The question of how much a person’s monthly Chapter 13 bankruptcy payment plan will be is a question with a short answer and a long answer.
The short answer is that, each month in your Chapter 13 proceeding, you will pay to the Chapter 13 Trustee assigned to your case—what you can afford to pay.
Sometimes, you’ll be required to pay more than you can afford to pay, on the other hand.
The mysterious quality of that short answer is why it is necessary to explore the longer and more specific answer to that question.
First, let’s review some Chapter 13 basics so that we are working from a common understanding on this topic.
How Does Chapter 13 Bankruptcy Work in Detroit?
Chapter 13 bankruptcy is a “reorganization” bankruptcy.
That is, unlike the Chapter 7 “liquidation” bankruptcy, you are not discharging your debt entirely without any personal contribution.
The Chapter 13 process requires that you make a payment every month to the Chapter 13 Trustee, who then distributes those funds to your creditors.
Your creditors are paid by the Trustee in a priority depending on what sort of debt they hold.
Your debts are prioritized by whether they are secured, like a car payment or mortgage, or unsecured, like a credit card or medical bill. They are also classified as to whether they are so-called “priority debts,” such as child support or tax obligations, or “non-priority, such as, again, credit card debts.
Credit card, medical, and other non-priority, unsecured debts are paid last, after all other creditors, and even your own bankruptcy attorney.
They only get whatever remains after secured higher priority debts and expenses are paid. Anything you may still owe them “on paper” at the end of the 3-5-year Chapter 13 payment process is discharged without need for further payment.
In a Chapter 13, because of this payment and disbursement mechanism, there is no need for the seizure and liquidation of your personal assets as can occur in a Chapter 7 bankruptcy.
So back to our question: how much will you have to pay each month in the Chapter 13 payment plan?
The Chapter 13 Plan Payment: The Basic Calculation
The general idea of Chapter 13 bankruptcy is that you pay only what you can afford to pay, on a monthly average basis.
Two schedules (sections) of your bankruptcy petition already require you to average out your household’s monthly income and your household’s monthly average necessary expenses.
The difference between these two average totals is the amount of your monthly Chapter 13 plan payment.
Sometimes, this simply is your monthly Chapter 13 plan payment, if none of the complicating factors discussed below happen to apply to you.
Otherwise, this basic arithmetic is just Step One in the Chapter 13 plan payment calculation process.
Consider a 4-person household with 2 (married) parents and 2 minor children.
The children earn no income, but both parents work. One is a salaried manager at an insurance company and the other is a self-employed web designer.
The net bi-weekly income of the manager parent, after all taxes and insurance and 401(k) contributions are deducted from his or her paycheck, is around $2,300.00.
It is important to note that this parent is paid bi-weekly, which means that he or she receives 26 paychecks per year. That is, he or she is not paid “twice per month” but, rather, every other week. Twice per year, he or she receives 3 paychecks in a month rather than two.
Thus, to calculate this parent’s net monthly income, the bankruptcy schedule requires that the net (after deductions) monthly income number utilized be: (average paycheck amount) x 26 / 12 months.
It is a common mistake to presume that, when you are paid bi-weekly, your average monthly income is (paycheck amount) x 2.
The net monthly income of the self-employed web designing parent is highly variable, depending on the month.
Self-employed and commission-based earners have good months and bad months.
What this parent must do is average the income earned over an entire year, and then deduct monthly average business expenses from that monthly average amount.
Our self-employed parent, on average, earns $1,000 per month.
They are truly a household that requires two incomes to properly feed, clothe, house, and educate two children.
As for household expenses, what can or can’t be included in the list of necessary household expenses is highly specific and governed by both statute and by prior judicial decisions from the judges in the Eastern and Western District of Michigan Bankruptcy Courts and by those of the Sixth Circuit Court of Appeals.
In other words, just because you write down on the questionnaire that your bankruptcy attorney gives you that you spend $1,000 per month on hair-styling or golf lessons does not mean that expense is going to fly once the petition is filed.
In the case of our example household, they have only the basic expenses and nothing controversial.
Out of that $3,500 per month in average net take-home pay, our household expends $3,100 on average for food, clothing, transportation, medical expenses, and other genuinely necessary expenses.
One of the children is only 4 and attends full-time daycare at a cost of approximately $900/month.
$3,100 subtracted from $3,500 is, of course, $400 per month.
This household’s Chapter 13 plan will be, if there are no complicating factors as discussed below, $400 per month.
It will be deducted automatically by court order from the salaried manager parent’s bi-weekly paycheck in the amount of $184.62 per pay-period (26 paychecks per month, remember).
The Chapter 13 Trustee and Your Income and Expenses
Complicating Factor #1 is the Chapter 13 Trustee.
In the Eastern District of Michigan, the Chapter 13 Trustee will be more or less aggressive in terms of objecting to the Chapter 13 Plan that you and your bankruptcy attorney draft and file depending upon the city in which you file.
