This video helps you understand how a bonus works in Chapter 13. The Layton Law Firm PLLC routinely represents bankruptcy clients who receive annual bonuses or commissions. We have been able to successfully assist clients in keeping those bonuses and commissions in Chapter 13.
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Bankruptcy and Taxes
If you are considering filing bankruptcy, you may be interested in determining how income taxes are addressed in a bankruptcy filing. In order to determine how bankruptcy affects taxes, you must know the original due date the taxes came due. From there, you will need to know when you filed the tax return related to that tax debt. With an understanding of these two factors, you can determine the treatment of the debt in a Chapter 7 filing and a Chapter 13 filing.
The Taxes Must Be Three Years Old
Your tax obligation comes due on the date the taxes are due. For example, the taxes due for calendar year 2016 did not come due until April 15th, 2017. That tax debt turns three years old on April 15th, 2020. If you file your bankruptcy prior to April 15th, 2020, the debt will still have priority status. This means in a Chapter 7 the tax debt will survive the bankruptcy. In a Chapter 13, the debt will be paid in full through your 60 month Chapter 13 plan.
If you file your bankruptcy after April 15th, 2020, the debt loses its status and is lumped in with other general unsecured debts in a Chapter 7 or Chapter 13 filing. In a Chapter 7, this means the debt is discharged in full. In a Chapter 13, a percentage of the debt will be paid just like the remainder of unsecured creditors receive a percentage of their debt through the Chapter 13 plan. Many Chapter 13 plans are set to pay 5 or 10 percent to unsecured creditors, or even less. This can be a tremendous advantage for individuals with heavy tax burdens who are considering bankruptcy. (If you want to read more about Chapter 13 payments, we wrote about them HERE).
Your Tax Return Must Be Filed
If your tax debt is more than three years old, there is a chance it qualifies to be treated as unsecured debt, as discussed above. However, there are a few additional requirements. One of those is that the tax returns related to that tax debt must have been filed at least two years prior to the bankruptcy filing. If you failed to file your own return and the taxing authority filed a “forced return” on your behalf, unfortunately even if that forced filing is more than two years old, it will not qualify for this requirement.
The 240 Day Rule
One last requirement is that the taxing authority must have assessed the tax debt at least 240 years prior to the filing. For example, consider a scenario where you file taxes April 15th of 2017 and owe $5,000.00. That tax debt turns three years old April 15th of 2020. However, if the IRS audits you for 2017 and assesses an additional $10,000 of debt for the 2017 tax year, you will need to wait at least 240 days from the date of the assessment of new taxes in order to have that debt discharged in bankruptcy.
Confused? Don’t Be!
We are here to help. We assess tax debt on a regular basis in our office and you will have confidence about the treatment of your tax debt prior to your bankruptcy filing. If you would like to schedule a consultation you can call us at 704.749.7747 or click HERE to request one. All consultations are free, and you deserve to understand your options regarding bankruptcy and taxes. When it comes to choosing a law firm, we know you have options. We hope you choose Layton Law.
Bankruptcy Is Not A Four Letter Word
Currently, both bankruptcy and Covid-19 are spreading quickly. As we begin to see Fortune 500 companies file for bankruptcy due to Covid-19, it is a great time to remind ourselves that bankruptcy can be viewed as a business decision. In fact, filing bankruptcy is what saves many companies and enables them to thrive in the market post-bankruptcy. It is too early to tell whether companies filing bankruptcy now will bounce back; however, historically we do know that companies like Apple, General Motors, and Hostess all successfully bounced back with the help of a bankruptcy filing.
There are also famous individuals who filed bankruptcy and went on to great success. This was long before bankruptcy and Covid-19, but among them are Walt Disney, Donald Trump, and Abraham Lincoln. These individuals understood that bankruptcy is not a four letter word. If anything it is more akin to a seven letter word: F-R-E-E-D-O-M. The day you file bankruptcy is the day you play your ace card against oppressive creditors and accumulating debt.
Bankruptcy Is The First Step To Recovery
One common concern regarding a bankruptcy filing is how long it will take you to bounce back from bankruptcy. Truthfully, it is the bankruptcy filing that is the first step in recovery for a business or individual. The bankruptcy filing brushes back creditors and forces them into a plan the company can manage while they continue to conduct business. The same is true of a personal bankruptcy filing.
