Chapter 13 functions as a court supervised payment plan. However, there is much more to a Chapter 13 than simply submitting a repayment plan and sending in money. Your Chapter 13 plan must satisfy the requirements of the Bankruptcy Code and you must resolve objections filed by either the Chapter 13 trustee, creditors or both. As you will see, the Bankruptcy Code requirements are generally a matter of making the right calculations, while trustee and creditor objections are more a matter of how much you can be squeezed.
Requirements of the Bankruptcy Code
There are basically four requirements set out for Chapter 13 cases in the Bankruptcy Code:
- Means Test Projection of Disposable Income Test. If your household income exceeds the median income for a similarly sized family in Georgia, we are required to complete a detailed means test analysis of your spending. The means test requires us to use historical data about your household income, reasonable expenses allowances as permitted by the United States Trustee and some expenses from your actual budget. All of these numbers are plugged into a formula and the result will be a number that, in theory, represents your disposable income.
- Best Interests of Creditors Test: Unsecured creditors in Chapter 13 must receive at least as much as they would if you were filing Chapter 7 and your assets were being liquidated by a trustee. Often, Chapter 13 debtors own assets that are not fully sheltered by the Georgia exemption statute. Once we figure out how much equity you have in non-exempt assets, we divide that by your unsecured debt to figure out how much your unsecureds would get in a Chapter 7 liquidation.
- Example: Tom owns a house worth $100,000, subject to a $70,000 mortgage. He has $15,000 of unsecured debt.
- $100,000 – $70,000 = $30,000 equity. Tom can shelter $21,000 of this equity under the Georgia exemption statute, leaving $8,500 of non-exempt equity. $8,500 / $15,000 = .56666. Tom’s Chapter 13 case would therefore have to pay unsecured creditors at least 57 cents on the dollar to pass the best interest of creditors (also called the liquidation) test.
- Correct Treatment of Secured Claims: Secured claims other than mortgages must be provided for in your plan. Some secured debts must be paid in full in your plan, while others can be bifurcated, which means that the claim will be treated as a secured debt to the extent of the value of the property, with the remainder treated as an unsecured debt. Most secured creditors are also entitled to interest, and creditors secured by motor vehicles get special treatment. All of the rules relating to secured debts must be met for your plan to pass muster.
- Budget Test: In addition to the means test budget, you also have to submit a real life budget in your Chapter 13 plan. Does your real life budget leave you with enough money to fund the plan that these other tests mandate? The judge will not, for example, confirm a plan that contains a $100 per month food budget for a family of four.
In addition to the requirements of the Bankruptcy Code, we must also prepare for…
- Creditor and Trustee Objections: Creditors, and to a lesser extent Chapter 13 trustees want you to submit a plan that pays as much as possible to your creditors. By contrast, as your lawyer, I know that five years – the length of a typical Chapter 13 plan – is a long time. During that time you are going to need to spend money on home repairs, car repairs and you may have personal emergencies like an unexpected illness or a funeral that requires a last minute plane trip. Further, you are going to want to go to the movies periodically or go out to dinner with your family.
Our observation over the years has been that creditors and sometimes the trustee can get so focused on squeezing every last dime out of your budget for payment into you plan that they forget that you a real person who should not be expected to live on rice and beans for the next 5 years.
As your attorneys, we are also your advocates and we will make every effort, including arguing to the judge, if we reach a point where creditors or the trustee want more than you can practically give.