In a Chapter 13, when they are talking about voluntary repayment plan for individuals with regular income, is there a rule/percentage that I have to pay back? (i.e 30% of the total debt, etc)
In a Chapter 13 case, any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $307,675 and secured debts are less than $922,975. 11 U.S.C. § 109(e). These amounts are adjusted periodically. A corporation or partnership may not be a chapter 13 debtor.
Individuals may use a chapter 13 proceeding to save their home from foreclosure or keep their car from being repossessed. The automatic stay stops the foreclosure proceeding or the repossession as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time.
A chapter 13 bankruptcy plan is created by you or your attorney and enables individuals with regular income to develop a plan to repay all or part of their debts. The Plan proposes a repayment plan to make installments to creditors. The Plan takes all debts into account, plus a 10% fee for the Trustee, divided by the number of months of the plan, usually 36 or 60. A Plan, to be successful, must be approved by the Trustee and confirmed by the Court.
The amount you have to pay back is dependent upon an amount called “disposable income”. Disposable income is a calculation of how much you “should” have left over at the end of the day. I say “should” have left over at the end of the day because disposable income is calculated based on national standard deductions, not based on what your bank account actually spends.
The disposable income calculation starts with your gross income. You must also be a wage earner in order to file a Chapter 13. Then, certain expenses are deducted based on an IRS deduction. The deduction is based upon a national average, taking into consideration the metropolitan area you live.
- For example, the IRS standard deduction for a 2 person household for food, clothing, and other expenses is $1,202.00 per month. This means $1,202 is deducted from your gross monthly income to determine your disposable income.
- Other deductions also reduce your disposable income. These items include health insurance, mortgage/rent expense, ownership of a car, taxes, court-ordered payments, child care, care of the chronically ill, home energy expenses, education for minor children, etc.
The issue with standard deductions is that they are standard and not objective. For example, in the deduction above for food, the standard deduction is $1,202. This means that if you pay only $800 a month for these items, you have the benefit of the extra $402 being deducted as an expense, even though you are not really spending it. On the flip side, if you spend $1,500 for these items, only $1,202 may be deducted, leaving you with a deficit of $298 that you should have available, but do not.
At the end, the calculation provides what your disposable income should be. That amount must be put towards the plan. In some cases, that amount is $0.00. In some cases, the plan payment is $200.00/month. Some clients pay 100% of their unsecured debt + 5.25% interest (the highest current maximum).
It is important to note that these deduction standards also change often. You can find the most up to date information on national standard deductions here: https://www.justice.gov/ust/means-testing/20180501