No Plan Term In Chapter 13 If You Qualify
A Sacramento bankruptcy lawyer discuess Chapter 13 with regard to plan terms...
In one of the most important bankruptcy cases of 2008 the 9th U.S. Circuit Court of Appeals has ruled that the strict language of the 2005 bankruptcy reform law allows higher-income debtors to limit the amount of money and time for repayment of debts, though lower-income debtors do not share the same benefit.
Also, the 9th Circuit held that bankruptcy judges must stick to the terms of the 2005 bankruptcy reform law even though it treats higher-income debtors better than lower-income debtors when it comes to calculating income available to pay creditors in Chapter 13 reorganizations.
The decision provides a potential windfall for what the law defines as "above-median income debtors" because repayment plans can be created to pay creditors smaller amounts over shorter periods of time. Debtors in the "below-median income" classification must still make "reasonable" repayments for a minimum of three years.
The ruling allows the repayments to be for periods shorter than five years, meaning that if a debtor received a windfall after the shortened repayment period, the creditor would have no recourse to collect.
If the Chapter 13 debtor(s) projected disposable income comes out to be negative then there is no applicable commitment period or plan term. Hence a debtor with a 0 or negative disposable income is free to propose any plan term.
A negative disposable income is usually achieved by having large monthly liabilities such as taxes, car payments, child care, 401k loan repayments, 401k deductions and of course the $3,500 1st mortgage payment.
As one bankruptcy judge remarked “This creates an incentive for a higher- income debtor ‘to fiddle with his expenses and income just before he presents his creditor plan for confirmation, [s]o long as he can push up his expenses and delay receipt of income so as to show no 'disposable income' at the time of plan confirmation, he can propose such a short period of time that he can save any postponed income from the creditors' clutches."
This current law makes it even more advantageous to file Chapter 13. Many Chapter 13s are filed in order to pay $0 to the 2nd lien holder on a house while treating the balance as credit card type debt and getting it discharged. No longer will some above median Chapter 13 filers have to propose a 60 month Chapter 13. If after careful planning with an experienced attorney a Chapter 13 filer may be able to show the means to repay $0 and therefore propose a plan that is substantially shorter than 60 months. I would love to hear from attorneys in other 9th Circuit jurisdictions about their trials or sucessess in incorporating In re Kagenveama in their Chapter 13 plans.
Its been this author’s experience that Sacramento trustees permit at least 36 month plan terms for Chapter 13 filers with negative disposable income. One trustee has made it clear that he will object to a less than 36 month plan.
The dispute began when Chapter 13 trustee Edward Maney of Arizona challenged a repayment plan by Kagenveama when her bankruptcy petition showed she had an income of $74,000 a year and $1,500 per month in disposable income to dedicate to paying creditors. But as an above-median-income debtor, she was required to recalculate her living expenses under Section 1324(b)(3), leaving her with zero in disposable income.
She volunteered to repay $1,000 per month for three years, rather than the typical five-year commitment period. The trustee appealed, and the 9th Circuit agreed she could limit her repayment to three years at the lower amount, even though her income projections realistically showed a greater ability to pay.
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