In Detroit, the Chapter 13 Trustees are quick to jump on and object to anything that can reasonably be alleged to be “unreasonable.”
Our Example Family has a few problems if they are filing in Detroit. One is the salaried manager parent’s 401(k) paycheck deduction.
The Chapter 13 Trustees in Detroit have aggressively litigated the issue of whether it is reasonable to pay into a retirement account “at the expense of your creditors” in a Chapter 13. Detroit bankruptcy judges have largely decided in the Trustees’ favor.
If you file an income schedule disclosing a sizeable (or even modest) 401(k) deduction, even if you’ve been doing it for 20 years, expect a Trustee objection.
Our Example Family’s daycare expense?
Beyond reasonable. Nevertheless, it is possible that the Trustee will object anyway to at least demand supporting documentation proving the expense.
The Effect of Your Assets on Your Chapter 13 Plan Payment
It is sometimes difficult to accurately predict, on a line-by-line basis, what income deductions and household expenses will raise red flags with Chapter 13 Trustees.
The second Chapter 13 plan payment complicating factor is easier to predict.
Your assets and their values must also be fully disclosed and listed in your bankruptcy petition schedules.
For each asset or item of property that you list, your bankruptcy attorney will, to the extent possible, attempt to “exempt” it from the bankruptcy estate that is created when you file your bankruptcy case.
Exemptions are statutory provisions allowing you to remove certain types of property up to certain dollar value amounts from this bankruptcy estate.
If an asset has its full value exempted from the bankruptcy estate, it is not subject to seizure and liquidation by the Trustee in a Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, although assets are never liquidated, the listing and exempting of assets is also required.
Recall that, as noted above, unsecured non-priority creditors are only paid whatever is remains out of your monthly plan payments after other creditors and case expenses (attorney and Trustees’ fees) are paid.
There is no requirement that these unsecured creditors normally receive any minimum amount of money.
Unsecured creditors may each receive 1 cent on the debts owed to them and no more (or even less, theoretically).
However, if you do have property that is too valuable or too esoteric to fully exempt or to exempt at all, your unsecured creditors will need to be paid, as a pool (not individually), the dollar value equivalent of that non-exempt property.
That’s a lot of legalese.
This is called the Best Interests of Creditors Rule, otherwise known as the Liquidation Analysis.
The long story short is that your unsecured creditors can’t receive less from your Chapter 13 than they would have if you’d filed Chapter 7 bankruptcy and had that non-exempt property seized and liquidated.
Thus, for example, if you own a comic book collection worth $15,000, and you are only able to exempt $5,000 worth of its value, your unsecured creditors will need to be paid a minimum of $10,000 in your Chapter 13 bankruptcy.
Your expenses will need to be tightened to order to generate a greater amount of “net income” on a monthly average basis and, thus, a higher monthly plan payment engineered to result in a $10,000 net distribution to your last-to-be-paid unsecured creditors.
If you can’t afford to pay this new amount, it may be that Chapter 13 bankruptcy is not the best option for you. You will need to discuss this with your bankruptcy attorney.
The Means Test and Your Chapter 13 Plan Payment
Finally, the Means Test can also affect the amount of your monthly Chapter 13 plan payment.
The Means Test is well known as the mathematical formula that determines whether or not your household earns too much money for any member to be eligible to file for Chapter 7 bankruptcy.
Less well known is that it must also be completed in a Chapter 13 bankruptcy.
The Chapter 13 bankruptcy Means Test determines whether you are eligible to file a 3-year Chapter 13 plan or whether you must file a 5-year Chapter 13 plan or a 100% Chapter 13 repayment plan.
It also calculates an end-result number that represents your Disposable Monthly Income, or “DMI.”
Rather, this DMI number represents what the Means Test thinks your disposable monthly income is.
This number has only a vague resemblance to the actual amount of income you have left over after paying necessary monthly expenses each month.
This is because the “expenses” and deductions from gross income allowed on the Means Test are even more restrictive than those allowed on the expense average petition schedule described above.
Further, many of the deductions that are allowed are for flat amounts governed by statute and current IRS allowable household expense figures and are not at all based on what a household may actually spend in a given month.
That all said, there is a rule in Chapter 13 of the US Bankruptcy Code requiring that non-priority unsecured creditors receive no less than DMI multiplied by the number of months in the Chapter 13 Plan.
Thus, if you have $100 in Means Test DMI and are filing a 60-month Chapter 13 plan, you’ll be required to make a monthly plan payment large enough to leave $6,000 for your unsecured creditors after everyone else is paid.
This rule has more than once made Chapter 13 an unaffordable process for needful debtors.
The Chapter 13 Plan Payment: The Bottom Line
The bottom line is that you should not attempt to “DIY” a Chapter 13 plan payment at home on your coffee table.
Analyzing all of these factors requires the skilled eye of an experienced Detroit-area bankruptcy attorney.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert with more than 28 years of experience assisting Michigan Chapter 13 Clients.
If you are considering filing for bankruptcy, contact us to discuss your options.