Will this Chapter 13 plan work?

[Kymi]

Hi everyone. I should start by saying that I am not in bankruptcy myself, but a friend of mine filed last week for Chapter 13 and has shared information and documents with me, so it really isn't my business but he has asked me to help him understand since apparently his attorney is either hard to contact or can't explain it well enough to satisfy him. So, here I sit with a desk full of copies that I am sorting through trying to understand what exactly is going on and how well this will work for him. I am hoping to give him some peace of mind besides the repetition of, "I am sure your lawyer knows what he is doing" that I have been doing so far. I will lay out what facts I have and what questions he/we have, and I hope the experience here can help both of us understand better.

The first question is: Is this really the way it should go? He filed the "voluntary petition for Chapter 13" individually (his wife is not joint debtor) and a proposed plan. Is that proposed plan going to be accepted or will the trustee question or change it? There are some sneaky (IMO) things being slipped in to make the next 58 months much more comfortable for him and the total payoff amounts look far too low to me. (1) Under income and expenses, he is claiming a monthly "child care and education expense" of $100 ($1200/year). But the child in question is a step child who lives with him only part time, for whom he pays no expenses at all, and who will be 18 and moving out (not to college) within the next few weeks. He says his lawyer is aware of this but the expense is allowed anyway. (2) Although his income for the past month has been well over $6000, he has been using FMLA and short term disability leave for the past several months to care for his wife, who has been having some trouble with stress related mental illness, the timing of the leave was in order to lower the income on the look back so that for the past 3 months his "average income" is much less than the normal income. So his "normal" pay is over $6000, but his "average pay" over the past 3 months is $3800, and the income and expense forms are based on this average. This was on the advice of the lawyer with whom he consulted about bankruptcy 8 months ago. With all allowed expenses using the tables for maximum allowable, the DMI is $253. (In reality he states his actual dmi is closer to $800 since he doesn't really spend as much as the allowed amounts.)

The proposed plan is for a payment of $250 for 58 months. Of this, he has priority claims for IRS and State taxes owed (current taxes for 2013) of $3500, secured debt in the amount 0f $5800 and his attorney's fees being built in of $1407. There is also a debt that should be listed as secured but is not, but I will get to that later, and he is surrendering his house (non primary residence) so according to the paperwork, there will be no payments made toward the mortgage from this point on. He has $51,000 in unsecured debt.

According to my math and possibly faulty understanding, this leaves a total payment to unsecured creditors of less than 10% of the total debt over the life of the Chapter 13. Isn't that too low?

The second question is one that bothers him more than it does me. I think I know, but I would still appreciate insight. One of his accounts is a jewelry store in-house financing, which in the fine print of the agreement mentions that the purchases are secured and are subject to repossession in the event of default. This account was lumped in with "unsecured creditors" despite the language of the agreement. I believe that if they do not object to it, then they will be treated as unsecured for the purpose of bankruptcy, is that correct? But my friend is concerned that he could be in trouble for trying to hide something. Again, the lawyer is aware of this and says, "it's fine, don't worry" so that is the stance I am taking as well.

Is there anything we are missing here? It looks to me that once confirmed, he will pay $250 for 58 months and then everything is fine. But that gives him so much wiggle room and so much extra money each month that it has him worried (and I agree) that this is truly too good to be true. Although he is surrendering his house (that he does not live in anyway and owes $120,000 on the mortgage) he is not losing any assets, he is continuing to contribute several hundred dollars a month to his 401k and also to a profit sharing plan through his employer, so come retirement he should be a millionaire based on these accounts alone.

It can't be this easy can it? What are we missing?

[wd2005]

I'm no lawyer but the Trustee is going to go over the same financial information and I bet objections will be made. The 341 meeting should be interesting. At mine, several people were questioned about their assets, income, expenses, etc. What I found was that those who were prepared, had a solid plan and a good lawyer breezed through. I was fortunate to be one of those people.

[Kymi]

I have never been involved in the process, and truly I am only tangentially involved now, but what I saw as a "red flag" might not be a big deal to the Trustee, and I noticed another addition which I am sure will come into play but my friend thinks is irrelevant. (1) The step child for whom he is claiming educational expenses will be 18 the day after the meeting of creditors. Is that the same as the 341 meeting? The terms still confuse me... and (2) Under a section to describe any anticipated changes in income or expenses within the next year he wrote that he plans to move to a different town in May, which will decrease his expenses slightly in the long run, but will incur moving expenses for that month. In reality his plan is to move in with family in another town, eliminating his rent and utility payments entirely, increasing "household income" and of course his step daughter will no longer be with him even part time so he would have no dependent to support at all (other than wife). Again, I know nothing about any of this, but just reading the language of the petition, it seems to me that come the move in May, he will then be freeing up a couple of thousand of dollars per month to pay into the plan. Isn't it required that all DMI be payed into a Chapter 13?

What he is telling me that his lawyer is telling him, which might be a case of misunderstanding on his part, is that this is the reason he filed now, while his expenses can still be made to appear high, thus his payments will be low; and then once he moves, he will essentially be "off the hook" financially because a $250 payment a month with a $5000-$6000 income is nothing, and the rest of his money will be his to do with what he pleases.

The whole thing seems sketchy to me, but I am not a lawyer, and this one does many BKs every month so presumably knows what he is doing. So I guess what I am asking is: is that really what happens? Do you get a plan in place at a (possibly creatively) low period until it is confirmed, then that's the governing plan for the next 5 years? I know he is supposed to report increases of income above a certain percentage but are there any checks into finances after the plan is confirmed? I am a bit worried he might be heading into some kind of fraud here and risk having the case dismissed altogether. But he says once confirmed the only reason it would be dismissed is for non-payment. He is also under the impression that "confirming" the plan and the meeting of creditors is just a formality and that no one will do more than a quick scan to make sure all the blocks are filled in on the paperwork and that the numbers don't set off any alarms. Do the Trustees actually go over everything closely enough to notice if he obtains free housing for example or if he suddenly has more disposable income than he did a month or a year ago?

