Practical Bankruptcy: Walking Through a Simple Chapter 13 Case–Part 2

To demystify how Chapter 13 works, see how a relatively straightforward one pencils out.

 

In the last blog we introduced you to a married couple, Andrew and Amanda, who decided to file a Chapter 13 in order to save their home from foreclosure and to deal with a big chunk of income tax debt.

The Components of Their Chapter 13 Plan

The plan that their attorney puts together to present to the Bankruptcy Court is designed to do the following:

  • Permanently stop the foreclosure by their first mortgage lender and then require this creditor to give them up to 5 years to catch up on the $15,000 of mortgage payments that they are behind on.
  • “Strip” their entire $45,000 second mortgage off their home, so that they 1) can permanently stop paying the $400 monthly second mortgage payment, 2) avoid paying any of the $6,000 in payment arrearage, and 3) avoid paying all or most of the $45,000 balance.
  • Force the IRS to 1) stop accruing any further interest and penalties on any of the tax debts they owe, 2) discharge (legally write-off) most or all of their 2009 income tax debt of $3,000, and 3) accept payments on their 2010 and 2011 taxes of $5,000 over the course of up to 5 years, all while the IRS can’t take any collection action against them or any of their assets.
  • Not pay all or most of the $60,000 they owe in credit cards and other unsecured debts.

Amanda and Andrew’s budget had only enough disposable income each month after living expenses to pay the regular monthly payments on the first ($1,500) and second ($400) mortgage, plus about $125. They were amazed to hear that this gave them enough to save their home, even though they were behind a total of $21,000 on the two mortgages and owed $8,000 in income taxes—plus $60,000 in other debts. They could not imagine how only $125 per month extra beyond their mortgage payments could accomplish much.

The rest of this blog post shows the relatively simple calculations illustrating how this is possible—how this couple could do so much with so little money because of the power of Chapter 13.

The Plan Payment

The amount Andrew and Amanda propose to pay to ALL of their creditors each month is $525. That’s $125 plus $400—the $125 indicated above that they could afford beyond their mortgage payments plus the $400 they had earlier earmarked to pay on their second mortgage, which is no longer needed for that because of the “stripping” of that mortgage.

The Number of Monthly Plan Payments

They proposed to pay this $525 per month for four years. Because their income is less than the published median income for their family size and state, they are required to pay what they can afford to pay for at least 3 years (instead of for 5 years if their income would have been higher than the median). But they are allowed to pay longer than their minimum of 3 years if they need more time to pay the total amount they need to pay because of the limited amount they can afford to pay each month.

Designating Which Creditors Are To Be Paid through the Plan

Amanda and Andrew’s 48 months of $525 per month payments would result in them paying a total of $25,200 into their Chapter 13 plan.

From this $25,200 the following would be paid:

  • $15,000 in first mortgage payment arrearage
  • $5,000 in 2010 and 2011 income taxes to the IRS
  • $2,000 (or so) in trustee fees (usually between about 5-10% of the total, so this is variable)
  • $2,000 (or so) in remaining fees for their attorney  (beyond whatever was paid before filing, also variable)
  • The rest of the money—only $1,200 in this scenario—would be divided among all the “general unsecured” debts—here the $45,000 balance on the second mortgage, plus the $3,000 in 2009 income tax, plus the $60,000 in credit card and other debts, or a total of $108,000. That means that these debts would be paid barely more than 1% of the amounts owed.

Under this plan, at the end of four years of Andrew and Amanda paying their regular first mortgage monthly payment and $525 to the Chapter 13 trustee, they will have brought their home mortgage current, will owe nothing on their second mortgage, which will no longer be on their title, they will have paid whatever income taxes had to be paid and discharged the rest, and will have also discharged all their other debts. So at that point the couple will be completely caught up on their home, will owe no taxes, and, other than their first mortgage, will be completely debt free.

(Caution: Be aware that some judges are resistant to debtors paying very little to the “general unsecured” creditors, so in those jurisdictions this couple may have to pay more, for example by paying into their plan for 5 years instead of 4, or by paying more per month. Your attorney will advise you about any such local variations in interpreting Chapter 13 law.) 

 

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