Payments to Unsecured Creditors in Chapter 13
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.
Long Island Bankruptcy Attorney Explains How to Determine Payments to Unsecured Creditors in Chapter 13
Contact Andrew M. Doktofsky, P.C. at 631-812-7020 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, Nassau County, and Long Island. 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.
Information Center for Payments to Unsecured Creditors in Chapter 13 Bankruptcy
- What is “current monthly income” in Chapter 13?
- What is the “marital adjustment”?
- What is the chapter 13 plan commitment period?
- How is disposable income determined in Chapter 13 for debtors above the median income?
- How much is paid to unsecured creditors in Chapter 13 for debtors below the median income?
- What are the national standards for living and healthcare expenses?
- What are the local standards for housing and transportation expenses?
- Other deductions from income in Chapter 13
- How much is paid to unsecured creditors in Chapter 13 for debtors above the median income?
The first step in calculating the amount to be paid to unsecured creditors is to determine the debtor’s “current monthly income.” To determine current monthly income, it is first necessary to determine the debtor’s average income for the six full months preceding the month of the bankruptcy filing. This is based on gross income (i.e. before taxes, insurance, etc.), and includes almost all forms of income (except social security income), including:
- Spousal support and child support
- Regular contributions to the debtor’s household
- Net business income
- Net rental income
- Interest, dividends, and royalties
- Unemployment benefits
- Pension/retirement income
Income earned by the debtor’s spouse is included, even if the spouse is not filing for bankruptcy. However, if the debtor and spouse are separated, the spouse’s income is not included, except to the extent that the spouse’s income is used to pay for expenses of the debtor’s household.
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:
- spouse’s income taxes
- spouse’s life and health insurance premiums
- spouse’s union dues
- spouse’s contributions to retirement plans
- payments for debts solely in the spouse’s name, including credit cards, student loans, and automobile loans
- spouse’s payments for child support (for children other than the debtor’s) or spousal maintenance (from a previous marriage)
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 or 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.
The median income in New York State, based on family size, according to the U.S. Census Bureau, is:
- One Person in Household, $54,014
- Two People in Household, $69,642
- Three People in Household, $81,887
- Four People in Household, $99,943
For households exceeding four people, add $8,400 for each individual in excess of four
Click here for the U.S. Census Bureau median income table.
Determining the Amount to be Paid to Unsecured Creditors in Chapter 13 for Debtors Below the Median Income
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 J) 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 by deducting certain expenses from the debtor’s current monthly income. The deductions are generally 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:
- local standard
- national standard
- actual expense
Properly applying the deductions can be complex and confusing. It is imperative to consult an experienced attorney throughout this process.
For means testing purposes, certain deductions must be calculated using a national standard. This is a set figure established by the Internal Revenue Service (IRS). The figure does not consider the actual amount spent by the debtor on the particular expense. There are two deductions on the means test that utilize the national standards.
- Food, clothing and other items
- Out of pocket health care allowance
Based on the most current IRS table, the maximum a single debtor can deduct for food, clothing, and other items is $647, irrespective of the amount actually spent. The out of pocket health care allowance is currently $52 per person under the age of 65, and $114 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:
- Mortgage or rent
- Property taxes
- Maintenance and Repairs
- Electric, water, heating
- Garbage collections
- Telephone, internet, cell phone, and cable
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 $1,958, while in Nassau County a debtor may deduct $2,258 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 the debtor’s disposable income for Chapter 13 purposes.
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 Expense
Only 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:
- Maintenance and repairs
- Parking and tolls
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 $304 for one automobile, or $608 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 $497 for one vehicle, and $994 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 $173, 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:
- Income Taxes. This includes federal, state, and local income taxes; self-employment taxes; and social security and Medicare taxes. Debtors may only deduct their actual tax liability. Debtors that receive or expect to receive tax refunds, must ide the tax refunds by twelve, and subtract that amount from the total monthly taxes withheld from their pay.
- Involuntary Deductions. This is the monthly total of all payroll deductions required by the debtor’s employment, including union dues, uniform costs, and mandatory retirement contributions. This does not include voluntary retirement contributions.
- Life Insurance. Only premiums for term life insurance may be deducted, i.e. not whole life insurance premiums.
- Court Ordered Payments. This includes child support and spousal support. The support payments must be pursuant to a court order, or judgment of divorce. Support paid voluntarily, or by agreement only, may not be deducted.
- Educational Expenses. Allowable only if the educational expenses are required as a condition of the debtor’s employment or the expenses are for a disabled dependent child and no public education is available.
- Childcare. Includes babysitting, daycare, nursery school, and preschool.
- Additional Health Care Expenses. Only if not reimbursed by insurance or health savings account, and only to the extent the actual expenses exceed the national out of pocket health care allowance.
- Insurance Premiums. Includes health and disability insurance, and health savings account deductions.
- Care of Household or Family Members. Includes expenses incurred for care and support of elderly, ill, or disabled members of the debtor’s household or immediate family, only if they are unable to pay for such expenses.
- Educational Expenses for Dependent Children Under 18. Includes private or public school expenses up to a limit of $160.42 per child, per month. The debtor must be able to show that the expense is reasonable and necessary.
- Charitable Contributions. Includes continuing contributions to religious or charitable organizations, up to a limit of 15% of gross monthly income.
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 $497 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:
- Income Received for the Support of Dependent Children. This includes child support, foster care payments, and disability payments. This income may be deducted only to the extent that it is reasonably necessary to be expended for such child.
- Amounts Withheld from Wages for Retirement Contributions and Repayment of Retirement Loans. This would include voluntary contributions to retirement and pension plans. The plan must be a qualified IRS plan.
Special Circumstances in Chapter 13
A 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.
Determining the Amount to be Paid to Unsecured Creditors in Chapter 13 for Debtors Above the Median Income
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 between 7.5% and 10%. 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.
Changes to Income or Expenses in Chapter 13
There is one last consideration that must be addressed before determining the amount to be paid to unsecured creditors by debtors above the median income. When filing for Chapter 13, a debtor must indicate whether the reported income or expenses have changed, or are virtually certain to change, after the date that the bankruptcy petition is filed. This information is used to determine if the debtor’s projected disposable income differs from the monthly disposable income, as calculated above. For instance, there may have been unusual or one-time additional income earned in the six months preceding the bankruptcy filing that the debtor will not be receiving again, such as retroactive pay or severance pay. Based on the U.S. Supreme Court’s decision in Hamilton v. Lanning, the bankruptcy court may consider foreseeable changes in the debtor’s income and expenses in determining the amount to be paid to unsecured creditors in Chapter 13.
Andrew M. Doktofsky, P.C. | Long Island Bankruptcy Attorney
Contact Andrew M. Doktofsky, P.C. today for a free consultation about filing for bankruptcy in Suffolk County, Nassau County, or Long Island. This includes Bay Shore, Lindenhurst, Commack, Huntington Station, Northport, Levittown, Amityville, and surrounding communities. Call 631-812-7020 for a consultation about filing for Chapter 13 bankruptcy.