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In Chapter 13, there are two methods by which the amount to be paid to unsecured creditors is determined. First, unsecured creditors must be paid at least as much as they would have been paid if the debtor’s assets had been liquidated under Chapter 7. This is known as the best interests of creditors test. For debtors with little or no non-exempt assets, the best interests of creditors test will often equal zero.
Second is what is known as the disposable income test. Under this test, all of the debtor’s projected disposable income for a three or five year period must be committed to paying unsecured creditors.
In essence, this means that the plan must first satisfy the best interests of creditors test and then must satisfy the disposable income test.
Contact the law firm of Andrew M. Doktofsky, P.C., at (631) 673-9600, for a free consultation regarding how much you would have to pay your unsecured creditors in Chapter 13. Attorney Andrew M. Doktofsky’s practice is focused on consumer bankruptcy law and he possesses the knowledge and experience necessary to guide you through a successful bankruptcy filing in Suffolk County or Nassau County. Call Andrew M. Doktofsky, P.C. today if you have questions about filing for bankruptcy in Commack, Greenlawn, Melville, Hicksville, Deer Park, West Babylon, Huntington, and surrounding areas.
The first step in determining the amount to be paid to unsecured creditors is to calculate the debtor’s “average monthly income”. Average monthly income is the average income for the six full months preceding the month of the bankruptcy filing. It is based on gross income (i.e. before taxes, insurance, etc.), and includes almost all forms of income (except social security income), including:
Income earned by the debtor’s spouse is included, even if the spouse is not filing for bankruptcy.
Once the debtor’s average monthly income is determined, the next step is what is known as the “marital adjustment”. The marital adjustment only applies in cases where the debtor is married and the spouse is not filing for bankruptcy. The purpose of the marital adjustment is to subtract income of the spouse that is not regularly used to pay for the household expenses of the debtor or the debtor’s dependents. Such expenses may include:
Note that the total marital adjustment cannot exceed the spouse’s monthly gross income (based on average of six months preceding the bankruptcy filing).
After deducting the above expenses of the debtor’s non-filing spouse, the amount remaining is the debtor’s “current monthly income”.
Payments under a Chapter 13 plan will be made for either a three year of five year period. This repayment period is called the “commitment period”.
If the debtor’s current monthly income is less than the median income for the debtor’s household size in the state in which the debtor resides, then the commitment period is three years.
If the debtor’s current monthly income is equal to or greater than the median income for the debtor’s household size in the state in which the debtor resides, then the commitment period is five years.
Click here for the median income in New York State. Click here for the U.S. Census Bureau median income table.
For debtors whose current monthly income is equal to or less than the median income, disposable income is calculated by subtracting expenses that are reasonably necessary for the support of the debtor and the debtor’s dependents. This will generally be the amount that the debtor shows on the list of monthly expenses (Schedule) that is filed with the bankruptcy petition. The difference between the debtor’s current monthly income and the debtor’s expenses will be the monthly disposable income. This amount, multiplied by thirty-six months, will be the amount that must be paid to unsecured creditors in Chapter 13, for debtors below the median income.
For debtors whose current monthly income is greater than the median income, disposable income is calculated using the same deductions that are used in the Chapter 7 means test. However, there are some additional deductions that may be taken in Chapter 13 that are not permitted in Chapter 7.
All deductions are not calculated the same. Deductions fall into one of the following categories:
Properly applying the deductions can be complex and confusing. It is imperative to consult an experienced attorney throughout this process.
Based on the most current IRS table, the maximum a single debtor can deduct for food, clothing, and other items is $585, irrespective of the amount actually spent. The out of pocket health care allowance is currently $60 per person under the age of 65, and $144 per person for those 65 and older.
Similar to the national standard, local standards are set figures that a debtor may deduct from his or her current monthly income. The local standards are specific to the state and county in which the debtor resides. Generally, a debtor may deduct the local standard or the amount actual spent on a particular expense, whichever is less. Most common local expenses include housing and utility expenses and transportation expenses.
The local standard amount for housing costs depends on the state and county in which the debtor resides, and the size of the debtor’s family. The following expenses are included in the housing and utility expense:
It is imperative to properly identify the county of residence when calculating the local standard for housing and utilities. For example, the maximum mortgage/rent deduction for a single debtor differs significantly from Suffolk County to Nassau County.
In Suffolk County, the maximum a single debtor may deduct for mortgage or rent expense is $1,985, while in Nassau County a debtor may deduct $2,254 for the same expense.
An individual contemplating bankruptcy, and who is planning to move to a new residence, must consider the impact that moving to a different county can have on their ability to file under Chapter 7.
