Portland Bankruptcy Law Group

In our last blog we told you how your “income” determines whether your Chapter 13 Plan will be scheduled to last 3 years or 5. You have just a little bit of say about what your “income” is for that purpose, and thus about how long your case will take to finish.  However, you and your circumstances have a lot more say about how long your case actually does last, based on how much your budget says you can afford to pay into your Plan, and how successfully you end up making the payments as scheduled.

Your “income”—that is, the very specialized definition of that term that we explained in our last blog—sets the initial ground rules.  But if those ground rules say that you may do a 3-year Plan, you are still allowed to set up your Plan to take longer IF it is in your best interest to do so.  So, if your budget does not leave you enough money each month to pay into your Plan the amount that you would need to finish in 36-months, you are allowed to lower the Plan payments and stretch them out over a longer period.  This doesn’t generally cost you any more or give any more money to the creditors (except maybe a little more interest, and that happens only in certain cases).

This flexible aspect of Chapter 13 also applies if your circumstances change during the course of your case.  If your income qualifies you for a 3 -year Plan, and your initial budget shows that you can afford to pay what you need to within the 3 years, a year or two later your circumstances may change so that you cannot pay as much into your Plan.  Your Plan payments could then be lowered and stretched longer, as long as a total of 5 years if necessary.

For better or worse this flexibility does not extend beyond a maximum of 5 years.  Your Chapter 13 Plan cannot be set up to last more than 5 years, neither at the beginning nor by amendment if circumstances change.  That’s why a Plan that starts as a 5-year one cannot be stretched any longer.  In some circumstances the payments may be reduced, as long as all the obligations under the Chapter 13 case are accomplished within the original 5 years.

Common sense says that if you do not make all the payments required by the Plan as approved by the bankruptcy judge, your case will not be completed within the time originally expected. As you can imagine, if you miss Plan payments your creditors aren’t getting paid when they thought they would, so they won’t be happy. Those with collateral—vehicles, real estate—may well want to be allowed to repossess or foreclose on the collateral. Your case could go in various unintended directions, including how long it would take to complete, assuming that it could still be completed.  If the case does survive, there’s a good chance that this would happen through an “Amended Plan,” which would have a new payment schedule and a new anticipated completion date.

You might have heard that Chapter 13 cases are supposed to take from three to five years to complete.  That’s a big difference.  What decides how long it is going to be?

There are three main things that determine the length of your case:

1. Your recent total income

2. Your present and anticipated budget

3. How consistently you will make your Chapter 13 Plan payments

We’ll cover the first one of these in this blog, the other two in the next one.  In each of these three you have at least some theoretical control over the length of your case, a theme we’ll come back to.

When we just said that “recent total income” is the first thing that determines the length of your case, we’re talking about a very particular definition of “income.”  First, this income is calculated by looking at the precise amount of income received in the 6 FULL calendar months before your Chapter 13 case is filed.

Second, this income does not just include taxable income, but also income from virtually any source: regular wages and salaries, bonuses and commissions, all business or self-employment income, pension or retirement, child and spousal support, rental or any other kind of investment income, and any other sources.  For most purposes, the only kinds of money that do NOT count are payments received under Social Security, both retirement and disability benefits.

Third, the total income of this 6-month period is divided by 6 to average these and arrive at the so-called “Current Monthly Income.”  Multiply that by 12 to come up with an annualized income amount.  Then compare that amount with the published current Median Income for your state for the size of your family.  If your annualized income amount as described here is LESS than the applicable Median Income, then you qualify for a 3-year Chapter 13 case (or a Chapter 7 case, if that is the better option).  If your income is the same as or MORE than the Median Income, then you are stuck with a 5-year case. Here are the current Median Income amounts for Oregon:

Family Size                  Median Income

1                            $42,877

2                            $52,316

3                            $57,429

4                            $66,616

For larger families, add $7,500 for each additional family member of the household.  These amounts are for bankruptcy cases filed on or after November 1, 2011; the next adjustments will likely be in March 2012.

