Here’s an example of how to safely and sanely use a Chapter 13 payment plan to catch up on past-due support.
Today we incorporate what we explained in the last three blog posts (post 1, post 2, post 3) into a sample Chapter 13 plan. It shows how Chapter 13 is a powerful tool when a person needs to catch up on past-due support. A Chapter 13 filing protects you from the aggressive collection of overdue support, immediately and as long as needed. And through the Chapter 13 payment plan, you get a reasonable and even peaceful way to catch up on support.
Assume you’ve fallen behind on both child and spousal support because your income was interrupted. You owe $6,000 in past-due support. You’re back at work so you can now pay your ongoing monthly support but have no way to catch up. You have too many other debts.
Your ex-spouse’s support enforcement agency is poised to garnish your wages for the past-due support. If they did, you wouldn’t be able to pay your vehicle loan payment and you’d lose your vehicle.
Assume that the divorce decree requires you to pay $900 in monthly child support and $600 in monthly spousal support, $1,500 total, for 5 more years. So the $6,000 in past-due support represents 4 months of missed payments.
You received a good deal on the vehicle loan. So the vehicle is worth about as much as you owe on it—$10,000. Your monthly payments are $425 per month, with 25 more payments to go.
Besides the $5,000 in past-due support and the vehicle loan, you owe $95,000 in other debts. These other debts are all unsecured credit cards and medical bills—“general unsecured debts” under bankruptcy law. If you pay the monthly payments on the credit cards you have no money left for the medical debts, much less the $1,500 in ongoing support payments. You are in a very tight financial box.
Chapter 13 gets you out of that box fast and solves these problems permanently.
Your Chapter 13 Budget and “Disposable Income”
Filing a Chapter 13 case stops the collection of past-due support immediately. See our blog posts of 2 and 3 weeks ago about this works and the conditions you must meet. See the blog post of last week about how the Chapter 13 plan gives you a safe and flexible way to catch up on the support. Today’s example brings all this together.
In a Chapter 13 case, you and your bankruptcy lawyer put together a monthly budget of your income and expenses. That budget gives you money to pay your ongoing monthly support as well as your own reasonable expenses. See Subsection 1325(b)(2)(A)(i) of the U.S. Bankruptcy Code.
The amount left over is your monthly “projected disposable income.” See Section 1325(b)(1)(B) of the Bankruptcy Code.
The way this works is your monthly expenses exclude any debt payments. Your expenses DO include the $1,500 in child and support payments since that’s a required ongoing expense. But your expenses don’t include any money for the past-due support since that part is a debt.
Your expenses for determining your disposable income also don’t include the $425 vehicle loan payment. That is, of course, debt as well.
Assume that after subtracting all of your monthly expenses (including the $1,500 in support) your monthly “projected disposable income” is $500. You commit to paying that amount to all of your creditors for the following 3 years in your Chapter 13 payment plan.
The Chapter 13 Plan
Paying $500 per month for 3 years would in most situations be enough to take care of all your debts. This includes the $6,000 in past-due support. At the end of 3 years, you would have paid off the vehicle loan, caught up on the support, and be free and clear on all your other debts.
How could this be when you owe $425 per month on just your vehicle loan? And what about the $95,000 in credit card and medical debts? How could just $500 per month over 3 years cover ALL of these debts?
This is possible for the following main reasons. Chapter 13 usually allows you to:
- Delay paying the past-due support until your plan pays certain other debts first—here the vehicle loan.
- Pay the general unsecured debts only as much as you have the disposable income to pay them. The rest is forever written off (“discharged”).
In this present example, $525 per month for 36 months provides a total of $18,900 to pay on all the debts. About $10,665 of that would go to the $10,000 vehicle loan (the extra amount being interest). $6,000 would go to pay the past-due support.
That leaves $2,235. The Chapter 13 trustee (who receives and distributes your $525 payments) gets a fee. In this case assume 5% of every dollar that flows through the plan, or $945 here.
That now leaves $1,290. Your bankruptcy lawyer gets paid out of your plan to the extent you didn’t pay him or her in advance. Most, or all, of that $1,290 would like to go to your lawyer.
This leaves nothing for the $95,000 in general unsecured debts. In many circumstances that is allowed. It’s called a 0% Chapter 13 plan—paying the general unsecured debts 0% of the debt amounts.
The Result Here
In this example, you could stop paying all your debts when you filed your Chapter 13 case. Support enforcement would immediately stop as to past-due support. All other collection of debts would stop as well. You would have a budget enabling you to take care of all your reasonable and necessary expenses. That would include your ongoing monthly support obligations. You would protect your vehicle loan and your vehicle.
After 3 years you’d have paid off your vehicle loan, caught up on support, paid all expenses of the Chapter 13 case, and paid nothing on the general unsecured debts and yet no longer owe anything on them. This is an incredibly good result.
In many circumstances, Chapter 13 gives you results this good as to your past-due support and otherwise. But in other circumstances, Chapter 13 is extremely helpful yet not as perfect results. For example, your case may take longer than 3 years—it can be as long as 5 years. You may have to pay general unsecured debts something instead of nothing, sometimes even a significant percentage. This blog post has been long enough so we’ll look at such other scenarios next week.