You might have heard that Chapter 13 cases are supposed to take from three to five years to complete. That’s a big difference. What decides how long it is going to be?
There are three main things that determine the length of your case:
1. Your recent total income
2. Your present and anticipated budget
3. How consistently you will make your Chapter 13 Plan payments
We’ll cover the first one of these in this blog, the other two in the next one. In each of these three you have at least some theoretical control over the length of your case, a theme we’ll come back to.
When we just said that “recent total income” is the first thing that determines the length of your case, we’re talking about a very particular definition of “income.” First, this income is calculated by looking at the precise amount of income received in the 6 FULL calendar months before your Chapter 13 case is filed.
Second, this income does not just include taxable income, but also income from virtually any source: regular wages and salaries, bonuses and commissions, all business or self-employment income, pension or retirement, child and spousal support, rental or any other kind of investment income, and any other sources. For most purposes, the only kinds of money that do NOT count are payments received under Social Security, both retirement and disability benefits.
Third, the total income of this 6-month period is divided by 6 to average these and arrive at the so-called “Current Monthly Income.” Multiply that by 12 to come up with an annualized income amount. Then compare that amount with the published current Median Income for your state for the size of your family. If your annualized income amount as described here is LESS than the applicable Median Income, then you qualify for a 3-year Chapter 13 case (or a Chapter 7 case, if that is the better option). If your income is the same as or MORE than the Median Income, then you are stuck with a 5-year case. Here are the current Median Income amounts for Oregon:
Family Size Median Income
For larger families, add $7,500 for each additional family member of the household. These amounts are for bankruptcy cases filed on or after November 1, 2011; the next adjustments will likely be in March 2012.
So, being over or under these Median Income amounts, even just slightly, determines whether you are required to pay into your Chapter 13 case for three years instead of five years, a huge difference in time and money.
Considering this major impact, let’s finish by going back to what I called “some theoretical control” that you may have over the length of your case. Most people don’t have much control over how much income they receive in the six months before filing bankruptcy, but sometimes they have just enough control to get below the Median Income. By a combination of reducing or delaying some source of income and careful timing of the filing of their case, this rather artificial kind of “income” can in some cases be reduced to be less than the applicable Median Income.
This will make the most sense with an example. Let’s say that 5 months ago you received an unusual chunk of money—a back support payment, a bonus from work, an insurance settlement, or from cashing in some retirement fund. As long as the date that you received those unusual funds is within the last 6 full calendar months, it is artificially increasing your “income” for purposes of calculating the mandatory length of your Chapter 13 case. But if you are able to wait until that unusual payment is no longer in the 6-month look-back period, this will likely lower your “income,” possibly low enough to slide under the crucial Median Income amount, enabling you to do a 3-year case (or file a Chapter 7) instead of a 5-year one.
This can come up in all kinds of ways, not just money from a single lump sum. When you come in to talk with us, if you are a good candidate for Chapter 13 we will calculate your “income,” see if you are close to the Median Income amount, and if so will discuss with you whether it would be in your best interest to change the timing of your filing.