Calculating transportation expenses involves three separate types of expenses – 1) vehicle operating expense; 2) vehicle ownership expense; and 3) public transportation expense. A debtor may deduct the allowable transportation expense or the actual amount spent, whichever is less.
Vehicle Operating ExpenseOnly debtors that own, lease, or pay the operating expenses for a vehicle may take a deduction for vehicle operating expense. Operating costs are calculated using a local standard and vary based on region. Operating costs include the following:
In New York State, debtors residing in Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, and Westchester counties may deduct a vehicle operating expense of $342 for one automobile, or $684 for two vehicles. In any other county in New York State, the vehicle operating expense is $278 for one automobile, or $556 for two vehicles.
Vehicle Ownership Expense A debtor may claim the vehicle ownership expense only if the debtor either owns a vehicle and is making loan payments for the vehicle, or is leasing a vehicle. Although it is considered a local standard, the allowable deduction is the same throughout the U.S. The deduction is $517 for one vehicle, and $1,034 for two vehicles. Generally, a debtor whose household contains a single driver may claim an ownership expense for only one vehicle. A debtor may not claim an ownership expense for more than two vehicles.
Public Transportation Expense Debtors that do not claim a vehicle operating or ownership expense may claim the full public transportation allowance, regardless of whether they use public transportation. The public transportation expense is $185 throughout the U.S.
Debtors that claim a vehicle operating or ownership expense may also claim a public transportation expense, up to a maximum of $185, if they actually incur public transportation expenses.
In addition to the expenses listed above, debtors may deduct their actual monthly expenses for the following categories:
Debtors may deduct the average monthly payment for secured debts that are contractually due within the sixty month period after the filing of the bankruptcy. Examples of secured debts are those owed for automobile loans, mortgages, and home equity loans. Mortgage debts include property taxes, and property insurance, even if these expenses are paid directly by the debtor, i.e. not through the mortgage lender.
If there are more than sixty months of payments remaining on the loan, then the actual monthly payment will be the same as the sixty-month average. However, if there are less than sixty months remaining, then the total remaining payments must be added up, and divided by sixty, to determine the average monthly payment due.
The deduction for secured debts is not in addition to the deduction for vehicle ownership expense, or the deduction for housing expense. However, to the extent that payment for secured debt exceeds the vehicle ownership or housing expense, then the debtor may deduct the higher amount. For example, if the average monthly payment for a debtor’s automobile loan exceeds $517 per month, then the debtor may deduct the higher amount.
Keep in mind that excessively high monthly payments for luxury automobiles may be questioned by the Chapter 13 trustee, and may be cause for an objection to confirmation of the Chapter 13 plan, on the grounds that the expense is not reasonably necessary. (This would be an issue only if the plan proposes to pay less than 100% to unsecured creditors).
In addition to the average monthly payment, a debtor who has fallen behind on payments for a secured loan may deduct the amount necessary to bring the loan current (the cure amount), divided by sixty. This provision only applies to property that is necessary for the support of the debtor or the debtor’s dependents. In other words, an objection could be raised if a debtor deducts arrears owed for a pleasure boat or recreational vehicle.
Amounts due for priority debts, including domestic support obligations and priority income taxes, may be deducted on the means test. This provision applies to amounts that are past due, not ongoing obligations (which are included in “other expenses”). The total amount owed is divided by sixty.
In addition to the above deductions, which are the same as those used in the Chapter 7 means test, debtors in Chapter 13 may deduct the following from income:
Special Circumstances in Chapter 13A debtor may include expenses that are not included in the allowable expenses above, only if special circumstances justify the additional expenses. To establish special circumstances, a debtor must itemize each additional expense, and provide supporting documentation. In addition, a detailed explanation as to the special circumstances that make such expenses necessary and reasonable, must be provided. The debtor must also provide a sworn statement attesting to the accuracy of any information provided to demonstrate that the additional expenses are required.
After deducting all of the permissible deductions from the debtor’s current monthly income, the amount remaining is the monthly disposable income. This amount, multiplied by sixty, is the amount that must be paid to unsecured creditors for debtors above the median income. Keep in mind that the Chapter 13 trustee is paid a commission on all amounts paid through the Chapter 13 plan. The commission is approximately ten percent. This percentage must be added to the total amount being paid through the Chapter 13 plan, in order to determine the total plan payment. If any arrears for secured debts, or amounts due for priority debts, are being paid through the plan, the trustee’s commission must be paid on these amounts as well.
Contact the law firm of Andrew M. Doktofsky, P.C. today for a free consultation about filing for bankruptcy in Suffolk County and Nassau County in New York. This includes Bay Shore, Lindenhurst, Commack, Huntington Station, Northport, Levittown, Amityville, and surrounding communities. Call (631) 673-9600 for a consultation about whether you qualify to file for Chapter 7 bankruptcy.