This the second part of a blog series. In Part 1, I explained the first step in determining the amount of the monthly chapter 13 payment. In order to qualify for Chapter 13 protection, creditors must receive at least as much in a Chapter 13 payment plan as they would get if debtor filed a Chapter 7 case. That means the creditors must receive the full value of property that is not exempt under the bankruptcy law. I find this a good starting point.
The next step is to determine what debts must be paid in full through the plan. In Part 1, we found Jane and John had $18,000.00 is non-exempt assets probably requiring Jane and John pay at least $18,000.00 through their plan. That does not mean the credit card companies will receive all that money. There are different kinds of debt. People have secured debt, priority debt, and unsecured debt.
Secured debt includes mortgages and car loans. Priority debts are debt like taxes and some other government debts. Credit card are considered general unsecured debt and are discharged at the end of the case.
In this example, we find Jane and John have missed 10 mortgage payments in the last 18 months and their home is in foreclosure proceedings. Their mortgage payment is $1,250/month so they have mortgage arrears of $15,000 and owe the mortgage company $4,000 in late fees and attorney's fees. This is secured debt and, in order to keep the home, Jane and John must pay the full debt of $19,000 by the end of the plan.
Also, two years earlier, Jane and John withdrew money from their 401(k) retirement plans. They incurred $7,000 tax liability with the IRS. Because they were so far behind on everything else, they could not pay the taxes and penalty for early withdraw of retirement funds. This is priority debt and also must be paid by the end of the plan. This means the minimum amount of the plan increases from $18,000 to $26,000. Jane and John will need to pay at least $26,000 over the length of the plan if they intend to keep their home.
Again, this is not the end of the analysis. We still need to consider the "Means" Test and the couple's actual disposable income. I will discuss these factors in upcoming parts of this series.
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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