From the day you file bankruptcy, you get relief from creditors. They are no longer allowed to pursue you for collection of debts, or legal actions against you related to debt. As a result, you can finally breathe again. Your income is no longer being shoveled to creditors whose balances do not seem to move despite significant payments each month. Instead, you can use those funds to pay for the needs of yourself and your family. If you file a Chapter 7 bankruptcy, you will receive a discharge of your debts. If you file a Chapter 13 bankruptcy, you will enter into a re-payment plan which quite often requires you to pay less than 10% to your creditors spread out over a five year period.
As one of our favorite clients said in a recent review of the firm “Chapter 7 and Chapter 13 are just that: Chapters. They are not the entire book!”
Treat It Like A Business Decision
You can choose to view a bankruptcy filing as a business decision—or at least a financial one—for you and your family. Smart business owners put their emotions aside and do what has to be done for the health of the company. Most of our clients realize that bankruptcy is not an emotional experience; however, they do confess that it was their emotions that kept them from filing sooner. Unfortunately, this means months or years of payments to creditors on debts which are ultimately discharged in bankruptcy. If you act quickly, you can avoid spending any additional money on unsecured debt which will be addressed with one bankruptcy fee and one bankruptcy filing.
The bankruptcy court has remained open despite Covid-19, allowing debtors to move forward with their financial recoveries. Most hearings are done over the telephone at this time, which is a great convenience for all parties and a wonderful solution as the courts are busier each month with bankruptcy filings.
Take The Next Step
The next step is simple. Call us to speak with an attorney. The call is free and you deserve to understand your options. We can be reached at 704.749.7747. We are happy to answer questions about bankruptcy and Covid-19. Or, you can click HERE to request a consultation by filling out a very short form.
Watch A Short Video
If you’d like to know a little more about the firm, watch this short one minute Introductory Video by Chris Layton. We know you have choices. We hope you choose Layton Law.
Small Business Bankruptcy
Filing a small business bankruptcy in North Carolina will relieve you of your personal obligations on business debt. Your business entity will still be liable for the debt. As a result, for most small businesses, a Chapter 7 or Chapter 13 combined with a dissolution of the corporate entity, will accomplish your goal of eliminating both personal liability and business liability. After bankruptcy, most small business bankruptcy clients are able to start a new small business under a different name.
Despite what you’ve read about filing business bankruptcy under Chapter 11, our clients often accomplish the same result through a personal bankruptcy by filing a Chapter 7 or Chapter 13 bankruptcy, and dissolving the small business. This saves you thousands of dollars and you are rewarded with the same result– you are free from your obligation under the small business debt.
Personal Liability In Small Business Bankruptcy
When most small business owners take on business debt, they sign as an officer or member of the small business, and then again personally. This guarantees the lender that either the business or the individual will repay the debt. This is why simply dissolving the business will not eliminate the debt from your life—you’re still on the hook personally. This means creditors for the business can come after your personal assets: home, vehicles, savings, etc.
Business Assets and Liabilities
When you file a personal bankruptcy and include business debt, you’ll also need to provide income and loss statements for the business for the year prior to filing. Your Charlotte bankruptcy attorney can assist you with putting these together, if an accountant has not already done so. You’ll also need to list all assets and debts of the business.
Dissolving The Company
Dissolving an LLC or other small business entity eliminates the potential for creditors to pursue the company for debt—the company no longer exists. If you file a personal bankruptcy in combination with the dissolution, you relieve your personal liability. In essence, you’ve filed a small business bankruptcy by filing personally. If there are assets of the company which need to be addressed, our firm can assist with contacting creditors in compliance with The North Carolina Business Corporation Act.
Starting Another Business
Filing a small business bankruptcy does not prevent you from starting a new business. You’ll be subject to the same approval process if you need to take on debt to get the business started, and your personal bankruptcy may be a hurdle from a credit perspective. But entrepreneurs are creative and often find funding outside of traditional means to get new businesses started.
Call today if you have questions about your small business, small business bankruptcy or personal bankruptcy. The consultation is free, and we’re here to help. We can be reached at 704.479.7747. Or, you can click HERE to request a free consultation.
Does Bankruptcy Ruin Your Credit?
No, bankruptcy does not ruin your credit. In fact, bankruptcy may ultimately be the reason you are finally able to restore your credit. We understand your credit score is an important factor in deciding whether to file bankruptcy. While the initial filing of a bankruptcy will temporarily lower your credit score, most debtors find that their score recovers within a year from filing bankruptcy.
