Income requirements for a Chapter 13?

[Invincible88]

I'm curious, because when I filed my chapter 7, I was well below the income threshold on the means test and underneath the median household income as well. I was always under the impression you had to make a certain amount of income to qualify for a Chapter 13. Would it not be the chapter 7 means threshold plus whatever your monthly payment to repay creditors is? Also, I thought the monthly payment amount was always based on the equity you have in your home. How much income would I have to make to get approved on a chapter 13 plan? Thanks.

[justbroke]

There are no income requirements for Chapter 13... except that the debtor must have "regular income" to fund the plan. In some districts, they also want you to pay something to the unsecured creditors because the Chapter 13 Trustee would get nothing for managing your plan. In the past I have heard of some districts/Trustees wanting you to pay the unsecured creditors at least 10% of the allowed unsecured claims.

Otherwise, the Chapter 13 would just be a so-called back-door Chapter 7.

[Invincible88]

There are no income requirements for Chapter 13... except that the debtor must have "regular income" to fund the plan. In some districts, they also want you to pay something to the unsecured creditors because the Chapter 13 Trustee would get nothing for managing your plan. In the past I have heard of some districts/Trustees wanting you to pay the unsecured creditors at least 10% of the allowed unsecured claims.

Otherwise, the Chapter 13 would just be a so-called back-door Chapter 7.

I see. I was under the impression that I had to have enough income in a Chapter 13 to: a) pass the means test used on a Chapter 7 (ie to show available disposable income) b) to make the repayment plan payments each month out of that disposable income. In my case, based on my understanding, I'm not going to have any disposable income as I am well below on the means test. How does home equity play out in this? I don't think I have any, but if it ends up that I do have a little, do I have to repay all of that equity back in a Chapter 13 or does it depend on my disposable income amount? I'm seeing stuff about 1% plan or 0% plan. I would still be paying back more in a Chapter 13 than a 7 because I would be catching the mortgage up and paying back taxes owed for 2021. How much of the home equity (if there is any) would I have to pay to unsecured creditors in a Chapter 13 if I'm below the means test on income (ie no disposable income)?

Thanks.

[justbroke]

The Means Test is such a... piece of junk. It takes numbers from the past to arbitrarily -- some would say -- come up with your future "current monthly income" (CMI) and your projected "disposable monthly income " (DMI). The Means Test is used in a Chapter 7 to determine if you are a.) over/under the median, and b.) if you are over, do you have enough "allowed" (standardized) expenses to overcome a presumption of having the "means" to payback your creditors in a Chapter 13.

For a Chapter 13, the Means Test is only used to determine a.) the "applicable commitment period" (36 months or 60 months), and b.) your "disposable monthly income" (DMI) as a starting point as to what your should pay the unsecured creditors.

A Chapter 13 doesn't have any minimum income test. It really only requires "regular" income to support a Plan of Reorganization (a/k/a the Plan). However, a Chapter 13 does have some maximums related to the amount of unsecured and secured debt (known as the 109(e) limits) before pushing a debtor into a Chapter 11.

Home Equity
So, for a Chapter 13 you must pay back a minimum amount to the unsecured creditors. The baseline amount is the DMI from your "Means Test" multiplied by either 36 or 60 (the applicable commitment period). But there's another test known as the "best interest of creditor's" test. This is to make sure you pay back at least as much as you would have in a hypothetical Chapter 7.

Home Equity could be an issue if you are unable to exempt that home equity. Let's say that you have $100K in home equity but your State only allows $10K in exemptions for a home. You now have $90K in equity. Your Chapter 13 plan must propose to pay the lesser of the $90K or the DMI * (36 or 60) which means you could be in a 100% plan.

Plan Base
The plan base is that minimum amount you must pay over the life of the plan. If you are filing a Chapter 13 to save a home, the Trustee will require you to pay the mortgage through the plan since you'll be paying the arrears (missed payments) through the plan as well. This at least gives the Trustee their commission (up to 10%) to manage the case (issue checks, do accounting, attending hearings, deal with creditors).

Back Door Chapter 7
If your plan base is $0.00 then there is no reason to file a Chapter 13. That means that you aren't paying anything in the plan and there's no purpose. Maybe someone could tell me why someone could get a $0 Chapter 13 plan confirmed (with no property to save, no arrears, no taxes, no equity)? I have read a few cases where attorneys have filed a Chapter 13 just so that they could collect the attorney's bankruptcy fees from the client... and those cases were dismissed (or converted). See: https://www.rtlaw.com/blog/blog/publ...ile-chapter-13

Bottom Line
If you can file a Chapter 7... file a Chapter 7. Unless you need the power of Chapter 13 to save property or you're "forced" into a Chapter 13 to protect yourself from creditors... don't file a Chapter 13. Most of the folks in a Chapter 13 would love to have just done a Chapter 7 and be done.

