Chapter 13 bankruptcy is generally used by two types of individual debtors: (1) either debtors who own an asset or assets – such as a home, investment property, vehicles, etc. which are secured by a loan – on which they are behind on payments, want to keep the asset, and need time to catch up and repay any amounts in arrears, or (2) who make “too much” income to qualify for Chapter 7 bankruptcy protection.
The amount a debtor has to repay creditors through the Chapter 13 Payment Plan is dictated by how much monthly disposable income they have. Generally speaking, and as a very simplified approximation, a debtor’s disposable income is the difference between their gross income and their necessary and ordinary expenses. (Please note that the actual calculation of a debtor’s monthly disposable income is a bit more complex, particularly in cases where a debtor’s gross income is above the median income for a household of similar size. For a detailed explanation of how a debtor’s disposable monthly income is calculated given the facts and circumstances of your case, always consult an attorney.) The analysis, however, does not end there. Even if a debtor has disposable monthly income (DMI), those amounts must be enough to allow a debtor to pay for: 1) all amounts that they are behind on for secured assets, such as a home, which they want to keep, 2) the bankruptcy trustee’s fee, 3) any attorney fees paid through the Plan, 4) any regular monthly amounts such as a mortgage or car payment that have to be paid through the Plan, and 5) any amounts to which unsecured creditors may be entitled (which in some cases may be zero dollars, but in cases of debtor’s with unexempt property may be higher.)
Things to Do and NOT Do Before You File
Before you file for Chapter 13 bankruptcy, every debtor should get:
- Copies of pay stubs and/or other sources of income for the 6-months prior to the calendar month in which you expect to file for bankruptcy. For example, if you expect to file your case any day in May, you should get pay stubs for the November 1 – April 30 period;
- Copies of your last 4 years of federal tax returns;
- Copies of 6 months of any bank statements and investment accounts in your name.
A debtor should, naturally, also consult an attorney about the facts and circumstances of their case. Equally as important, a debtor should NOT transfer title of any of their property prior to filing for bankruptcy without first consulting an attorney in order to ensure no potential fraudulent transfer issues can arise from such a transfer and complicate the debtor’s potential bankruptcy case. Finally, other than for a car loan or mortgage payment, a debtor should avoid paying any creditor more than $600 in the 90 days prior to the filing of their case in order to avoid the allegation that the debtor has given preferential treatment to one creditor over others.
Things to Do After You File
If you are current on your mortgage and/or car loan, try to have those payments be made through automatic debits from your bank or credit union accounts for at least the 6 months prior to your bankruptcy. If you are current on your mortgage and/or car loans and have been making those payments via automatic debit prior to the filing of your bankruptcy, you can elect to keep making those payments directly and outside the Chapter 13 Plan. The advantage of making direct payments outside of the Plan is that it saves you money as the bankruptcy trustee fee is normally 10% of any payments made through the Chapter 13 Plan. The less you pay through the Plan, the smaller the bankruptcy trustee fee.
Also, if already have direct debit for your mortgage or car loan and are current on payments prior to filing, then ask your attorney to give you a letter which you can send to your mortgage or car lender and which authorizes them to continue to pull debits from your bank or credit union accounts and allows them to talk to you directly about your account status. This is necessary as, absent this type of letter, many lenders will suspend automatic debits and refuse to talk to debtor in order to avoid running afoul of the injunction which prevents collection actions and is created automatically when a debtor files for bankruptcy.
Finally, make sure you make your Chapter 13 payments on time and keep your attorney appraised if any circumstances come up – such as job loss or medical emergency – which could affect your ability to continue making full and timely Chapter 13 payments.
As always, if you have questions about this article or bankruptcy in general, please feel free to contact us!