So, being over or under these Median Income amounts, even just slightly, determines whether you are required to pay into your Chapter 13 case for three years instead of five years, a huge difference in time and money.

Considering this major impact, let’s finish by going back to what I called “some theoretical control” that you may have over the length of your case.  Most people don’t have much control over how much income they receive in the six months before filing bankruptcy, but sometimes they have just enough control to get below the Median Income.  By a combination of reducing or delaying some source of income and careful timing of the filing of their case, this rather artificial kind of “income” can in some cases be reduced to be less than the applicable Median Income.

This will make the most sense with an example. Let’s say that 5 months ago you received an unusual chunk of money—a back support payment, a bonus from work, an insurance settlement, or from cashing in some retirement fund.  As long as the date that you received those unusual funds is within the last 6 full calendar months, it is artificially increasing your “income” for purposes of calculating the mandatory length of your Chapter 13 case.  But if you are able to wait until that unusual payment is no longer in the 6-month look-back period, this will likely lower your “income,” possibly low enough to slide under the crucial Median Income amount, enabling you to do a 3-year case (or file a Chapter 7) instead of a 5-year one.

This can come up in all kinds of ways, not just money from a single lump sum.  When you come in to talk with us, if you are a good candidate for Chapter 13 we will calculate your “income,” see if you are close to the Median Income amount, and if so will discuss with you whether it would be in your best interest to change the timing of your filing.

You may figure that with a vehicle loan it’s a take-it-or-leave it proposition—that in bankruptcy you either keep the car and keep on making payments on it, or you surrender it and get to write off any unpaid balance.  The above is generally true, in a “straight” Chapter 7 bankruptcy.

But, in a Chapter 13 case you may be able to keep a vehicle you thought you couldn’t afford to pay for.  Under certain conditions, you could pay less each month AND pay less over time, and at the end still own the vehicle free and clear.

Hanging onto a vehicle that you desperately need, but can’t afford the monthly payments on, puts you into a dreadful predicament.  This is especially true if you have already fallen behind, and are worrying about your vehicle disappearing courtesy of the repo man.  You know the contract requires you to make the payments or you lose the vehicle.  You might even be trying to find a cheap replacement vehicle, talking to friends or relatives, but really worried sick about getting an unreliable vehicle.  On the other hand, a part of you might also be looking forward to letting go of the vehicle you really can’t afford.  That’s especially true if the vehicle is worth less than the loan balance.

But what if you could reduce what you have to pay for the vehicle down to fair market value? And lower the payments to an amount you could afford, while at the same time reducing or eliminating what you have to pay to your other creditors? We call that a “cramdown.”

You can do a vehicle loan cramdown in a Chapter 13 case if you meet two main conditions:

1) you got your vehicle loan more than 910 days before the Chapter 13 case is filed (that’s just about two and a half years); and

2) at the time your Chapter 13 is filed, your vehicle is worth less than the balance on your loan.

If your vehicle loan meets these two conditions, we can essentially re-write your loan.  We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount.  That’s called the “secured portion” of the debt.  We then calculate a new monthly payment—the payment amount needed to pay off that smaller balance, sometimes at a lower interest rate than the contract rate, and often on a longer remaining term, which often  results in a radically reduced monthly payment.  You pay that each month as part of your Chapter 13 Plan.

So what happens to the “unsecured portion” of the debt—the part beyond the value of the vehicle?  It gets lumped in with the rest of your unsecured debts.  How much that part gets paid depends on everything else going on in your case.  But in many situations, you do not need to pay anything more to your unsecured creditors as a result of your vehicle loan cramdown.  The same amount you would otherwise pay to your unsecured creditors—if you are required to pay anything at all—would just get divvied up among them differently.