Your Debt To Income Ratio
One important aspect of your credit score is your debt to income ratio. The filing of a bankruptcy changes your debt to income ratio in your favor. This immediately serves to help you re-build your credit. Additionally, as a result of your bankruptcy, your credit report will show fewer debts. You become an attractive client to creditors when your debt to income ratio is healthy. This means you will be considered for credit cards, automobile loans, and other extensions of credit.
How Quickly After Bankruptcy Will My Credit Score Recover?
Most of our clients tell us that their credit score bounces back at the one year mark from filing bankruptcy. However, this will fluctuate depending upon how high your score was before filing bankruptcy, and depending upon the steps you take to rebuild your credit after bankruptcy. If you are making payments on a secured credit card or a vehicle after bankruptcy, those positive payment reports will serve your credit score well.
Free Yourself From The Chains Of Credit Card Debt
Credit card companies want you to fear bankruptcy. They would rather you give them every extra penny you have, to keep them from taking further action against you for non-payment. This is true regardless of whether your monthly payment to them makes even the slightest dent in the balance owed.
The bigger picture when deciding whether to file bankruptcy involves regaining your financial freedom. The relatively small price to pay for that financial freedom is the time it takes to rebuild your credit. When bankruptcy clients call us two years after their bankruptcy to tell us they have gotten approved for a home mortgage, they usually tell us the same thing: I never should have waited as long as I did to file my bankruptcy.
Speak With A Charlotte Bankruptcy Lawyer Today
If you have questions about how bankruptcy can help your credit, we are here to help. Once a client decides to file bankruptcy, we advise you stop paying on any debt which will be discharged by the bankruptcy. If you would like to speak with a bankruptcy lawyer, call us at 704.749.7747 or click HERE to request a free consultation by phone or in person.
When Is The Right Time To File Bankruptcy?
The short answer is that most people wait too long to file bankruptcy. The right time to file is before you have thrown thousands of dollars away on large debt. The right time to file bankruptcy is before you have eaten through your retirement funds to make good on mounting credit card debt. A consultation with a Charlotte bankruptcy attorney can often put all your fears about bankruptcy to rest, and help you decide if the time to file is right now.
Foreclosure And The Right Time To File Bankruptcy
There are a few matters which can force your hand in a bankruptcy filing. If you are facing a foreclosure and you want to use bankruptcy to save your home, you will need to file bankruptcy within 10 days after the foreclosure sale date. Additionally, you can only use Chapter 13 bankruptcy to save a home from foreclosure. As a result, the right time to file bankruptcy to stop a foreclosure sale is any time before the 10th day after the foreclosure sale. Then, your Chapter 13 plan will schedule the mortgage arrearages to be paid over a 60-month period. In many cases, we are able to file an Emergency Bankruptcy for clients as this deadline approaches.
Retirement Funds And The Right Time To File Bankruptcy
All retirement income is exempt in bankruptcy under 11 USC Sec. 522. This protection includes 401k, IRA, and most pension plans. This means that regardless of when you choose to file bankruptcy, whatever funds you have in a qualified retirement account will be exempt or protected from creditors.
Because of this “super exemption” on retirement funds, it does not make sense to withdraw your exempt retirement funds to pay creditors. Additionally, as soon as you take funds from an exempt retirement account those funds are no longer exempt assets. This means $10,000 in a 401k is exempt while the same $10,000 once withdrawn and placed in your checking account is no longer exempt by 11 USC Sec. 522. Potentially, these funds will need to be turned over to the bankruptcy court if they are in your possession at the time of your bankruptcy filing.
Income And The Right Time To File Bankruptcy
When attempting to qualify for a Chapter 7 bankruptcy filing, you must meet the income requirements. The bankruptcy court looks at your most recent six months of income in determining whether you qualify. This is done through what is known as The Means Test. Your bankruptcy attorney will apply the rules of bankruptcy to determine if you pass The Means Test.
The Means Test starts with a calculation of Current Monthly Income (CMI). Your CMI is your average monthly income from all sources, for the six months prior to filing. The bankruptcy definition of income differs from the definition of income used by the IRS. If you receive a cash gift from a family member, it will be included in your income calculations. As a result, your bankruptcy attorney may advise you to wait to file, if you have income from the past six months in excess of the allowable amount. The good news is that by waiting a few months to file, your six-month average income will change. For example, if you received a bonus at work for $10,000 in February, it would be included in your income calculations if you file in March, April, May, June, July, or August. However, if you wait to file until September, your February income is no longer relevant.