[Invincible88]

The Means Test is such a... piece of junk. It takes numbers from the past to arbitrarily -- some would say -- come up with your future "current monthly income" (CMI) and your projected "disposable monthly income " (DMI). The Means Test is used in a Chapter 7 to determine if you are a.) over/under the median, and b.) if you are over, do you have enough "allowed" (standardized) expenses to overcome a presumption of having the "means" to payback your creditors in a Chapter 13.

For a Chapter 13, the Means Test is only used to determine a.) the "applicable commitment period" (36 months or 60 months), and b.) your "disposable monthly income" (DMI) as a starting point as to what your should pay the unsecured creditors.

A Chapter 13 doesn't have any minimum income test. It really only requires "regular" income to support a Plan of Reorganization (a/k/a the Plan). However, a Chapter 13 does have some maximums related to the amount of unsecured and secured debt (known as the 109(e) limits) before pushing a debtor into a Chapter 11.
Bottom Line

I think this answered the gist of my question. I understand there's no rationale to file a 13 unless you have property you may lose (home). I was looking for confirmation that if (in a completely hypothetical scenario) the trustee said I had 150k in equity in my home and we wanted to save our home. We could flip the chapter 7 to a 13 and our repayment plan would be based on our DMI, which is 0 at the moment. We'd still have to pay the mortgage arrearages and income taxes owed for 2021, but beyond that, based on what you've written, unsecured creditors would get basically nothing based on our current DMI, which is 0. I have a steady job, but it doesn't pay enough to yield any DMI. I could in theory pick up a 2nd job if my motivation was to save the home, in order to be able to keep up with the payments. We don't know that we'll be forced into a Chapter 13 at this stage, as I truly don't think we have enough equity to compel the trustee to sell the home, but we're preparing for all possibilities and we really don't want to lose the home, as there are very few good alternatives out there right now rental wise that wouldn't cost almost as much as our mortgage payment.

Tough situation..

[justbroke]

Not exactly. Filing a Chapter 13 can be voluntary, typically to save property, or required (because the debtor has the "means" to fund a Chapter 13).

Whether or not you have DMI will depend on how much equity you have less how much equity you could have protected in a theoretical Chapter 7. If you lived in Florida, the equity question doesn't exist since Florida has an unlimited homestead exemption. But let's say you live in a State that used the federal exemptions and you have $150K in equity... that's a MUCH different situation.

Given that the federal homestead exemption is (now) $27,900 (or $55,800 if filing double), you would have nearly $100K in equity exposed. That means you'd have to propose a plan that pays the unsecured creditors at least $100K over the life of the plan. In most scenarios, that would put most debtors into a 100% plan.

Getting a second job gives you more DMI which would go to the creditors. There are few scenarios where obtaining a 2nd job while in an active Chapter 13 makes sense. But, alas, there aren't many reasons to do that if you're just going to pay into the plan.

Think of it this way... if you have $150K in equity and $30K in unsecured debt the bankruptcy court -- whether Chapter 7 or 13 -- is not going to let you pay those creditors nothing. (Unless you have a significant homestead exemption such as in Florida, Texas, and a couple of other States where the homestead exemption is unlimited.)

[Invincible88]

Not exactly. Filing a Chapter 13 can be voluntary, typically to save property, or required (because the debtor has the "means" to fund a Chapter 13).

Whether or not you have DMI will depend on how much equity you have less how much equity you could have protected in a theoretical Chapter 7. If you lived in Florida, the equity question doesn't exist since Florida has an unlimited homestead exemption. But let's say you live in a State that used the federal exemptions and you have $150K in equity... that's a MUCH different situation.

Given that the federal homestead exemption is (now) $27,900 (or $55,800 if filing double), you would have nearly $100K in equity exposed. That means you'd have to propose a plan that pays the unsecured creditors at least $100K over the life of the plan. In most scenarios, that would put most debtors into a 100% plan.

Getting a second job gives you more DMI which would go to the creditors. There are few scenarios where obtaining a 2nd job while in an active Chapter 13 makes sense. But, alas, there aren't many reasons to do that if you're just going to pay into the plan.

Think of it this way... if you have $150K in equity and $30K in unsecured debt the bankruptcy court -- whether Chapter 7 or 13 -- is not going to let you pay those creditors nothing. (Unless you have a significant homestead exemption such as in Florida, Texas, and a couple of other States where the homestead exemption is unlimited.)

