By Ullian Associates of The Law Firm of Ullian & Associates, P.C. on April 2, 2020
In a Chapter 13 Bankruptcy, the Debtor needs to file a Plan which outlines how they will address their debt. Then they will pay the monthly Plan Payment to the Trustee who then distributes the funds to the creditors. Below is a sample outline of a Chapter 13 Plan.
FACTS:
Sally Lotsofbills is behind on her mortgage payments. She is a single mother of two children. She grosses $3,800.00 per month and nets $2,800.00 per month in income and has $2,550.00 of expenses per month. The amount which can be used to fund her Plan is $250.00 per month (income of $2,800.00 less expenses of $2,550.00 = $250.00). Her assets and liabilities are as follows:
| Assets | Liabilities | |
| House value | $350,000.00 | |
| Mortgage | $250,000.00 | |
| Mortgage arrears | $10,000.00 | |
| Car (paid in full) | $9,000.00 | |
| Other assets | $8,000.00 | |
| Unsecured debts | $50,000.00 |
ANALYSIS:
One of the first things we must do in evaluating Sally’s situation for a possible Chapter 13 bankruptcy is to apply the Means Test. Her gross monthly income is under the median income for a household of three in Massachusetts so she is not required to be in a five-year Plan or to pay a dividend to her unsecured creditors. The next step is to determine the liquidation value of her estate.
- The house has a value of $350,000.00 and from that we subtract the mortgage of $250,000.00. There is $100,000.00 in equity. Sally has recorded a homestead on her house (which she has owned for 10 years), and therefore she gets a $500,000.00 exemption (using the Massachusetts homestead laws on her house). The liquidation value is $0.
- The car has a value of $9,000.00 and from that we can subtract the Massachusetts automobile exemption of $7,500.00. The liquidation value is $1,500.00.
- The other assets of $8,000.00 in personal property such a clothing, jewelry, and furniture can all be exempted, so the liquidation value is $0.
- In total Sally’s estate has a liquidation value of $1,500.00.
Based on the liquidation value, Sally would have to pay back to the unsecured creditors at least as much as they would receive under Chapter 7 (i.e., if the nonexempt assets were sold). We have determined this amount to be $1,500.00. Her unsecured creditors are owed $50,000.00, so if we proposed paying them $2,500.00 this is the equivalent of a dividend of five percent ($2,500.00 ÷ $50,000.00 = 5%). The $2,500.00 to unsecured creditors exceeds the liquidation value of $1,500.00. Sally could file a five-year Chapter 13 Plan as follows:
|
Mortgage arrears: |
$10,000.00 |
|
Unsecured debt: |
$2,500.00 |
|
Legal fee: |
$1,000.00 |
|
Trustee fee (10%): |
$1,350.00 |
|
Total |
$14,850.00 |
|
Plan payment: |
$248.00 for 60 months |
From this example, you can see that part of your Chapter 13 legal fees may be paid through the Chapter 13 Plan. Many times an attorney is agreeable to have part of his or her fee paid as a portion of the Chapter 13 Plan. Sally would need to stay current on her mortgage payment and pay $248.00 per month to the Trustee in order for her Chapter 13 Plan to work. Since her disposable income is $250.00 per month, her bankruptcy Schedules indicate that she would be able to comply with her Chapter 13 Plan.
The reason Sally would not file a three-year Plan is because the monthly payments required to the Trustee would have been more than her disposable income. Instead of repaying $14,850.00 through the Trustee in five years at $248.00 per month, she would need to pay the Trustee in three years at $413.00 per month, which she cannot afford.
For more information on Chapter 13 bankruptcy or to schedule your free telephone or Zoom consultation with The Law Firm of Ullian & Associates, P.C., contact us here.