Formulating a Confirmable Chapter 13 Plan: Requirements and Calculations
Find out what it takes to create an acceptable Chapter 13 Bankruptcy repayment plan.
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If you're thinking about filing a Chapter 13 Bankruptcy, you'll need to propose a repayment plan. This article describes the basic conditions under which your plan should be confirmed. Pursuant to 11 U.S.C. § 1325(a), the Chapter 13 plan shall be confirmed if the following conditions are met:
- any fees, charge or amount to be paid prior to confirmation has been paid
- plan is proposed in good faith
- values of property (as of the effective date of the plan) to be distributed to the allowed unsecured creditors under the plan is equal to or greater than the amount that would have been paid under a chapter 7 liquidation
- Secured Creditors:
- have accepted the plan;
- plan provides that the secured creditors retain their liens until the earlier of:
- secured debt is repaid; or
- discharge is granted under section 1328
- plan provides that if the case is dismissed or converted without completion of the plan, such lien shall be retained by the secured creditor to the extent recognized by applicable non-bankruptcy law
- value of the property is not less than the allowed secured claim amount
- payments to secured creditors are in equal monthly payments
- adequate protection payments are provided to the holder of the claim secured by personal property
- or, property is surrendered
- Debtor is able to make all payments under the plan
- Debtor’s action of filing the petition is in good faith
- Debtor has paid all amounts required to be paid under a domestic support obligation and stays current during the pendency of the case
- Debtor has filed all applicable income tax returns as required b section 1308
In addition, if the trustee or unsecured creditor objects to the plan confirmation, the court cannot approve the plan unless the value of the property to be distributed is not less than the amount of such claim, or the plan provides that all of the projected disposable income received during the applicable commitment period will be applied to make payments to the unsecured creditors under the plan.
How to Determine Reasonable Dividend to the Unsecured Creditors
Formulating a confirmable Chapter 13 Plan can be complicated. Several factors combine to determine the reasonable dividend that the non-priority unsecured creditors should receive, which include a liquidation analysis to determine equity, budget review to determine disposable income, and outcome of the median income test and means test.
After determining which exemption laws apply, review which assets have valid liens. Once the liens have been examined, and the exemptions have been applied, the remaining equity in the assets is subject to creditor action. In other words, the unsecured creditors, which includes both the general and priority unsecured creditors, at a minimum must receive a dividend that is equal to the unexempted and/or non-liened equity in the asset(s).
Example: Tommy Debtor is 25 years old and single with no children. He has lived in Virginia all of his life. He is current on his rent, and drives a 2010 Ford Escape that is valued at $20,000. The car loan’s payoff is $2,000. He is current on the car loan payments, and wants to keep it.
Virginia’s Poor Debtor’s exemption allows $6,000 for an automobile, leaving $12,000 equity after paying off the lien. The homestead exemption allows a qualified Virginia resident to exempt $5,000 per individual. In this example, his homestead exemption will only protect $5,000 of the remaining $7,000 equity. The unsecured creditors would have received approximately $7,000 under a Chapter 7 liquidation, and therefore, the dividend to unsecured creditors in a Chapter 13 case must at a minimum repay $7,000.
Outcome of the Median Income Test and Means Test
As discussed earlier, if the client’s income is above the median income level, the means test is evoked, which in a Chapter 13, determines the minimum amount to be repaid to the general non-priority unsecured creditors. For example, if the client is above the median, and after deducting the appropriate items, the DMI (disposable income) is $200, then the minimum amount to be repaid to the unsecured creditors is calculated by multiplying it by 60 months. In this example, $12,000 becomes the minimum amount to be repaid.
Another consideration to finalize the amount to be repaid to the unsecured creditors is the client’s budget. Despite the above two factors, if your client has the income to repay all of his debts in full, then it must be a 100% repayment plan. The budget reflected in the difference between Schedule I (income) and Schedule J (household living expenses) must show that your client has the ability to repay his debts under a Chapter 13 plan.