Ok.. so you do have to pay back any equity that is not exempt in a chapter 13, regardless of if you make 3k a month or 20k a month income at your job? That's what I was trying to see. I'm in a federal exemption state. So if I have a significant amount of equity, that kills me on a chapter 13 every time, because I'd have to repay all of that over 5 years regardless of my income, which could hypothetically be a pretty steep monthly payment and with no DMI over the means test, that's probably a recipe for disaster for someone like me, as the required payment plan would likely be more than I can handle every month. Am I reading that correctly?

I was thinking my repayment plan could be lower than the equity (minus exemptions) I have in my home, due to my low income. For example, let's say I have 100k exposed home equity in a Chapter 7, if I wanted to save the home, I'd have to re-file as a 13 and propose a payment plan that would repay the full 100k exposed equity + attorney fees + trustee fees + court fees + mortgage arrearages, so let's say 125k. 125k over 60 months is about 2k per month, which amounts to a new mortgage payment. That's regardless of my monthly income, right? I'm a little confused by it as nobody could reasonably expect someone like me to come up with 2k additional DMI per month to repay a chapter 13 if I'm below the means test for a chapter 7. Some things I read seem to indicate that my repayment plan could be much less than the 2k a month in the scenario mentioned above, due to my income being low.

[justbroke]

Ok.. so you do have to pay back any equity that is not exempt in a chapter 13, regardless of if you make 3k a month or 20k a month income at your job? That's what I was trying to see.

Correct. Unless you can exempt all the equity, your "minimum" payment to the unsecured creditors would be that exposed equity.

I'm in a federal exemption state. So if I have a significant amount of equity, that kills me on a chapter 13 every time, because I'd have to repay all of that over 5 years regardless of my income, which could hypothetically be a pretty steep monthly payment and with no DMI over the means test, that's probably a recipe for disaster for someone like me, as the required payment plan would likely be more than I can handle every month. Am I reading that correctly?

Correct. You must pay the equity or the total of all allowed unsecured claims, whichever is less.

I was thinking my repayment plan could be lower than the equity (minus exemptions) I have in my home, due to my low income.

The bankruptcy court would consider it a windfall if a person had $100K in non-exempt equity and didn't want to pay the creditors by having it all summarily discharged.

For example, let's say I have 100k exposed home equity in a Chapter 7, if I wanted to save the home, I'd have to re-file as a 13 and propose a payment plan that would repay the full 100k exposed equity + attorney fees + trustee fees + court fees + mortgage arrearages, so let's say 125k. 125k over 60 months is about 2k per month, which amounts to a new mortgage payment.

Exactly. At quick glance we just say you'd pay $100K/60-months of about $1,667/month (if my math is right... I'm not checking). That's the minimum that you'd have to pay unless your DMI was higher.

Simply put, you must propose a plan that would pay the unsecured creditors at least $100K over the life of your plan.

That's regardless of my monthly income, right?

Correct. Your CMI, or income, does not matter . What matters, for the "best interest of creditor's" test is that you have non-exempt property (such as equity in a home). In your example, it would be equity with a value of $100K. You'd have to propose a plan that paid the unsecured creditors at least $100K over the life of the plan (unless your unsecured creditors had a total claim amount less than $100K).

What makes this worse is that you still have to pay your secured debt and any attorney fees while paying that hypothetical $1,667/month. So if your house payment is $2,000/month, your arrears come out to $500/month, and your attorney fees calculated come out to $333.00/month (just for easy math), your payment to the Trustee would be $4,500/month. If you don't propose a plan paying that amount, then the Trustee would object due to infeasibility or not dedicating more money to the plan.

I'm a little confused by it as nobody could reasonably expect someone like me to come up with 2k additional DMI per month to repay a chapter 13 if I'm below the means test for a chapter 7. Some things I read seem to indicate that my repayment plan could be much less than the 2k a month in the scenario mentioned above, due to my income being low.

Looking back to my post earlier, why would the bankruptcy court let a debtor keep $100K in equity when it is non-exempt? It would not. The bankruptcy laws are there to give the debtor a fresh start... not a head start.

A Chapter 13 performs the "best interest of creditors" test which is colloquially known as the "Chapter 7 liquidatiom" test. They create a hypothetical Chapter 7 to determine what would have happened had you filed Chapter 7. As you can readily see, $100K of unprotected equity would surely have the Chapter 7 Trustee liquidate the home to recover the money for the (unsecured) creditors. A Chapter 13 only helps a person with significant equity when their DMI is already that high.

(Another hypo: same scenario but your DMI is $1,000/month. In that case, you'd still pay $1,667/month, but your DMI already covers a portion of that monthly payment to the unsecured creditor pool. If your DMI was $1,667/month... then it's a win... because you only must pay a minimum of $100K over the 60 months.)

