We show how wise timing in your filing of a Chapter 13 “adjustment of debts” case could shorten your payment plan from 5 years to 3 years.
Chapter 7 vs. Chapter 13
Two days ago we showed the importance of timing in the filing of a Chapter 7 case. The timing can affect whether you can qualify to be in a Chapter 7 “straight bankruptcy” case. If your income is too high you may not pass the “means test.” If you can’t pass this test you’d instead have to go through a Chapter 13 “adjustment of debts” case. That requires you to pay for 3 to 5 years into a payment plan, instead of being able to “discharge” (write off) all or most of your debts within about 4 months.
But what if you need a Chapter 13 case? It can be the much better option in certain circumstances. If you have debts that can’t be discharged like recent income taxes or child/spousal support, or debts you want to catch up on like a home mortgage, Chapter 13 buys you time to take care of those special debts. There are many other reasons Chapter 13 may be better for you than Chapter 7.
So assume you want to file a Chapter 13 case. One important question is how long you will be required to pay into your payment plan. Sometimes you’d want to have as much time as possible to stretch out and lower your plan payments. But in other circumstances you’d just want to get it over with as soon as possible. Then you can get on with life, and if you want start rebuilding your credit.
Your “Income” Dictates the Length of Your Chapter 13 Case
There is no “means test” under Chapter 13. Yet the same unusual way of calculating income in the Chapter 7 “means test” is used in Chapter 13. That same unusual calculation of income determines whether your payment plan can be 3 years long or instead must last 5 years.
So let’s look briefly again at how income is calculated.
The Chapter 13 Calculation of Income
To calculate your income for this purpose:
- includes almost all sources of money other than from Social Security (not just taxable income)
- total all gross amounts received precisely during the 6 FULL calendar months prior to filing your case
- multiply this 6-month amount by 2 for the annual “income” total
- compare that annualized amount to the “median income” for your state and family size
You may finish your Chapter 13 case in 3 years instead of 5 if your income is no larger than the applicable “median income” for your state and family size.
The “median income” amounts are adjusted regularly and are available online. You can find those state-by-state amounts for cases filed starting May 1, 2017 and for several months thereafter here. (And if you’re reading this well after this date, check here to see if this table has subsequently been updated.)
If you want you can go through each of the specific steps in this calculation right on the official bankruptcy court form. Download or print the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (effective 12/1/15).
How Smart Timing of Filing Can Make Such a Difference
See our last blog post for an example how even just a day or two difference in the date of filing a case can put you over or under your applicable “median income” amount.
This is even more crucial in Chapter 13 than in Chapter 7. In Chapter 7 the income step is just the first step of the “means test.” Even with higher-than-median income you may be able to pass the “means test” based on your expenses or other considerations. But under Chapter 13 your income as calculated above determines whether or not you’re required to be in it for 5 years.
Important Practical Notes
Even if your income ALLOWS you to finish in 3 years you can usually take longer if you want. As mentioned above, you may want to stretch out and so reduce your monthly payments. But in this situation you’d not be REQUIRED to go the full 5 years. And you generally don’t pay any more to your creditors while doing so.
Also, if you ARE required to go the full 5 years based on your income that doesn’t always hurt you. To pay everything you want and need to pay may take that long, without necessarily paying more to your creditors.
However, there ARE situations in which based on your budget you could finish your payment plan in 3 years. Or other situations in which you could finish sometime between 3 and 5 years. In these situations being required to go the full 5 years means paying more to your creditors—sometimes much more. And it delays getting to that point in time when you can actually start your fresh financial start.