Since the bankruptcy code was altered in 2005, making it tougher to file for Chapter 7 Bankruptcy, debtors are more frequently seeking absolution through a Chapter 13 filing, which arrives at a manageable repayment plan.
D.C. Chapter 13 bankruptcy lawyers recognize that the key word here is “manageable.” As the recent case of Pliler v. Browning before the U.S. Court of Appeals for the Fourth Circuit clearly illustrates, failure to work out a reasonable plan can result in even greater financial difficulties for debtors down the road.
One of the most important factors to be determined by a bankruptcy lawyer is that of disposable income. This is how much money is left over after a debtor has covered the bare necessities. This will determine how much the debtor may be able to pay each month.
Chapter 13 repayment plans are typically set in 3- or 5-year increments. Only under special circumstances can the plan be terminated early. This point was underscored when the Fourth Circuit recently ruled that Section 1325 of the U.S. Bankruptcy Code requires that above-median-income debtors keep up with their five-year repayment plan unless all unsecured creditor claims are paid in full – irrespective of projected disposable income.
In other words, save for a court order, you will be bound by that repayment plan no matter what – so you and your attorney need to make sure it’s reasonable from the start.
In the Pliler case, according to court records, a husband and wife filed a voluntary petition for relief through a Chapter 13 bankruptcy in August 2012. Their income was calculated to be above-average in their state for comparably-sized households. Their disposable income was calculated at negative $300.
Under the proposed repayment plan, the couple was to pay $1,800 monthly for 15 months, followed by $1,500 for 40 months. The total of these payments would cover attorneys’ fees, the trustee’s commission and secured creditors. Unsecured creditors would get nothing.
The agreement allowed for termination of the repayment plan at 55 months. The trustee objected on the grounds that the plan was not in good faith, as it didn’t meet the five-year requirement and yet the unsecured creditors were slated to recover nothing
The chief bankruptcy court judge denied a motion to dismiss, but directed the trustee to file a motion for confirmation of a plan that would require the couple to pay $1,800 monthly for a full 60 months with no early termination. Under this plan, unsecured creditors would recover 40 percent of their losses.
The bankruptcy judge held that 11 U.S.C. 1325(b) required that above-median income debtors commit to a five-year plan, regardless of disposable income – even if it was negative.
A direct appeal was filed.
The appellate court ruled that plans can be terminated in as little as three years or maybe less, but only if unsecured creditors have been repaid in full. This is known as the “applicable commitment period.”
The idea is that during this time, debtors must devote their full disposable income to repaying creditors so that creditors receive as much back as the debtor can reasonably afford.
The debtors in this case argued that this did not apply because they had negative disposable income. However, the court noted that just because there is no disposable income at the time the plan is filed doesn’t mean there won’t be additional funds later with which to satisfy the claims.
While the appellate court affirmed the bankruptcy court’s decision not to allow early termination of the plan, it did order the case remanded so that the debtors could present evidence regarding the feasibility of their monthly payments during the five-year time frame.