Written by Charleston Bankruptcy Lawyer, Russell A. DeMott
Once we decide a Chapter 13 bankruptcy is in your best interest, the next question you’ll probably ask is, “how much will my Chapter 13 payment be?” That’s understandable. You’ll be in Chapter 13 for three to five (and usually five) years. You want to know how much you’ll have to pay so you can plan accordingly.
However, the problem is that your Chapter 13 plan payment is the result of very extensive calculations. First, we look to schedule I (income) and schedule J (expenses). Prior to 2005, we simply took your income and subtracted your expenses–voila, your payment. For example, if you had $6,000 in income and $5,000 of expenses, your payment would be $1,000. However, after October 17, 2005, we are required to fill out a complicated form called the “means test” (or officially known as B22C in Chapter 13). The form has 60 sections. At the end, the form shows what your unsecured creditors should receive in your bankruptcy plan. From that number, we can extrapolate what your payment should be. If the form, for example, says your unsecured creditors should receive $300 per month, and we have $300 to pay for other things (taxes, attorney’s fees, trustee’s fees, cars, etc.), we know that your payment should be $600 per month.
It sounds simple…
But it’s not. The most glaring problem with the form is that it assumes your income over the last six months is your income at filing. Obviously, that’s not always the case. Maybe you lost a job and got another one paying less. Maybe you had overtime, but it’s been eliminated. Maybe you and your spouse were working, but she lost her job.
Because of this faulty premise, the means test pumps out absurd numbers much of the time. We must then correct for the inaccuracy by figuring out your RCMI (my term, “real current monthly income”). From there, we begin to make entries on the form.
But what if the form results in a payment very different from schedule I (income) and J (expenses)?
This frequently happens because of another obvious problem. Schedules I and J are “the real deal” as I call them. The means test, on the other hand, uses arbitrary allowances. To take one example, the means test gives you a monthly allowance of $514 for each car on which you are making payments. What if I only have two more payments of $300? It still gives you $514! You can see with this one example how there can be tension between the fantasy football numbers the means test uses and the real life numbers on your income and expense schedules. In some instances, those differences are in the favor of the debtor, and in some instances the differences go against the debtor–for example if your rent is higher than the paltry allowance on the form.
What numbers does the bankruptcy court use?
And like any other bankruptcy question, the answer is: it depends. Our trustees and bankruptcy judges here in South Carolina tend to be fond of reality, rather than some absurd number pumped out by a (really really) poorly designed form. If the form says you should pay $300 but you should really pay $600 to unsecured creditors, I’d be willing to bet you’d have a hard time getting your case confirmed. So too, if the form says you should pay $600 to your unsecured creditors and your budget (as shown on I and J) shows only $300 is reasonable, you’d have a good chance of getting your plan confirmed.
Wrestling with the colon of the Bankruptcy Code
I refer to the means test form as “the colon of the Bankruptcy Code” because of what it produces. The form, and the 2005 “bankruptcy reform,” has amounted to solution to a problem which didn’t exist. The law made Chapter 13 far (far, far) less appealing by requiring five-year plans, which, in turn, made Chapter 7 bankruptcy the more preferred bankruptcy chapter. I now file Chapter 7s (or use non-bankruptcy options) with far more frequency than I did prior to the law being “reformed” in 2005. The law requires that lawyers, clients, bankruptcy trustees, and bankruptcy judges spend considerable time on a form that all-to-often produces absurd and inequitable results for both debtors and creditors. And now you hopefully see how much work it takes to determine your plan payment!