Chapter 13 cases provide for a monthly payment to a bankruptcy trustee over a 3 to 5 year period of time. Generally, a person files Chapter 13 when their income is too high to qualify for Chapter 7 or if they are disqualified from filing Chapter 7 due to a prior bankruptcy being filed in the past 8 years or if there are certain assets that would be liquidated in Chapter 7.
There are four basic factors which determine the amount of the monthly Chapter 13 payment:
- Difference between Income and Expenses: A person must pay the difference between their net take-home pay and their basic monthly living expenses. A budget must be submitted to the Court showing all monthly income and expenses. This sounds simple enough, but since income can vary from month to month with overtime and bonus pay that is not guaranteed, it is important to measure income by averaging out the highs and lows of the income over a long period of time. Also, what is considered a “basic living expense?” Well, that answer varies from judge to judge and from trustee to trustee. Is a $200 monthly cell phone charge a basic living expense? How about $300 per month expense for tobacco use? Much litigation in Chapter 13 surrounds how to measure income and what expenses are reasonable.
- Tax & Child Support Debts: A requirement of all Chapter 13 Plans is that they fully pay back all Priority claims, which basically are comprised of child support and income tax debts. Not all income tax debts are considered to be “priority debts.” Generally, only income tax debts incurred within three years of filing bankruptcy are classified as priority debts, however, there are many special rules and exceptions to this rule.
- House, Auto & Other Secured Debts: The Chapter 13 Plan in Nebraska must provide for payment of the auto loans for any vehicle a person wishes to keep. Some states allow the debtor to pay the auto loan outside the bankruptcy plan, but Nebraska requires these loans to be paid in the plan. If a person is behind on their mortgage payment and wishes to keep the home, the Plan must provide for payment of the past due payments with interest over the course of the plan. Furniture loans (i.e., The Nebraska Furniture Mart credit card) must be paid through the Plan as well.
- Liquidation Analysis: Chapter 13 Plans must pay to unsecured creditors at least as much as they would have received if a person’s non-exempt property were sold in a Chapter 7 case. For example, if person had $20,000 of non-exempt equity in their home (only $60,000 of home equity is protected in Nebraska to qualified individuals), the Chapter 13 Plan would have pay at least that much to the unsecured creditors during the life of the plan.
Many clients wrongly assume that all debts must be paid back in the Plan. This is not true. Although some plans pay back 100% of the debt, the majority of plans pay back a small portion of the unsecured debt and some plans pay virtually nothing. The amount of the monthly Chapter 13 payment is generally determined by application of the four factors listed above.