Do you need a Chapter 13 case? WHEN you file it can mean the difference between a payment plan that takes 3 years and one that takes 5.
In two blog posts last month (November 12 and 19) we showed how filing bankruptcy by the end of December 31 might allow you to file a Chapter 7 “straight bankruptcy” case instead of being forced into a Chapter 13 “adjustment of debts” one. You could have your debts discharged (legally written off) within just 3 or 4 months under Chapter 7. Otherwise you may have to go through a 3-to-5-year payment plan under Chapter 13. Besides likely costing much more, you’d only discharge your remaining debts if you successfully completed your payment plan.
But What If You Need a Chapter 13 Case?
The benefits of Chapter 7 won’t matter much to you if you need a Chapter 13 case in the first place.
Yes, Chapter 13 takes so much longer than Chapter 7.
And Chapter 13 is much riskier. Most Chapter 7 cases—especially one in which the debtor has a bankruptcy lawyer—get completed successfully. Chapter 13 comes with longer odds. A lot can happen in the 3 to 5 years that they usually take. Chapter 13 is a flexible tool, one that you can often adjust to changing circumstances. But the truth is that a significant percentage of them do NOT get completed successfully.
Notwithstanding the extra time and risks, Chapter 13 could still be by far the best tool for you. That’s simply because it can accomplish many things that Chapter 7 can’t. For example, Chapter 13 can:
- give you time to catch up on home mortgage and/or property taxes
- buy you time and save you money if you owe lots of income taxes, especially if you owe on more than one tax year
- give you time to catch up on child or spousal support while protecting your income, assets, and license(s) from suspension while doing so
- allow you to keep assets that are otherwise not protected in a Chapter 7 case
- lower your monthly vehicle payments and reduce the total amount on the loan
- hold off on student loan payments and collection until you qualify for an “undue hardship”
And these are just some of the ways that Chapter 13 can deal with your creditors more powerfully than Chapter 7.
A Shorter Chapter 13 Payment Plan
So, what if you’ve learned that you really need a Chapter 13 case? What if you also learned that filing your Chapter 13 case in December instead of January would allow you to finish your case in 3 years instead of 5 years? Or what if that was true if you filed your case in January instead of February?
Paying into a Chapter 13 payment plan for 2 years less could save you many thousands of dollars. Plus, that would get you out of bankruptcy 2 years sooner. You’d be that much ahead of the game in rebuilding your credit. You’d have the emotional relief of finishing and getting on with life sooner
Here could filing a Chapter case a month sooner shorten the case so much? Here’s how.
Your Last-6-Full Months of Income Determines How Long Your Chapter 13 Lasts
Our blog post of November 12 described an unusual way of calculating your income for the Chapter 7 “means test.” (That’s a test to qualify for filing a Chapter 7 case.) That way of calculating income also determines whether your Chapter 13 plan lasts a minimum of 3 years or 5.
Income is calculated as follows:
1) Consider almost all sources of money coming to you in just about any form as income…. . Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).
2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case.
The 6-month amount is multiplied by 2 for the annual “income” total to be compared to the “median income” for your state and family size.
When you combine the above two considerations, monthly changes in your “income” can make a big difference. That’s especially true if your money coming in is more than usual in either December or January. (That would most often be from more overtime, a seasonal job, a monetary gift from family, and/or an employer’s bonus.)
Because of the way “income” is calculated there’s a higher risk that it would be larger than the “median income” for your state and family size. If it is larger, then you must pay your Chapter 13 case for 5 years instead of 3 years.
What’s My Applicable “Median income”?
The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. Here’s a table showing the “median family income” amounts for cases filed on or after November 1, 2018. It shows the amount for each state, by family size. (The amounts are adjusted about three times a year; see this webpage to see if there has been an update.)
(For the actual steps used in this calculation, see the official form, Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period.)
So if your “income” as calculated above is larger than your applicable “median family income” than your Chapter 13 case gets pushed to 5 years. If it’s smaller, your case can last as short as 3 years. (That 3 or 5 years is the “commitment period” referred to in the official form in the paragraph above.)
If your “income” is larger because of unusual money you received in December and/or January, it may make sense to file your Chapter 13 case in either December or January so that the income of that month would not count. (Remember, that’s because you only count income of the PRIOR 6 FULL calendar months before the filing date.)
In next week’s blog post we’ll put all this into an example to make better sense of it for you.