We show how filing bankruptcy before the end of December could result in a much shorter Chapter 13 “adjustment of debts.”
Two weeks ago we showed how filing bankruptcy by December 31 could enable certain people to file a Chapter 7 case instead of being forced into a Chapter 13 one. They could have their debts discharged (legally written off) within 3 or 4 months under Chapter 7. Otherwise under Chapter 13 they would be required to go through a 3-to-5-year payment plan. And they would only get a discharge of their remaining debts if they’d successfully make it to the end of that payment plan.
If You Need a Chapter 13 Case
But getting to file a Chapter 7 case wouldn’t be any motivation to file your bankruptcy this month if you already knew that you needed a Chapter 13 case anyway. Although Chapter 13 takes so much longer, and is riskier, it can accomplish many things that Chapter 7 simply can’t. Chapter 13 can give you incredible help if you are behind on your mortgage and want to keep your home. It can buy you time and protection and save you a lot of money if you owe tons of income taxes and especially if they span more than one tax year. Chapter 13 can enable you to catch up on child or spousal support better than anything. These are just some of the many ways that Chapter 13 is a great tool for dealing with your creditors.
But what if you found out that filing your Chapter 13 case in December instead of January could allow you to finish your case in 3 years instead of having to stretch it out 5 years? Paying into a payment plan for 2 years less could save you many thousands of dollars. And you’d be 2 years ahead being out of bankruptcy and on your way to improving your credit.
Here’s how this works.
Your “Income” Dictates How Long Your Chapter 13 Lasts
As we described 2 weeks ago, a very specific and unusual way of calculating your income is a major step in determining whether you qualify for Chapter 7. If you’ve instead decided that your circumstances make Chapter 13 better for you, that same unusual way of calculating income determines whether your payment plan can be 3 years long or instead must last 5 years.
So let’s look again at how income is calculated and its impact under Chapter 13.
Quick Summary of “Income” Calculation
You can finish your Chapter 13 case in 3 years instead of 5 if your “income” is calculated to be no more than the appropriate “median income” for your state and family size.
The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. For cases filed November 1, 2015 and for several months thereafter those state-by-state amounts can be found here.
“Income” as calculated for this purpose includes 1) almost all sources of money other than from Social Security (not just taxable income), but 2) only the amounts received precisely during the last 6 FULL calendar months. The 6-month amount is multiplied by 2 for the annual “income” total to be compared to the “median income” for your state and family size.
To walk through each of the specific steps in this calculation, see the official federal court form, Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period, effective 12/1/15.
Extra Money Received in December
A crucial consequence of this unusual definition of “income” is that if you receive a bonus or any other unusual income or money during December, that will NOT be counted for this purpose as long as your Chapter 13 case is filed by December 31. That’s because the current partial month’s income doesn’t count; only the prior 6 FULL calendar’s income does. As a result, filing before the end of December makes it more likely that your income will be less than your applicable “median income,” and therefore that your Chapter 13 case could last 3 years instead of 5 years.
Now let’s put these principles into practice with an example.
Let’s assume that the median income amount for your family size in your state is $54,000. So if your “income” is no more than that your Chapter 13 case can be 3 years long instead of 5.
Let’s also say that you get paid on the 1stand the 15th of each month, receiving a gross salary of $2,200 per payday, or $52,800 per year. You started working for your employer in 2013, and until this month have received no income or funds from any sources whatsoever other than your employer since then. But you received an annual bonus of $1,200 from your employer on December 3, and your parents gave you a holiday gift of $900 in cash on December 7.
In this situation if you filed a Chapter 13 case in December before the end of the month, your income for these purposes would be below the $56,000 median income amount. So your Chapter 13 case would not have to go beyond 36 months—your minimum “commitment period.” That’s because your “income” during the 6 full calendar months of June through November would be $52,800—2 paychecks of $2,200 gross income per month, or $4,400 per month times 6 months, or $26,400, times 2 for the annual amount of $52,800.
But if instead you filed anytime in January, your income would be above that $56,000 median income amount. That’s because your “income” during the 6 full calendar months of July through December would be $56,600—2 paychecks of $2,200 gross income, or $4,400 per month times 6 months, or $26,400, plus the $1,200 bonus and $900 gift, or a total of $28,500, times 2 for the annual amount of $57,000. Because this is more than the $56,000 applicable median income amount, your minimum “commitment period” would be 60 months—5 years.
So, in this scenario filing on or before December 31 you would result in a 3-year “commitment period” while filing on or after January 1 would result in a 5-year “commitment period”.
(Even with a 3-year “commitment period” you are usually ALLOWED to take longer if it helps you to do so to stretch out and reduce your monthly payments. But you are not required to pay any more to your creditors while doing so.)
The Bottom Line
If you’ve committed to filing a Chapter 13 “adjustment of debts” for any of the many reasons that it was designed for, WHEN you file that case can determine whether it lasts 3 years or 5. The process we’ve described works for any month that you get an unusual chunk of money, but that likely happens in December more than in any other month, because of annual bonuses and holiday employment or overtime. If you’re reading this in December and you’ve gotten any extra money this month, consider seeing a bankruptcy attorney right away to see if filing before the end of the month would benefit you as we’ve described. And if you are reading this in any other month, consider whether the rules we’ve described may still apply to you.