Chapter 13 Payments: How much will I have to pay?

A chapter 13 bankruptcy is a finantial reorganization.  You pay a fixed amount each month for 3 to 5 years (or less).  In return, you may be eligable to modify liens, keep property you'd lose in a chapter 7, or qualify for bankrutpcy with a high income.

By far the most common question is "how much will I have to pay?"  There are two answers to that question.

Chapter 13 is, by definition, affordable.  You pay your disposable income each month; that is, your income minus your reasonable and necessary expenses.  Take all your income from employment, self-employment, support, assistance, etc.  Subtract withholdings, and all your other monthly obligations (except your debt): food, clothing, maintenance, taxes, transportation, child care costs. . . you get the idea.  Whatever is left over, that's what you pay.  It might be $50, or $500, or $5000.

Who decides what you spend on these things?  YOU!  Of course, the expenses must be both necessary and reasonable.  But every person's situation is different, which is why the courts leave this to common sense and reason.  Age, household size, income, and location are all factors.

Also, keep in mind that your disposable income is used to pay all of your debt - including secured debt on property you keep, like your house and cars.  The number may seem high for that reason.  Unsecured creditors, like credit cards, medical debt, and personal loans, only get whatever is left over.  They do not necessarily get 100%; in many cases they get less than 10%.  The rest is discharged!  You do not have to pay everything 100%.

There is one other consideration.  You must pay your unsecured creditors at least as much as they would have received in a chapter 7. In most cases, this number is 0, because the exemptions protect all of the property in a chapter 7, leaving nothing for the creditors.  However, if the number is higher, then you must pay at least that amount within 5 years or less to your unsecured creditors.

In sum, your chapter 13 payments are your disposable income (income minus reasonable and necessary expenses) with your unsecured creditors getting no less than what they would have received in a chapter 7 (usually, nothing).

How Much Debt Do You Need to File Bankruptcy?

The answer is simple: there is no minimum.  You can technically file a bankruptcy with just a $1.00 of debt.

However, whether you should or not is a more difficult question.  I've seen people with under $5,000.00 of debt file because they had no income and essentially no ability to pay.  The creditors refused to negotiate, leaving the client with little choice.

On the other hand, I've had a client with over $10,000.00 of unsecured debt decide not to file, because his household income was enough to reasonably pay back the debt after making a few adjustments.  With these clients, I often recommend a certified non-profit debt consolidation agency.  Note this is NOT a debt settlement company!  A debt consolidation agency will help you adjust your budget, work with your creditors, and make a single payment to cover most of your obligations.

Also, it's important to know that bankruptcy isn't just about the amount of debt.  Sometimes it's about reversing a recent garnishment, or stopping a pending foreclosure.  In these cases, a person may have no unsecured debt, yet a bankruptcy is still an option.

In other words: it depends.  The only way to determine if bankruptcy is right in your situation is to setup a no-cost consultation to review your circumstances in detail.

Effective November 1, 2010: New Michigan Means Test Numbers

Anyone filing a bankruptcy after November 1, 2010 should be aware of the new means test numbers in effect.

The Means Test is what determines whether there is a so-called "presumption of abuse" in filing a chapter 7 bankruptcy under the BAPCPA amendment of 2005.  The test looks at your household's gross income from all sources (except income under the social security act) over the past six calendar months.  If your income is in excess of the median income for the same size household in the state of Michigan, you must calculate a hypothetical chapter 13 payment.  This calculation is fairly complicated, but if it results in a significant return to your creditors, the "presumption of abuse" arises.

The numbers for Michigan will be as follows:

1 person: $41,875 (was $43,611)

2 people: $49,919 (was $52,620)

3 people: $59,190 (was $61,737)

4 people: $70,600 (was $74,824)

4+ people: $70,600 + $7,500 per additional person (was $74,824 + $6,900/person)

It's important to stress that you can still qualify for a chapter 7, even if your gross income is over these numbers.  However, also note that these numbers are decreasing due to Michigan's economic crisis.  So if you wait too long to file, you could find yourself ineligible for a chapter 7.

What's Been Keeping Me Busy

I've been kept very busy over the past month, so I apologize for the lack of new blog posts or additional consumer information.

What's been keeping me busy?  A year ago I was appointed to a criminal public defense case, which went to trial in March.  Although I normally focus only a consumer cases and bankruptcy, this case was an exception.  It was a two week ordeal, ending in a mistrial which you can read about here.

Additionally, I've been busy helping my friend Ken Borton defend charges from the Michigan DNR(E) that his bird feeders violate Michigan's deer and elk feeding ban.  Ken runs the popular website www.snowmancam.com.  I've been working with Ken for over a year to deal with this issue and, although it's another criminal case I wouldn't normally take, I felt this issue was important enough to justify the exception.  Yesterday we received a favorable ruling dismissing the charges, which you can read about at the following links: here, and video here.

In addition to all that, March was a busy month getting bankruptcies filed and assisting clients with consumer issues.  April will be just as busy, doling out advice, filing bankruptcies, and attending ICLE's bankruptcy conference in Plymouth.  I'm also looking forward to the ABI Central States Workshop in Traverse City in June.  

Fortunately, I like being busy.  Technology allows me to continue servicing clients even when I'm travelling or otherwise outside my office.  I don't divert calls to a secretary, so people can reach me directly and I can access voice messages promptly (being in court is the rare exception).  I offer consultations after-hours and by phone to facilitate work and family schedules.  I make extensive use of email and the Internet to prepare cases.  And I offer flat fees, so all of this comes as part of the package.

If you're facing a consumer issue or mounting debt,  I'm never too busy to do my best for you: send me an email or pick up the phone.

Collection Lawsuits in Michigan (Part I)

The creditors have been calling, but no matter how much you pay it's not enough to stop them. You start ignoring the calls and the threatening letters.  What happens next?

The creditor will sue you to get a money judgment.  Why?  Because a judgment is good for ten years and Michigan law gives the holder of a money judgment a set of tools to force you to pay.  These include bank account and paycheck garnishments, levies, creditor exams, and liens.  Sometimes a creditor will sue you before they even entertain a settlement offer.

But don't panic if a creditor sues you.  The creditor cannot use these tools until a judgment is obtained. To get a judgment, the creditor must file and serve you with the complaint.  If you're served by mailed, you then have 28 days to answer. After that, the creditor must apply for a default judgment, and then wait another 21 days for it to become effective. If you answer the complaint, you can buy more time as the court will set the matter for a pretrial.  

That said, don't wait for the creditor to get a judgment.  A timely bankruptcy filing will halt or prevent litigation.  It can discharge your debt before the garnishments start or the liens get placed on property.  It can even get back some of your recent garnishments and strip off liens, but this can result in a more complicated and expensive bankruptcy filing.

In my next post, I'll address some of the tools creditors use once they obtain their judgments