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:
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.
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.
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.