Speak With A Charlotte Bankruptcy Attorney Today
If you would like to have a consultation with a bankruptcy attorney, you can call us at 704.749.7747 or click HERE to request a consultation. Consultations can be done over the phone or in person, and they are free. The goal is to help you understand your options, and answer any questions you may have about the process.
Emergency Bankruptcy To Stop Foreclosure
Yes, you can file an emergency bankruptcy to stop a foreclosure. If you’re behind on your mortgage and your mortgage lender is about to sell your home in foreclosure, a Chapter 13 bankruptcy filing will freeze the foreclosure proceeding. Then, as long as you make your Chapter 13 payments as scheduled, your Chapter 13 plan will allow you to get caught up on the mortgage over the Plan period (typically 60 months).
What If The Sale Already Took Place?
In North Carolina, after a foreclosure sale, you have ten days within which you can file a bankruptcy to stop the foreclosure. If you have a court paper showing a sale date of January 1st, you would have 10 days after that date to file your Chapter 13 bankruptcy. Weekends and holidays are included in the 10 days, and if your 10th day falls on a weekend or holiday, you have until the next business day to file your Chapter 13.
Will My Mortgage Lender Object To The Bankruptcy?
Most mortgage lenders have no objection to a Chapter 13 bankruptcy. After all, it’s a court-approved plan to get caught up on the mortgage. The mortgage lender will file documents with the court laying out the balance owed on the mortgage and the amount you are behind (The “Arrears”). Your Chapter 13 bankruptcy lawyer will calculate your plan payments for you based on these figures as well as your monthly income and expense figures.
Even if the mortgage lender does object to the Chapter 13, there objection will not survive provided your Chapter 13 plan proposes to pay the normal monthly mortgage payment each month and make up the arrears over the course of the plan.
How Quickly Can I File An Emergency Bankruptcy?
Whether it’s a Chapter 7 or a Chapter 13, an emergency bankruptcy can be filed very quickly. You’ll need to take the mandatory online course required by the statute (it takes an hour), and you’ll need to meet with our firm to sign your bankruptcy petition prior to signing.
When you file an emergency bankruptcy to stop foreclosure, providing the court with the required documentation is very important. Typically, our firm will prepare for quite some time with a client before filing their bankruptcy. When we file an emergency bankruptcy, we have fourteen days to provide the court with the remainder of the information required for a successful bankruptcy. So, getting it filed is the first step, but be prepared to work quickly together to fulfill the remainder of the court’s requirements.
How Do I Get Started?
Getting started with an emergency bankruptcy to stop foreclosure is easy. You can call us at 704.749.7747 for a free consultation or click HERE to request a phone call. A lawyer will call you today.
Filing A Small Business Bankruptcy
Filing a small business bankruptcy in North Carolina is an endeavor which will relieve you of your personal obligations on business debt. For most small businesses, a Chapter 7 or Chapter 13 combined with a dissolution of the corporate entity, will accomplish your goals.
While Chapter 11 is designed for traditional business bankruptcy filings, it is an expensive bankruptcy option that costs debtors tens of thousands of dollars. There are times when a Chapter 11 is the appropriate avenue for a corporate entity to enter into bankruptcy and continue to do business. More often, in a small business bankruptcy setting, a Chapter 7 or Chapter 13 will serve to meet your goals, and save you thousands of dollars.
Debt With A Personal Guaranty
As part of preparing for bankruptcy, you must review your debt obligations with the help of your bankruptcy attorney. Specifically, it is important to distinguish between debt which is to the corporate entity only, and debt which includes a personal guaranty. The dissolution of the corporate entity serves to relieve the corporate entity of the obligation on the debt; the personal bankruptcy filing will serve to address the personal guaranty.
Anti-Bankruptcy Clauses In Contracts
Many corporate debt contracts contain language specific to bankruptcy. Those contracts often dictate that a bankruptcy filing will not serve to relieve the personal guaranty or other obligations to repay the debt. While this language is freely entered into by both parties signing the contract, courts have rules it to be in conflict with public policy. Our firm will defend any challenges to the discharge of your corporate debt, specifically challenges premised upon an anti-bankruptcy clause.
