This is the fourth and final part of this blog series. In Part 1, I explained the first step in determining the amount of the monthly chapter 13 payment is to determine what a debtor must pay. In Part 2, I explained the second step is to determine what debts must be paid in full through the plan. In Part 3, I explained the next step is to complete the Disposable Income analysis, which is referred to as the "Means" Test. Finally, a review of the debtors' budget to determine if the debtors' actual disposable is sufficient to meet the minimum required payment.
Getting back to John and Jane Smith; what do we know so far? We know they have $18,000 of property they cannot exempt or protect from creditors. That means they have to pay a minimum of $18,000 into the plan to protect their property. We also know they have $26,000 in secure and priority debt that must be paid through the plan. That means as long as the Smiths can pay their secure and priority debt, they will pay enough through the plan to protect their property that is not exempt.
We also know the means test shows the Smiths must pay a 60 month plan and should have at least $375 per month disposable income. The sum of $375/month for 60 months equals $22,500 total into the plan. This is not sufficient to meet the full debt of $26,000. The next step is to determine if the Smiths can pay at least $26,000.
John and Jane Smith need to figure out their budget. They must add together all their income no matter the source. Once you have the total gross income calculated, they will deduct everything they pay out; taxes, mortgage, utilities, auto loans, education, entertainment, etc. ... everything. Whatever is left is the Smiths' actual disposable income. In this case, John and Jane Smith found they have $475 a month left after paying all their bills. That will be the plan payment. The sum of $475/month for 60 moths equals $28,500 total into the plan. That is enough pay the mortgage company $19,000 to cover the arrears, late fees and attorneys costs; the IRS $7,000 in back taxes; and unsecure creditors $2,500. This is a plan that can work.
This allows the Smiths to file for Chapter 13 protection proposing a plan paying $475/month for 60 months. After the case is filed, the plan may need to be adjusted as creditors file proofs of claims. Creditors have a period of time to make claims against the bankruptcy estate. Once that period passes, the plan can be amended to adjust to any underestimated; unexpected, or unclaimed debts.
In a side note, if the Smiths' budget would have shown they only had $400/month of disposable income, the Smiths would not be fully protected by filing for Chapter 13 protection. The full sum would have been $24,000 and not enough to pay the required sum of $26,000.
If you want assistance, legal representation, or just want to know more about me, Mark M. Medvesky, or Wells, Hoffman, Holloway & Medvesky LLP, check out our website at www.whhmlaw.com.
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