Chapter 13 (Consumer Reorganization)
The main difference between a straight liquidation and that of a reorganization is the presence of a payment plan in the latter. Today, there are generally two (2) reasons to file a Chapter 13 and incur such a payment plan: (1) because a debtor ‘fails’ the means test and thus are required to make monthly payments because of their alleged ability to afford such payments & (2) the debtor is trying to save something that they are worried about losing. While failing the means test is mathematical and matter of fact, the debtor’s effort to save something is subjective.
In 2005, the US Bankruptcy Code was revised. One of the new additions was a commonly known, but misunderstood device called the “Means Test”. The Means Test is a 60-step mathematical process in which debtors’ household incomes are compared to a similar-situated household in the state. In those 60-steps include questions about your last six-months of income, your secured loans such as auto loans and mortgages, as well as mundane calculations like whether you pay for a home alarm system or internet. It is an extremely complex process and any debtor would be well-advised to seek professional counsel.
Simply stated, if the debtor’s household income is greater than the average, they are forced into a repayment plan via a Chapter 13, infra. If the debtor’s income is less than the average, then they qualify (and can remain in) a Chapter 7.
Often times, a debtor chooses Chapter 13 as a means to save a house from being foreclosed or an automobile from being reposed. Chapter 13 gives the debtor an opportunity to cure all missed payments (“arrears”) over a time period up to five (5) years. Note: in North Carolina, the debtor has up to ten (10) days after a foreclosure sale to file a chapter 13 to stop the foreclosure (“Upset Bid period”). For example, if a debtor’s mortgage payment is $1000 per month and they have fallen six (6) months behind, then they can begin to payback their arrears ($1000 x 6 months = $6000) over five years which equates to $100/month. The biggest problem for prospective debtors is not the $100/month cure payment, but rather the continuing obligation to pay their normal mortgage payment on top of the cure payment. Thus, the Chapter 13 Trustee would expect the debtor to make a monthly payment of $1100 ($1000 + $100). For a debtor that can’t afford the normal mortgage payment, this can be quite dismaying since it almost always ends up being a higher chapter 13 payment that normal.
A debtor’s Chapter 13 plan payment is generally not limited to just that calculation. For as complicated as the means test may be to calculate, the calculation of the Chapter 13 plan payment may be the simplest to imagine. A debtor is required to contribute his/her “Disposable Monthly Income”, which is generally defined as net monthly revenues1 minus normal monthly expenses, such as electricity, gas, food, etc… Very simply, if after house expenses, a debtor has $1500 leftover, then the chapter 13 plan payment will be $1500. In the scenario above with the debtor filing to stop a foreclosure, the Debtor would make a monthly payment of $1500, wherein $1100 would cure the house arrears, maintain the mortgage, and the balance ($400) would go toward other debt claims, such as taxes, credit cards, or medical debts.
Administratively, a Debtor will have the burden of mailing their monthly Plan payment to the Chapter 13 Trustee. When the Debtor defaults on those payments, the Chapter 13 Trustee will ask the case to dismiss the case. If the case is dismissed, then the Debtor will be kicked out of bankruptcy and still must deal with the debt that he or she had before filing bankruptcy. An experienced bankruptcy attorney will assist you through this process. Arnold & Smith, PLLC has experienced attorneys in the field of bankruptcy and can help navigate the process for you. If you would like to set up a consultation with one of our attorneys, please do not hesitate to contact us.