How does chapter 13 plans deal with variable income?

[avengers]

I'm actually going to be filing Chapter 7, so I've never researched chapter 13. An acquaintance of mine was asking me about BK and I was telling him the basic differences between chapters 7 and 13. He then asked me a seemingly simple question, but I have no idea what the answer is. How does a chapter 13 plan deal with variable income?

The person in question just lost his job, can't find a new one, and is going to be trying to make his own consulting business succeed. He has good months and he has bad months. So how does chapter 13 deal with that?

It would appear that Chapter 13 is meant to deal with the guy who makes $5000 per month. Not the guy who makes $5k one month, $2k the next month, then $8k the month after. Those two situations have the exact same average income. But if he was stuck in a plan that required him to pay, e.g., $1k per month (after his $4k per month of expenses), that would be doable in the $5k month, extremely easy in the $8k month, and impossible in the $2k month. So what would they have him do?

[LadyInTheRed]

His plan payment would be based on his annual income divided by 12. He would have to manage his money carefully so that in months when his income is high, he sets enough income aside so that he can make his plan payments in months when income is low. It's all about good budgeting.

If he can't qualify for a Chap 7, he should build up a cash cushion before he files a Chap 13.

[justbroke]

Let me just back up a little bit. A Chapter 13 is for debtors with regular income. If your income is irregular, then you are likely to have problems. If you are unable to save and deal with fluctuations in income, then your plan is doomed to failure from the start. The Trustee may realize that the plan is infeasible if the differences are drastic month over month. (Don't ask me what "drastic" means, but I would consider 10% fluctuation month-over-month a drastic change.)

This looks like irregular income to me and a Chapter 7 is better in this type of case. Baring that there aren't any features of a Trustee upon which this person would need reliance upon (e.g. lien stripping, cramdowns, etc).

[avengers]

OK. Thing is, this guy has a lot of assets. (E.g., he has 3 cars and he owns his house outright, which is worth more than our state's exemption). He doesn't really want to get rid of his stuff.

[justbroke]

There is a one word answer for that: lawyer. I will not ever recommend that anyone file bankruptcy Pro Se when they have any assets (whether or not they have equity in those items). I can't say whether he would need to get ride of "his stuff" because it depends on the availability or lack of, exemptions to protect personal and real property.

[cz3ch]

I agree with JB. If he has variable income a chapter 13 is probably not going to fly unless he can work out a static payment plan with the trustee (which isn't likely). Chapter 7 would be a better option, however if he has a lot of assets and can't exempt them the trustee may decide to take what isn't exempt, sell it off, and put the money towards the debt before discharging.

Assets and exemptions can become complicated and there are a lot of loopholes (legal) that can be leveraged, however I wouldn't file Pro Se if I were him. I'd find a good attorney who can look at the totality of the case and let him know what he is up against. The attorney will know the rules of the district and most likely have a good idea of the trustee(s) and judge in that district and how they handle business.

Bottom line, he should get an attorney to hash this out. Just my .02c.

[despritfreya]

Self employed people file Chapter 13 bk all the time. A self employed person will most likely be required to file monthly business operating reports (P&L statements) so that the court, trustee and creditors can monitor income. The Plan payment will be either 1) based upon projected average monthly income (as Lady suggests) or 2) if income is seasonal, higher payments during the good months and lower ones during the not-so-good months. I have even filed cases where the payments (large sum) were paid in quarterly increments. A good bk attny will know exactly how to formulate the Plan. It is not a big deal.

Des.