Profit and Loss Statements
Qualifying for Chapter 7 requires a thorough review and disclosure of your income for the 6-month window prior to the filing. When operating as a small business, debtors are typically not paid as W-2 employees. LLC members and partners take draws and often those draws differ dramatically from month to month, depending upon the profitability of the business. Additionally, while bankruptcy is available for debtors who qualify from an income perspective, you must demonstrate to the bankruptcy court your income, as defined by the bankruptcy court. This necessitates the submission of a profit and loss statement showing actual gross income, less actual expenses. Our firm will guide you through this process. We can help to create your profit and loss statement or advise a third party—typically an accountant—who you might retain to prepare it for you. For small businesses which have not had much income over the 6-12-month window prior to filing, often the profit and loss statement is easily created.
Call For A Consultation
We know the stress of running any small business. When you’re facing financial difficulties, it can be overwhelming. We’re here to help. Call us for a free consultation at 704.749.7747 or click HERE to make a simple request to be contacted. We will reach out to speak with you or schedule a time to speak. Your financially recovery is right around the corner, and we hope you choose to Recover With Us.
What To Expect After Filing Bankruptcy
When you file bankruptcy, you should feel an instant sense of relief. Your bankruptcy attorney has filed the paperwork, and the court has sent out notices of the filing to your creditors. The Automatic Stay immediately goes into effect, which means your creditors are no longer allowed to contact you. You are on your way toward a brighter financial future. Below, we address some common concerns clients have shortly after filing.
The Post-Bankruptcy Timeline
If you file a Chapter 7 or a Chapter 13 bankruptcy, you will receive notice within a week, of your 341 meeting date. The 341 meeting date is typically 45 days after the bankruptcy is filed. The meeting only takes about 10 minutes and your attorney will attend with you. The advance notice is provided so you can make sure to clear your schedule. You can read further in our blog about what happens at a 341 meeting if you like.
Note also that the trustee may request additional documents at the 341 meeting. These may be bank statements, or other information related to assets or debts. The trustee will typically continue the meeting for a few weeks. So long as you provide the requested documentation within 14 days, you do not have to attend a continued 341 meeting.
Chapter 13 Payments
If you have filed Chapter 13, you will need to make your first Chapter 13 payment within 30 days of the bankruptcy filing. Because it takes seven days for your payment to post, you should make sure to mail your payment no later than 21 days after the bankruptcy was filed. Making on time payments in Chapter 13 is a key part of not having your Chapter 13 case dismissed. You will be provided guidance as to how to make a payment.
Taking The Financial Management Course
Once you file, you will need to take a second online course called the Financial Management course, or the Post Bankruptcy course. This is true of Chapter 7 or Chapter 13. The course is for education purposes only, but it is a requirement that it is completed prior to the entry of your discharge. A failure to take the course in the required time will result in you not receiving your discharge. Taking the Financial Management course should be done prior to your 341 meeting. Our firm pays for both the Credit Counseling course you take before filing, and the Financial Management course you take after filing.
Reaffirming Vehicle Loans
In Chapter 13, there is nothing to do regarding your vehicle except to make your monthly Chapter 13 payment. If you have decided to keep your vehicle in Chapter 7 bankruptcy, you may need to complete a Reaffirmation agreement with the lender. Essentially, if you want to keep your car, and if the car has a loan, you must complete and submit the Reaffirmation agreement as quickly as possible after filing. In any case, it must be completed prior to the entry of discharge. In a Chapter 7, this means you have roughly 60 days to complete the Reaffirmation agreement and return it to the lender with enough time for them to review it and file it.
While we will assist with completing the Reaffirmation agreement, you will need to request it from your lender. Steps should be taken toward this as quickly after you file your bankruptcy as possible—certainly no later than two weeks after filing. It will take time for the lender to draft the agreement and send it to our office.
When you reaffirm a vehicle loan, you are re-obligating yourself to the debt. This is done under the same interest rate, terms and repayment period. Additionally, once you reaffirm, any payments you make on the loan will be reported by the lender to the credit bureaus and will help to rebuild your credit.
Surrendering A Vehicle
If you are surrendering a vehicle in bankruptcy, you will simply need to reach out to the lender and make arrangements for them to pick up the vehicle. In the alternative, you can deliver the vehicle to them. This process is quite painless, but you should take steps shortly after filing, to complete the process.
