Modification of Chapter 13 Bankruptcy Plans

When an individual files a Chapter 13 Bankruptcy,  that person will normally make monthly payments toward his or her debts for a period of 36 to 60 months.  At the end of the plan period the debtor will receive a discharge of debts, even though in most cases the plan payments cover less than 100% of the debts.

If the plan does not pay 100%  of the debts, the amount the Chapter 13 debtor pays each month must include all his of her available income determined under tests provided for in the bankruptcy code.  The tests are normally applied as of the date the individual files bankruptcy, and are then used to formulate a plan, which the court confirms,  for the entire 36 or 60 month period.

If there is a substantial change of circumstances the court can grant a motion to modify the plan.   A debtor frequently uses this provision to obtain a reduced payment,  if his or her income drops, or if there are certain significant expense increases such as medical costs.  Likewise a trustee or a creditor may bring a motion to increase the monthly payment based on a change of circumstances.

In what appears to be a break for debtors trying to save their homes a 2013 court case ruled that a mortgage modification, which reduced the debtors’ mortgage payment, could not be grounds to increase the Chapter 13 payment.  The court said that while an increase of income will justify a modification of the plan, the law does not allow a modification based on a decrease of expenses.

Are Income Tax Refunds Forfeited in Chapter 13 Bankruptcies

In most Chapter 13 Bankruptcies a debtor makes monthly payments for either 36 or 60 months based on the debtor’s income, and at the end of the term the debtor receives a discharge. Some Chapter 13 plans however also order the debtor to turn over his annual tax refunds to the plan during the term, which seems like a questionable practice under the law.

In most Chapter 13 plans the payments are based on the means test.  The means test is a mechanical formula which subtracts the allowable expenses from the debtor’s average monthly income to determine the payments that the debtor must make under the plan.  One of the expenses allowed in the means test is taxes, and according to the law the debtor should use  her actual tax expense rather than the withholding from one’s paychecks.  Thus the monthly payment should already be adjusted to reflect an annual tax refund or a balance due on one’s tax return.

The problem is that projecting what a future tax expense will be is always an estimate, which can vary in accuracy depending on the tax expertise level of the lawyers, the trustees, and the judges involved in the case.  Some bankruptcy judges have thus decided that as a practical matter the estimate will be made more accurate, if the debtor is required to pay his or her annual tax refund into the plan in addition to the monthly payments, and in fairness to the judges this is probably correct at least some of the time.

Unfortunately, this practice is not uniform and an individual filing a Chapter 13 Bankruptcy will often not know whether they will be required to make this extra payment until the plan is confirmed.  About the best they can do is ask their bankruptcy attorney for an opinion, who will probably make a better guess, since he or she is normally familiar with the local judges and trustees, but this too is only an estimate.    

Dissipation of Assets In Divorce.

Sometimes when a marriage is breaking down one of the spouses will be careless with the property acquired during the marriage.  Classic examples include the husband giving away their investments to members of his family, or the wife footing the bill for an exotic vacation with her new lover.  There are also less fragrant examples, such as the spouse occupying the home failing to keep up mortgage payments after the couple has separated and he or she suddenly finds it harder to pay the bills when they are now maintaining two households rather than one.

In divorce law this is known as dissipation of property, and when it occurs the divorce lawyer of the injured spouse will try to make his or her client whole through the final judgment.  If a court finds that one spouse has dissipated assets it can order a division of the marital property that will subtract the amount that the wrong doing spouse dissipated from his or her share of the settlement.

As one can imagine disputes over dissipation can become nasty.  A spouse who has acted out of animosity in wasting the assets is not likely to readily agree to reimburse his spouse for the losses.  Also dissipation is one of the accusations a party looking for a fight is likely to make against his or her spouse with a very weak factual basis.

Review of Credit Reports by Employers

As a bankruptcy lawyer I often hear clients express concern that, if they file bankruptcy, their employers will fire them. I can in this case point out that it is illegal for an employer to take action against an employee for filing bankruptcy, which I believe is a law most employers, who obtain legal advice on employment matters will follow. However, some people still express fear that their employers will merely deny that bankruptcy was the real cause of the hostile action against the employee. Senator Elizabeth Warren from Massachusetts has just introduced a bill that could also make it illegal for an employer to look at an employee’s credit report in making hiring or firing decisions. This would of course strengthen the protection, because if employers cannot look at credit reports, they are less likely to even know the employee filed bankruptcy. Since January 1, 2011 Illinois has had a similar law barring employers from considering credit reports although the Illinois law has a number of exceptions.

Pursuing Child Support Against Bankrupt Debtor

When an individual files bankruptcy an automatic stay goes into affect which forbids a creditor from taking action outside the bankruptcy process to action to collect a debt. The creditor cannot call or write to the debtor demanding payment, pursue a collection action in court or garnish the debtor’s wages or property. Domestic support obligations, including child support and spousal maintenance are somewhat of an exception to the automatic stay. Thus while a credit card company with a judgment against an individual would have to cease garnishing the person’s wages on the day the bankruptcy is filed, an order to withhold child support from the individual’s wages would continue in effect. The law makes some subtle distinctions however that could create pitfalls for someone who aggressively pursues these debts without consulting a bankruptcy attorney . For example the bankruptcy law allows the custodial parent to bring a motion to establish or modify child support during the payor’s bankruptcy, but an action to hold the debtor in contempt of court for past unpaid child support would be a violation of the automatic stay. This of course does not mean that the delinquent child support is discharged by bankruptcy, only that certain actions to collect the support are not allowed while the bankruptcy is pending.

Social Security Income And Chapter 13 Bankruptcy Payments

In a Chapter 13 bankruptcy the debtor’s monthly payments toward his or her debts are usually determined by the bankruptcy means test.  The means test is a mechanical calculation that takes the debtors average  monthly income and subtracts out allowable expenses.  For most expenses such as food, clothing and utilities the amount of allowed expenses is a specific allowance.  For some expenses such as taxes, mortgage payments, and child support the debtor’s actual expenses are used.

The Bankruptcy Code specifically excludes Social Security from income in the means test, and therefore most Chapter 13 debtors will not have higher payments, because they are receiving Social Security.  There is another provision in the law however that allows the trustee to ask for higher monthly payments, if a debtor is spending unreasonably high amounts on his or her living expenses.

The question thus arises, what happens, if the living expenses are too high, but the debtor is paying for these out of Social Security.  For example, what if a man spends $600 a month of his Social Security eating dinner every night in a nice restaurant, when the means test only allows him a $315 a month food allowance.

From what the courts have said the man will not have a problem.  Social Security must still be subtracted in calculating how much income the debtor would have available to make Chapter 13 payments, if he or she was only incurring reasonable expenses.