And one final question for now. This particular plan has a total payment of $14,500 over 58 months. When his income increases and his expenses decrease, could he start paying in more per month in order to accelerate the time line, so that he could finish and get his discharge sooner? Right now he believes he could comfortably pay $2000 starting in May after he moves in with his family and could effectively pay off the Chapter 13 within 7 months. Is that allowed?

[plateump]

I'm not a lawyer either. But I can tell you that this area is the reason why the trustee is appointed. They are to look out for the best interests of the creditors and it's up to them to practice due diligence and show integrity. If this attorney is used to working with a particular trustee, everything should be fine.

The amount of payback is irrelevant in a CH. 13 BK. The base payback amount is determined by the equity the debtor would realize if he were to liquidate assets.

I find it hard to believe that the creditors at the 341 meeting would not object if things were not above board.

[Kymi]

In your lay opinion, do you think this (just what I have so far) would look like it is not "above board" enough to raise objections? I think I might be being overly critical in an attempt to make sure he is fully protected and that nothing goes wrong. Honestly, unless one was familiar with his family situation (the step daughter who lives with him and his wife only 2 days a week and only until graduation in May when she will move out of state as well as the moving in with family eliminating almost all "regular" living expenses) there would be no way of knowing his petition is not 100% honest and correct.

The meeting is typically an in and out in 5 minutes kind of a thing isn't it? Is there time for any in depth probing or would anyone even think to do so as long as on the surface everything looks "typical"?

[TheBajan]

It sounds like he has found a good lawyer who knows his trustees and knows how to take full advantage of good planning. What you are describing, for the most part, sounds good. He does need to be aware that when his income increases, he may have his plan amount increase also but not always. The one thing I think might be a bit questionable is the step-daughter. He may get questioned about that. Whatever happens, whatever questions may come, he needs to be completely honest.

It's normal to use standards for expenses. It's why standards are created. If he happens to spend less than the normal standard amount for something then good for him. There's nothing wrong with claiming the standard allowed. There's nothing wrong with claiming current expenses even if you know those expenses are going to eventually go away. For example, when we filed our ch 13, we had a monthly expense for cable that was $108. We listed that on our plan. Within two months of filing, we were able to cancel our cable and eliminate that expense. That's not lying. It's not cheating. It's just a progression in life.

The situation with the step daughter is different because he is actually lying about paying expenses for her currently when in fact he is not. I wouldn't lie on the petition about that. From what you are describing, it's not as if having an extra $100 dmi is going to really cramp his style. However, lying to the trustee and saying that you have an expense that is non-existent, that could really cause problems.

Everyone here who is (or has) filed a ch 13 wants to get the best plan possible. We do that by working within the lines. No one here will advocate deception or, dare I say it..... bk fraud. It's just not worth it. BK is a tool to help us get back on our feet and there are things you are allowed to do during planning that will make it a smoother process. Using standards is fine. Making up expenses that do not exist... that's another story.

Best to you.

[Kymi]

That's a relief to hear. I was really thinking it was looking fraudulent which I would definitely steer him away from. And using standards and such makes sense, but what happens when you are claiming standard amounts for expenses that simply do not exists. When he relocates to live with family, he will still be claiming rent payments of $1500 (which is his current rent) but his actual expense will be 0. Does he need to inform the court of this or will his plan once confirmed, simply carry on as if there were no change? That is a pretty significant change especially in what would be the amount available for distribution to creditors.

[LadyInTheRed]

I would be more concerned about the income than the expenses. It is correct to use the average of the last 6 month's income on form b22c (the Chap 13 equivalent of the means test), but schedule I should show his actual current income. If $6,000 a month is what he expects to be his ongoing income, then that is what his plan payment should be based on. Whether the trustee will pick up on that depends on what documentation he requests and reviews.

I think your friend should prepare for the possibility that his payment will increase. The petition is filed based on his attorney's advice. There's not much point second guessing it at this point. But, your friend should be honest at the 341 (yes, the same thing as the meeting of creditors), but not volunteer information he isn't asked. If he is concerned about answering yes to "is your petition correct", he should talk to his lawyer about his concerns. He should either be prepared to say "yes" or discuss with his attorney exactly what he wants to say is not correct.

Once the plan is confirmed, in most cases, nobody looks again at the debtor's financial situation except that some trustees require that debtors send a copy of their income tax returns every year. If a return shows a significant increase in income, the trustee may insist the plan payment be increased.

[Kymi]

Thank you! My decidedly non-legal advice to him was to discuss the $100/month non-existent expense with his lawyer. It's not that much money but goes to integrity and honesty in the filing in my opinion. And also to discuss the way the income was averaged out. I do agree that it is correct, per the submitted pay stubs and that averaging it is fine for the historical income, but my gut, in addition to your response tells me that using the lower "average" as the future expected is patently dishonest, especially when the most recent of the submitted pay stubs clearly shows that the paid amount is his normal base rate x a 40 hour work week with the statutory deductions (and additional voluntary deductions toward the profit sharing plan and 401k). It really would take only a glance at the numbers to see they don't add up as indicated on the petition. In fact it took me only a few seconds to notice it myself. I think it would be better to address this (via the lawyer) before it got around to being discovered by the Trustee.

If the lawyer agrees and changes it, is there such a thing as an amended or updated filing?

[LadyInTheRed]

Yes, a petition can be amended.