***Apologies if my math is off with the $100K / 60 because I didn't use a calculator.

[Invincible88]

Correct. Unless you can exempt all the equity, your "minimum" payment to the unsecured creditors would be that exposed equity.

(Another hypo: same scenario but your DMI is $1,000/month. In that case, you'd still pay $1,667/month, but your DMI already covers a portion of that monthly payment to the unsecured creditor pool. If your DMI was $1,667/month... then it's a win... because you only must pay a minimum of $100K over the 60 months.)

***Apologies if my math is off with the $100K / 60 because I didn't use a calculator.

Fantastic explanation and thank you so much for taking out the time. This clears it up for me. The only question at this point is if the trustee's appraiser will say my home appraises for enough to yield equity. We don't think it will, but it's close at the same time. I'm fretting, preparing for worst case scenarios, so looking at all options. One question that came up was a UCC fixture lien on my home title. The loan that lien is tied to is large. I'm not clear on whether the trustee looks at that is a part of selling the home equation, as my understanding is any buyer would want a clean title and since the UCC lien is rather fresh, the only way to remove it is to pay off the loan it's tied to, thus it would come out of the equity of my home. If that loan counts against my home equity value, then I'm probably in good shape, but if not, then there may be some equity exposed. Can't find a clear answer on this. Either way, the trustee knows about the lien.

And your post makes perfect sense about fresh start versus head start. I think I could read an entire book about bankruptcy and still have a million unanswered questions. My respect to you all for going through this.. especially if you had assets to protect, etc.

[justbroke]

A lien, is lien, is a lien. The question as to the impact on a Trustee sale would be whether it's a consensual lien or whether it's an avoidable lien. The Trustee has some strong-arm powers that allow them to avoid certain liens against property of the bankruptcy estate. Whether or not your (hypothetical?) UCC-9 consensual(?) lien is a.) perfected, and b.) impervious to the Trustee's strong-arm powers... is a good question.

(Since the Trustee knows of the lien, they may "quickly" look to see if the lien is both perfected and unavoidable. If it's both then the lien impacts your equity.)

I wouldn't worry about all this. Just let the process flow. In 95%+ of cases, there's no equity; the case is a no asset case. Just deal with this "if" the Trustee finds non-exempt equity in the property.

Otherwise you'll be up all night thinking about it. Wait, you're already restless and can't sleep? I know it's easier said than done, and I was guilty of it too, just relax. If you hired an attorney then you paid them to worry. If your attorney is not worried then you should definitely not be worried.

[Invincible88]

A lien, is lien, is a lien. The question as to the impact on a Trustee sale would be whether it's a consensual lien or whether it's an avoidable lien. The Trustee has some strong-arm powers that allow them to avoid certain liens against property of the bankruptcy estate. Whether or not your (hypothetical?) UCC-9 consensual(?) lien is a.) perfected, and b.) impervious to the Trustee's strong-arm powers... is a good question.

(Since the Trustee knows of the lien, they may "quickly" look to see if the lien is both perfected and unavoidable. If it's both then the lien impacts your equity.)

I hear you on the worrying part, but at the same time, I do want to know what I'm looking at and what my options are so that I don't have to make a decision on the fly. But I get it, you're right, it's best not to let it consume you. I have a copy of the lien from the courthouse. Do you have any idea what I'd look for to see if it's perfected, consensual or avoidable? Thanks again.

[justbroke]

Liens are generally "perfected" when they are recorded in the public record. Consensual just means that it wasn't from a judgment. In other words, a consensual lien is just one where you pledged all/a/the property as collateral for something (such as a loan). A nonconsensual lien usually comes from a judgment (you didn't ask for the lien).

Avoidance is where the Trustee can get rid of (strip off) certain types of liens that impact the property.

It's a lot to learn and to know.

Note: some liens are statutory and how those operate require a review of the law that creates that lien.

[Invincible88]

Liens are generally "perfected" when they are recorded in the public record. Consensual just means that it wasn't from a judgment. In other words, a consensual lien is just one where you pledged all/a/the property as collateral for something (such as a loan). A nonconsensual lien usually comes from a judgment (you didn't ask for the lien).

Avoidance is where the Trustee can get rid of (strip off) certain types of liens that impact the property.

It's a lot to learn and to know.

Note: some liens are statutory and how those operate require a review of the law that creates that lien.

I'd say based on your breakdown, the lien is perfected as I have a copy of the lien from the courthouse, recorded in the public record attached to my home and is consensual. Like you've said, I should just let the process play out. A lot of things are out of my hands at this point. I'll post a full update once all this is over. This forum is immensely helpful.