only required to pay for three years. And, of course, if you repay your creditors 100%, you can complete your plan as soon as all debts are repaid in full.
The measuring period for income (called “current monthly income” or “CMI”) is the six months prior to the month in which you file bankruptcy. The system looks to that income then doubles it, divides by 12, and, voila, you have Current Monthly Income.
This obviously yields inaccurate results much of the time. For example, it may count income during a time in which you received a one-time bonus, a large gift, overtime that is no longer available, or even income from a job you no longer have. Still, it’s our starting point. (I’ll address how we can adjust for this inaccuracy in a later post.)
We then (for above-median income debtors) use form B22C, known as the “means test,” to determine what you must pay to your unsecured creditors (like Visa, MasterCard, medical providers, or mom if she loaned you money). The form then subtracts three main types of expenses: (1) payments on secured debts (like car payments); (2) payments on priority debts (those which must be repaid in full like certain tax debts, child support arrearages, or other debts); and (3) allowable expenses.
Think of this as a three-legged stool
The third leg of the stool, allowable expenses, is where we spend the most time with the means test. After all, your priority debt must be repaid in full, so there’s not much we can do about that. And your secured debt is also fixed. If, for example, we must pay off a car loan in the plan, math constrains us. We typically repay secured debt at 5.25% interest over the the life of the plan. So if it takes $343 per month to do that using an amortization schedule, then that’s what we must pay.
But your expenses are unique to you. You may have a longer commute, an older vehicle, medical problems, a pattern of giving generously to your church, a home with large utility bills, and other unique budgetary needs.
And here’s where you need to pay attention and help your attorney
I recall a signing appointment for a client not so long ago. The means test assumes that out-of-pocket medical expenses for each member of the household (under 65 years old) is $60. This means for a family of four, the number would be $240. We had given the client a questionnaire like we always do, had a two-hour meeting to go over that questionnaire, exchanged emails, and discussed the case on the phone. Finally, after all the documents were prepared and we were about to file the case, the client said that the medical expense entry was way too low. We discussed various medicines, doctor’s visits, and health problems. I recall that the normal out-of-pocket medical expenses for that client were about double what the means test used as its default amount.
Engage the brain!
I once knew an attorney who was fond of saying, “engage the brain!” What she obviously meant was “think” or “pay attention.”
Here’s how this works: for every dollar of expense we list on the means test, your plan payment is lowered by that amount. And that’s normally over five years!
In our example, if we understated that client’s medical expenses by $250 per month, the client would have paid $15,000 more into her plan than the law requires. And the client’s chances of successfully completing the plan would be much lower because she would have been left with too little to live on during the plan period.
Hopefully, you get the point. Give your attorney complete information about your expenses. That, in turn, directly affects your Chapter 13 plan payments.