When a debtor files for Chapter 13 Bankruptcy, he is entering into a plan with his creditors whereby he is repaying back some, (if not all) of what he owes.
Three factors determine the amount a debtor pays back in Chapter 13. These are as follows :
- (i) the length of the Chapter 13 Plan;
- (ii) the amount of disposable income a debtor contributes each month into the Plan;
- and (iii) the amount of Federal income tax refunds the debtor contributes into the Plan.
The length of the Plan can be either 36 months or 60 months, and is determined by whether or not the debtor’s annual household income exceeds the “median” income threshold for a household his size.
Annual household income is computed by first figuring out the average monthly income earned by the debtor’s household in the six month period ending in the month prior to the debtor’s filing for Chapter 13. This monthly average is then annualized by multiplying by 12 (the number of months in a year).
The “median” income is a statistic published by the U.S. Government that shows the average monthly income required by a household the debtor’s size in order to live comfortably.
If the annual household income exceeds the median income, then the debtor must file a 60 month Plan. If the annual household income falls below the median income, the debtor can file a 36 month Plan.
The amount of disposable income a debtor contributes into the Plan each month is the difference between the household’s “net” monthly income and the household’s reasonable and necessary monthly living expenses. Disposable income has to include in it all net monthly income received by the household from all sources, and not just the debtor’s own net monthly income. If the debtor is married, but files Chapter 13 individually, his non-filing spouse’s net monthly income must also be factored into the Plan payment.
The net income (as opposed to disposable income) is calculated by deducting from the gross income payroll taxes, medical/dental insurance premiums, union dues, child support/alimony payments and 401K loan payments and contributions.
The monthly disposable income that must be contributed into the Plan becomes the difference between the net monthly income and the household’s reasonable and necessary monthly living expenses.
This monthly disposable income can and usually does change during the life of a Plan. Household income can fluctuate during the life of the Plan. Monthly living expenses can also fluctuate. For example, the debtor’s household size, and therefore living expenses, can increase due to the birth of a baby, which in turn can affect the Plan payment. Whenever such changes occur, the debtor, in conjunction with his attorney, must file an amended budget and a concurrent Plan modification, explaining the reason for the payment change and the resulting impact to the Plan.
The third thing that determines how much a debtor pays back is how much of any federal income tax refunds that he receives are contributed into the Plan. Chapter 13 law requires that a debtor commit all disposable income received during the life of the Plan into the Plan. Federal income tax refunds are considered disposable income (as are profit-sharing checks and bonuses). Ergo, the bigger the tax refund, the more the debtor pays back. However, it is fairly easy to get permission from the Bankruptcy Court to keep these refunds, or portions thereof, to help meet unexpected expenses that arise during the course of the Plan. The debtor’s might acquire medical bills due to illness that have to be paid. Such medical bills cannot be included in the bankruptcy if they arose after the filing of the case - the bankruptcy overcovers what was in existence prior to the filing of the case. In such a situation the debtor can seek the Court’s permission to keep the tax refunds to cover these expenses. Bankruptcy Courts are very liberal in this regard.
Please call the law offices of Joseph L. Grima & Associates P.C. at (313) 385-4076 so that we may explain what you would be expected to pay back if you file for Chapter 13 Bankruptcy.