You can succeed at a Chapter 13 plan
Video Transcribed: Edward Kelley with the 188-debtline, answering your bankruptcy questions. We’re finishing up the series on the basics of chapter 13 today, and I’m going to talk first a little bit about disposable income, which is the key to the whole thing, and then ways you can best succeed at completing a chapter 13 plan and getting what you need to get done.
So disposable income, I just realized I hadn’t talked enough about this. So the key to remember here, chapter 13, your payment is not based on what you owe except in a strategic practical sense that you may determine. It is only based on what you can pay. So from the point of view of the trustee, your payment is based solely on your disposable income, and that is my biggest job as your chapter 13 attorney, is to make sure that disposable income accurately reflects what you really have available to pay the chapter 13 trustee.
They can be tricky about what they consider a valid expense. Like for example, even if you have a mandatory contribution to your 401k, most of the time that’s not considered a valid expense. That’s one I can’t do much about. And that’s just based on case law, considered in a roundabout way to be voluntary, even though you may not have a choice about it. And if you have unusual expenses that they don’t…
The basic rule is, is it mandatory or is it voluntary? If you’re paying your kids college who lives far away, generally you’re not going to certainly get full credit for that. You may get some sympathy. It is a negotiation, but that’s not something you have to do, even if that’s being a good parent.
So, that’s my job to advocate on your behalf and negotiate with the trustee to make sure we have an accurate reflection of your disposable income, and as we’ve talked about in other videos, if you have to pay an arrearage on a house, we may be looking the other way, like we’ve got to get your disposable income up in order for the plan to be feasible.
So, you have to pay off $10,000 in 36 months, but you don’t make enough money. Your paychecks don’t reflect enough money to make that payment, and you’ve got a feasibility issue, your disposable income is too low. In that case, we might have to look at a voluntary contribution. Again, can’t be a loan. But a family member or non-filing spouse or someone who’s going to make enough of a contribution to allow you to have a big enough payment to pay that arrearage on the house.
Most of the time it’s the other way around though. So again, let’s say you’re in a five year plan, 60 months, the typical one. You owe $60,000, and your disposable income is $1,000 a month or more, you’re going to have to pay 100% of those debts because your disposable income pays it all off. And again, it’s not based on what you owe, and sometimes a 100% plan can be great. It means you’re paying everyone in full, which means you get to keep all your stuff. You don’t have to generally worry about exemptions.
Most of the time you can keep your tax refunds, you can keep your toys, and it will provide a stop gap, and it will impose the automatic stay, which we talked about. So none of these individual creditors can talk to you or collect from you at all. It’s all goes to the bankruptcy court, and we’ll talk about how to make that successful and it gets paid to your creditors.
Now, let’s say you make the equivalent within that five year period, your disposable income will total 30,000. We look at it as a monthly, like your disposable income’s $500 a month, which I think would equal out to the 30,000. So if you have $500 a month leftover, you’re going to pay your creditors 30,000, so you’re going to have a 50% plan, 50% payment to unsecured creditors.
So I think that probably all… that’s not too complex, so I’m probably understandable. So if you make 250 a month and you’re talking about paying $15,000, and having $45,000 discharged. If I’m off on the math, I think you get the idea.
So that is how disposable income works. Again, if you have a specific debt you need to pay, and this comes into play a lot. If you have 40,000 in tax debt, but you only have 30,000 to pay, that other 10,000 can’t be discharged. So you’re going to have to have enough to pay off that tax debt in the plan or it’s going to be unfeasible. And the way a chapter 13 works, just like a 7, we file it, you have a 341 creditor meeting, which is an opportunity for your creditors to show up and ask you questions, and basically cross examine you usually because they’re trying to object to an amount you’ve claimed or get some collateral back.
Most of the time it’s not a surprise. They’ve already contacted me. And for the trustee to ask you, they have certain questions they have to ask and always ask. Basically, did you provide this information? Did you sign this with your own signature? Is it correct? Did you lie? Did you list all of the property you have and all your creditors. And then if they have specific questions, and they have access to everything, so if you haven’t told me about property you have, particularly real property, they may know about it and spring that on you at the 341.
So always be honest with me or whoever your bankruptcy attorney is, but at the 341 meeting, trustee will also present any objections. Other creditors may have filed objections as well, and those have to be resolved before confirmation. So the confirmation hearing is generally not something you’re going to show up at. You only show up and I only show up if there’s a fight.
If I’m saying this plan that we have proposed needs to go forward, and at this point that it’s me versus the trustee in front of the actual bankruptcy judge. The bankruptcy judge really has nothing to do with it unless we can’t work things out with the trustee. Point you get to a judge though, you generally don’t want to have a fight with the trustee, although there are times it’s absolutely necessary.
So how can you succeed at a chapter 13 plan? Let’s say you’ve got a confirmed, you’ve got an amount, and all you have to do is finish it out. So there’s different options to pay. You can set up this TFS bill pay where they deducted out of your check automatically. The key here is don’t leave it to yourself, don’t leave human error in it. So the best possible option and what the trustee likes to do is a wage deduction.
Just give your employer information, they garnish it is right out of your check, and you never have to think about it as long as you have that job. Some districts require that. I believe the Eastern district at this point, they do not allow you to do it any other way if it’s at all possible, unless you’re self employed.
Another good option, if you absolutely just don’t want it to come from your job is this TFS bill pay auto pay. Have it come right out of your bank account. Of course you can start and stop that. And if you don’t have the funds, you’re still leaving yourself open to a little bit of problem, but you don’t have to physically think about it and remember to write a check and send it. And when you pay the bankruptcy court, you end up sending a check off to Memphis, and it can take many days to post.
So you have to send it way early in order for it to post on time. Depending on the district, some of them are real quick to file a motion to dismiss your case if you’re late on a payment. So DFS bill pay is a great way to do that, to set it up on a date that you know it’s going to post in time. And there you go. And there’s also a Money-gram option if you are behind that will post that day.
The trustee can see it immediately, costs a little bit extra, but if you’re in a bind, and catch it up, a little late or just in time, that’s an option. Other thing, like I said, you can send a check to Memphis. Don’t recommend that. If you want to succeed, absolutely 100% have it garnished out of your wages, and you don’t have to think about it. Or slightly less safe, but better than just writing a check is the TFS auto-pay. Can set it up so you never have to worry about it posting in time. If you do that and if your income stays the same, you shouldn’t have any trouble finishing.
And the great thing about a 13, we’ll close the series with this, is if your income changes, you lose your job, you end up unable to pay, you can file a motion to convert to a chapter 7 relatively painlessly. I’ve done that for a lot of people. And you also have a motion, you can file a motion just to modify your payment down to a lower amount, not convert it to a 7, but that reflects your income now. And most trustees are very understanding. Your income is what it is, and if it drops and you’re not able to pay the payment you used to, then you can modify it. Or if it gets low enough, you can just turn it into a liquidation.
So I hope all this has helped you understand a little bit about chapter 13. It’s a pretty complex process, but this is the basics. And if you ever have any direct questions for me, Edward Kelly, you can reach me at 188-debtline or you can always email me at firstname.lastname@example.org