One more sweet twist: if you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t have to catch up on that arrearage.  It’s just part of new reduced “crammed down” obligation. You just make your new Plan payments, and not need to worry about scraping up the missed payment.

As you can see, before you surrender a vehicle or allow it to be repossessed, you need to see if you qualify for a cramdown.  If you do, and we show you what the monthly payment would be reduced to, and how much less you would be paying for the vehicle over time, THEN you can make an informed decision about whether this cramdown makes it possible and worthwhile to keep that vehicle.

The part of bankruptcy law which seems to go most against common sense involves “preferences”—payments that you make to creditors (even if you don’t see them as creditors) within a certain amount of time before your bankruptcy case is filed. In most cases, if you understand and avoid preferences you will much more likely have a smooth bankruptcy case.

The idea behind the term “preference” is that it is a payment to a creditor in preference to your other creditors. You’re playing favorites with one of your creditors. If you do make such a payment, after you file your bankruptcy case the trustee may have the right—depending on the facts—to require that creditor to “return” the amount of that payment, not back to you but rather to the trustee. Then the trustee can distribute that money to all your creditors evenly.If you paid this person because you felt a strong moral obligation to do so—such as to a relative or close friend—then it may be a financial hardship to that person (and intensely embarrassing to you) when the trustee forces that person to “return” the money you paid. In fact, you may well feel like you must make up for that lost money by paying that person again. NOT a good situation.

We’ll tell you the basic rules about preferences in a moment, but first suggest that you’ll understand the term better if you start by disassociating the term from its usual meaning. A payment may be “preferential” even if you are not playing favorites at all. Indeed, the preference payment is often paid unintentionally, such as through a garnishment. The purpose behind the trustee’s right to undo a preferential payment is to discourage creditors from being overly aggressive against a person who looks like they may be a candidate for filing bankruptcy. If creditors know that money they grab may have to be returned, they will tend to be less aggressive about pursuing someone who is hurting financially. At least that’s the theory.

So here’s the basic rule. A preference is a payment (usually money, but it can be any asset) made on a prior debt to a creditor (anybody to whom you legally owe money) during the period of 90 days or less before the filing of a bankruptcy. However, that period is stretched out to a full year before filing for payments made to “insiders”—basically relatives and business associates.

There are a lot of exceptions. An important one is if the payment was made not on a prior obligation but rather to buy something new—say if you bought a used car for $1,500 right before filing bankruptcy, the payment of that amount would not be a preference. Also, if the payment to any particular creditor is less than $600 in a consumer case, or less than $5,000 in a business case, the trustee cannot pursue the preference.If you come in to see us about filing bankruptcy, we will definitely ask you about payments made to creditors in the past year. But we suggest that instead of waiting for us to ask, tell us at the beginning of our initial meeting if within the prior year (or longer if you have any doubt how long it’s been) you paid money (or made payment by transferring assets instead of money) to anyone—especially to relatives or business partners or other associates. We may decide to delay filing a bankruptcy to avoid a payment being a preferential one, but sometimes we may want to hurry the filing to enable the payment to be preferential. In the latter case, in the right circumstances money that you thought was long gone could be retrieved from a creditor and potentially used by the trustee to pay a debt that benefits you, such as paying a child support arrearage or income tax debt that would otherwise not be written off in your bankruptcy.
As you can see, preferences are an unusual aspect of bankruptcy. If we address them appropriately, we can either avoid some bad surprises or occasionally give you a good surprise.

If your income is low enough, you can pass the first part of the “means test” and don’t even have to take the second part. But even if your income is high, you may still be able to pass the test and file a Chapter 7 case. You just need to pass the second part, the expenses part.