Making Car Payments
In Chapter 13, your car payments are built into your Chapter 13 payment. In Chapter 7, if you plan to keep your car in bankruptcy, you will find that until your bankruptcy case closes, you will most likely need to make your monthly car payments to the bankruptcy division of your car lender’s office. This is a procedural matter for the car lender, and is a temporary payment situation until your cases closes. Once your case closes, you can resume auto-draft or any other type of payment method available prior to your bankruptcy filing.
Redeeming A Vehicle Loan
You may also choose to Redeem a vehicle loan in Chapter 7. This is a process by which you take out a new loan with a redemption company such as 722 Redemption. They will pay off your current vehicle loan, and going forward you will pay the new loan and keep the car. This is usually done to avoid reaffirming a vehicle loan with a very high interest rate, lower the loan balance to the blue book value, and may even offer a longer repayment period than a Reaffirmation. If you wish to start this process, you must reach out to a redemption company as soon as possible after the filing of your bankruptcy.
Home Mortgage Concerns
In Chapter 13, you simply make your Chapter 13 payment. In Chapter 7, as opposed to Reaffirmations on vehicles, you can generally keep your home so long as you continue to pay your mortgage. There is a public policy against reaffirming a home loan. The theory behind this is that your bankruptcy filing relieved you of the obligation to repay the home loan. To enter into a large debt immediately after filing bankruptcy may not be advisable. Supposing the housing market crashed after your bankruptcy. If you never entered into a home Reaffirmation, you could simply turn the home over to the mortgage lender and you would not be responsible for any remainder on the loan if the home is upside down.
For this reason, most individuals choose to “Retain and Pay” the mortgage. This means that as long as you continue to make mortgage payments, you are allowed to keep your home. You do not need to sign a home reaffirmation agreement. Additionally, your lender can not foreclose on the property if you are current. Lastly, your mortgage balance will reflect any payments you make, over time.
The only downside to not reaffirming a home loan is that the lender will typically NOT report the payments to the credit bureaus. This means you won’t get credit for your mortgage payments, and your credit score will not reflect them. You can address this yourself at the end of each year by submitting a list of payments you made on the mortgage, to each credit bureau. If the mortgage lender does not dispute them, you will be given credit for the payments on your credit report.
Your Credit Score After Bankruptcy
Everyone is concerned about their credit score after bankruptcy. You will be surprised how quickly your credit score recovers after bankruptcy. Additionally, you will receive offers for credit cards and vehicle financing shortly after your discharge. In most cases, our clients are able to purchase new homes two years after filing bankruptcy. You can read more about Your Credit Score After Bankruptcy on our blog.
The Discharge
In Chapter 7, after replying to any trustee requests for documents, filing Reaffirmation agreements, and taking your Financial Management course, your discharge will be entered. This means your case is officially closed and you have no further obligations in bankruptcy.
In Chapter 13, your discharge will be entered after you make your final Chapter 13 payment.
Speak With A Charlotte Bankruptcy Lawyer Today
If you are considering filing bankruptcy, it’s important that you speak with a Charlotte bankruptcy attorney. The call is free and you will come away with a much better understanding of your options. You can reach us at 704.749.7747 or click to request a FREE CASE EVALUATION, and we will be in touch shortly.
Further Reading
If this article was helpful, you may find other helpful articles on our Bankruptcy Blog. Thank you for visiting the website—we hope it has been helpful.
How Is A Chapter 13 Plan Calculation Performed?
A Chapter 13 plan calculation is based on two premises: your budget (ability to pay), and your mandatory repayments.
The Chapter 13 Budget
One premise behind Chapter 13 is that you must pay all disposable income to your creditors. This is known as your ability to pay. As such, you must show the court your ability to pay in the paperwork you file. You and your bankruptcy attorney will propose a budget to the court. The budget will be laid out in your filing as Schedule I (Income) and Schedule J (Expenses). Any ‘left over’ money in your budget must be committed to your unsecured creditors each month as Net Disposable Income.
When calculating the budget, your mortgage and vehicle payment are accounted for, together with all other ordinary and ongoing income and expenses. While the budget is not exact, you must use good faith efforts to disclose your anticipated ongoing income and expenses. The items you do not put into your budget are the ongoing debt payments to creditors—those are being removed as part of the relief offered by Chapter 13. Again, your Net Disposable Income (Sample of Net Disposable Income form) will be assigned to those creditors each month. If your plan is approve, they are required to accept those amounts as payment.