In our last blog we explained what it takes to pass the first part of the “means test”—the income portion. Remember that “income” for the purposes of the means test include just about every source of money, not just taxable income. Also “income” has an odd definition, one that often results in your “income” going up or down every month. This means that the timing of the filing of your Chapter 7 case can affect whether or not your “income” is below your state’s “median income” and thus passes the means test. But if you have very steady and moderately high wages, or have little choice about when you must file your bankruptcy case, your “income” may be too high to pass the means test. Then you must pass the second—expenses—part of the test. If you don’t pass it, you will likely be required to file under Chapter 13 instead of 7.

Passing the expenses part of the means test involves 3 steps.

1. Deduct certain expenses to determine if you have any “disposable income.” If you don’t have any disposable income, then you pass the “means test.” Many of these expense amounts come from local and national standards established by the IRS, plus other necessary and actual expenses, including secured debt payments (on mortgages and vehicle loans). Generally speaking, the larger your expenses, the more likely you will not have “disposable income.” Also, your allowed expenses will more likely be larger if you are making payments on your home and vehicle(s).

2. If you do have “disposable income” after deducting your allowed expenses, then you still pass the “means test” if the amount of “disposable income” is low enough. If the amount of monthly “disposable income” is less than $117, you pass. If the amount is $195 or more, you don’t pass this part of the test (but may still pass with the next step). If your monthly “disposable income” is somewhere from $117 to $194, then we apply a formula: multiply the monthly “disposable income” by 60, and compare that amount to 25% of your “general unsecured debts” (debts without collateral which don’t belong to a special set of “priority” debts). If 60 months of your “disposable income” is less than this 25% amount, then you pass the “means test.”

3. If you’ve still not passed the “means test,” you may still do so “by demonstrating special circumstances,” meaning either a) additional reasonable and necessary expenses which are not otherwise allowed in the step above, or b) adjustments to income reflecting a reality not shown by the standard calculation of income.

As shown above, there are a number of ways to meet the “means test.” The practical truth is that most people who want to file a Chapter 7 case can do so. But as you can also see, it can get complicated, and much more so than we can show here. On one level, the “means test” involves the application of some relatively simple mathematical formulas. But on a deeper level, it also gets into a myriad of evolving rules and judgment calls about what expenses are allowed, what qualifies for “special circumstances,” and other issues.  This is not a do-it-yourself project.

Before we end we have to add that the “means test” only applies in Chapter 7 cases when the person’s “debts are primarily personal debts.” This means that if more than 50% of your debts are business debts, then you don’t even need to take the “means test” to qualify for Chapter 7. That’s also true for certain disabled veterans, and for other military servicemembers who served in active-duty under specific conditions. At your initial consultation, we’ll discuss the details of these exceptions to see if they apply to you.

If you have the “means” to pay a meaningful amount to your creditors in a three-to-five-year Chapter 13 payment plan, you ought to be disqualified from being able to file a “straight bankruptcy” of Chapter 7.  That’s the theory of the “means test.”

In practice, for many people it is quite an easy hoop to jump through. For most, it ultimately does not stop them from filing Chapter 7 if they want to do so. Yet, for a small percentage of bankruptcy filers, it does indeed disqualify them from Chapter 7. Where do you fall?

It’s basically a two-part test. First, the income portion, second the expenses portion. We’ll tell you the first part in this blog, the “easy hoop” we just mentioned. You should be able to calculate with a fair amount of accuracy whether you beat this part of the means test. If you do, you win—you very likely get to do a Chapter 7 case without even needing to take the second, lots more complicated part of the test. We’ll tackle that second part of the test in our next blog for those who can’t avoid it.

The first part of the means test compares your income to a published “median income” for a household of your size in your state. If your income is less than the median, you’re done with the test—you get to file under Chapter 7.

Your income for this test is based on the precise amount of income you received (from every source, not just taxable income, except social security-related benefits) during the six full calendar months before your case is filed. So, for example, if your case is filed on October 7, we look at every dollar you received in the six-month period from the prior April 1 through September 30.