Chapter 13 Budget Example
A very simplified Chapter 13 budget example would be as follows:
Gross Monthly Income – $4,000.00
Monthly Expenses – $3,890 (Taxes $900, Mortgage $1,600, Vehicle $340, Food $600, Utilities $375, Home Maintenance $150, HOA $150, Hobbies/Entertainment $150, Health Insurance $450, Misc. $75)
Net Disposable Income – $110
In the example above, your Net Disposable Income (Income minus Expenses) is $110. You would need to commit $110 per month to your Chapter 13 creditors as part of your Chapter 13 plan calculation.
Mandatory Chapter 13 Payments
While your budget shows your ability to pay creditors, there are also mandatory payments which must be considered when calculating your Chapter 13 payment. In the example above, the debtor is keeping their home and vehicle. Both of those items have payments. As such, those payments are built into the calculation.
Suppose the debtor also owed the IRS $2,000. If that debt is from taxes which are less than 3 years old at the time of filing, that is a mandatory payment which must be paid in full over the life of the plan. When divided over a 60 month plan, the $2,000 debt comes to roughly $33 per month. As such, the $110 does not change for the debtor; however, $33 of that $110 each month will go to the IRS. This is an example of how the ability to pay works in tandem with mandatory payments.
Other examples of mandatory payments include: attorney fees, filing fees, mortgage arrears, vehicle arrears, child support, state taxes owed.
What If Mandatory Payments Exceed Net Disposable Income?
If your budget is very tight and you have a large mandatory payment which must be paid in full during your plan, you must show the court that despite the calculations, your plan is still feasible. Taking the example above, if the debtor owed the IRS $10,000, this would amount to a $166/month payment to the IRS; however, the debtor already established they only have $110 available for Chapter 13. Without further explanation, the trustee would object to the proposed plan because it is not ‘feasible’ given the debtor’s current budget.
One way to overcome feasibility objections in a Chapter 13 plan calculation is to provide an explanation to the court in your filing, showing the court why you believe you will be able to make the payments. It could be that you have a family member who has told you they will help out. Or, perhaps you expect your income to increase slightly in the near future. Perhaps a certain monthly expense is about to be removed from your budget. Any one or all of those things will start a conversation with the trustee about the feasibility of your plan.
Our experience has been that the easiest way to overcome a feasibility objection is to make your payments on time. In other words, when your attorney files your Chapter 13 case, you should make a full payment as quickly as possible. This way, when you attend your 341 hearing, the court will see that you’ve already demonstrated your ability to pay by making a payment on time. This, together with an explanation as to why you think ongoing payments are feasible, will most likely appease the court.
Additional Items Making Up The Chapter 13 Payment
If you still owe your attorney fees, those will be treated as a mandatory fee and will be calculated as the IRS payment was calculated above. Additionally, the trustee’s office charges a 4% fee for every dollar that flows through the plan. Therefore, if your mortgage is $1,000 and you have a budget of $100 Net Disposable Income, you will have a trustee fee of $44 added to the payment. Your bankruptcy attorney will account for this in the calculations—it will not be an additional fee.
If you own property, you must determine the equity in the property. The bankruptcy court allows you to keep a certain amount of equity in property, and these allowances are known as Exemptions. If your equity exceeds the allowable exemptions, you must propose a plan which pays at least that excess amount to the unsecured creditors, over the course of the plan. Your bankruptcy attorney will make sure your plan meets this test.
Gaining Perspective Regarding Your Chapter 13 Payment
Keep in mind, you may be discouraged about paying a trustee fee, or committing $100 a month to unsecured creditors; however, when you look at the full picture, Chapter 13 typically offers debtors a very enticing deal. In exchange for paying a very small payment to unsecured creditors each month, the remainder of the debt will be discharged. In the example above, if the debtor has $50,000 of unsecured debt, the Chapter 13 plan will allow them to receive a discharge of that debt in exchange for roughly $6,300 spread out over 60 months.
Speak With A Charlotte Bankruptcy Attorney Today
If you have not already, speak with a Charlotte bankruptcy attorney today. We can be reached at 704.749.7747 and we’re happy to help you understand the options. You can also request a FREE CONSULTATION and we will be in touch soon.