Notice that if you have some flexibility about when your case is filed, and if your applicable income is not precisely the same all the time, then you may well be able to adjust the timing of your filing to reduce your income during the applicable 6-month period. Remember we’re including ALL income, including irregular ones like bonuses, unemployment benefits, and support payments.

Once you know when your Chapter 7 is being filed, and therefore know what income your household received during the prior 6 full calendar months, that income is essentially multiplied by two to arrive at an annual income. If you live in Oregon, compare that annual income amount to the following table of median incomes:

* Add $7,500 for each individual in excess of 4.

If your income, as calculated in this precise fashion, is no more than the amount applicable for your family, then you can file a Chapter 7 case without having to do the expense side of the means test.

If your income is higher, don’t despair—once we go through the rest of the means test you may well still qualify. We have to tackle that in our next blog.

If you have a loan against your vehicle, and this is a vehicle you want to keep, you definitely want to know whether you qualify for a cram down.

A cram down on your vehicle loan could allow you to keep your vehicle while paying thousands of dollars less for it, often while also reducing the monthly payments on the loan. The term comes from the basic concept that you are essentially allowed to pay for the value of the vehicle instead of the contract balance, assuming that the vehicle is worth less than the balance. You “cram down” the debt to the value of the vehicle. But how much you actually save altogether, and how much you save each month, depends on the facts of the case. Don’t worry; we won’t leave you hanging. We’ll explain in a moment, so you’ll be able to at least get some idea how much money a cram down might save you.

But we don’t want you to get all excited about it if you don’t qualify. And the rules for qualifying are—for a change—really straightforward.

Vehicle cram downs apply only in Chapter 13. There’s no such thing in Chapter 7. If you have your heart set on a straight Chapter 7—a get-your-debts-discharged-in-three-months bankruptcy, don’t even think about a cram down on that vehicle loan. In Chapter 7, it’s take it or leave it. Keep that vehicle and sign on for the rest of the full loan, or surrender it and (almost always) owe nothing. Only Chapter 13, the pay-for-three-to-five-years bankruptcy, lets you keep your vehicle and not pay the full loan balance.

That is, you get a cram down if you also meet the second condition: the vehicle loan was originated more than 910 days (about two and a half years) before you file the Chapter 13 case. If your vehicle loan is not that old, no cram down.

So let’s assume you qualify—you’re in a Chapter 13 case with a vehicle loan that’s old enough. How much money are you going to save with a cram down?

The first part of the answer is pretty easy. We mentioned it above—the new cram down amount you would pay is the fair market value of the vehicle.  Your savings is the difference between that value and your contractual loan balance. Of course the value of any vehicle can be open to some dispute, but that’s usually resolved with some simple negotiations. There’s usually not enough money in it to waste everybody’s attorney fees on litigating this.

Then calculating the amount of the new monthly payment on that new reduced balance is a matter of simple math. We re-amortize the loan, meaning we calculate what payments are needed to pay off the new value-based balance within the life of the Chapter 13 Plan. The cool thing is that often not only is the balance to be paid reduced, the length of the remaining term of the loan can be stretched longer than it would have been under the contract, and often the interest rate is reduced, all potentially greatly reducing the new monthly payment.

The last part of the “how much do I save question?” is the tricky part. The part of the loan balance that isn’t being paid—the amount beyond the value of the vehicle—is treated like an unsecured debt. That means it is lumped in with the rest of those bottom-of-the-barrel debts, which are all paid however much your Chapter 13 Plan says those debts get paid. Sometimes that pool of unsecured debts is paid a little, sometimes a lot, sometimes it is paid nothing, sometimes (rarely) it is paid in full. It depends on your whole financial picture–your income and expenses, assets and debts—and how that all interrelates with all the rules of Chapter 13 as applied to your case. Hint—in most Chapter 13 cases with a vehicle cram down, the unsecured portion of the vehicle loan gets paid little or nothing.

A Chapter 13 vehicle cram down is usually a very good deal, if you qualify for it.