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A debtor filed Chapter 13. His exemptions were not enough

Resolved Question:

A debtor filed Chapter 13. His exemptions were not enough to cover some of his property, So due to the creditor's "best interests" rule, in exchange for keeping the non-exempt property, the debtor will pay an amount into the Chapter 13 plan that is equal to the value of the non-exempt property. How should the debtor state this in his Chapter 13 Plan? Does it go into Line 13 "Other Provisions" of the Chapter 13 Plan? Or is it stated somewhere else?
Submitted: 1 year ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 1 year ago.

cfortunato :

Hi JACustomer,

cfortunato :

Is it the case that the debtor's total plan payments (disposable income) will equal the value of the debtor's non-exempt property, is the debtor planning on paying more than his disposable income into the plan, or something else?

Customer:

That was going to be the next question - if the best interest payments come from the Chapter 13 Plan payments, or if the best interest payments must be in addition to the Plan payments.

Customer:

To answer your question - the total plan payments could be enough to cover the non-exempt property if some of the unsecured creditors get less. The debtor would only pay his disposable income into the plan.

Expert:  JoeLawyer replied 1 year ago.

I see the other expert is offline...

 

The debtor has to have enough disposable income to satisfy the Best Interest of Creditors Test ("BIT") or the trustee can still object to confirmation. So, ideally, when a debtor has to satisfy BIT, hopefully you can show enough disposable income to do so. If not, you may be looking at a Chapter 7 and liquidation of the unexempt asset.

However, BIT does not require the debtor to pay in an amount equal to the value of the unexempt asset(s); rather, it requires the debtor to pay to unsecured creditors, through the Plan, at least as much as they would have gotten had the debtor filed Chapter 7. These are similar, but not the same thing; and, after doing some math, they can turn out to be quite different.

For example, say the debtor has an asset worth $100,000, and $75,000 of that asset is exempt. Therefore, $25,000 of the asset is not exempt. BIT does not require the debtor to pay in at least $25,000 to unsecured creditors in the Plan; instead, only about $13,275 would satisfy BIT. The reason for this is that if a Chapter 7 trustee were going to liquidate the $100,000 asset to get to the $25,000 unexempt portion, you can assume that the trustee would face about 10% of the value of the asset in costs to liquidate (realtor fees, auction fees, storage fees, etc). Then, Chapter 7 fees are $1,250 on the first $10,000 and roughly 10% on an amount above that (see the Code for the formula). So, $100,000 value minus $75,000 exemption leaves $25,000 in unexempt equity, minus $10,000 costs to sell, minus $2,625 Chapter 7 trustee fees, leaves $13,275.

So, if I were filing a Plan under that hypothetical situation, let's say the attorneys fees to be paid through the Plan are $3,000, and the trustee fee in your district is 5%. Let's also say debtor has a car they want to pay through the Plan, and they owe $4,000 on it and it is worth $4,000, and the contract interest rate on the car is 21%. I would plug in the attorneys fees of $3,000, $4,447.20 for the car ($4,000 value/claim at 4.25% crammed down interest rate over 60 months), $13,275 for unsecured creditors to satisfy BIT, and multiply all this by 5% for the Ch 13 trustee fee, for a Plan base of $21,758.31. Then divide by 60 and you have $362.64/mo for 60 months as a Plan payment. As long as you have at least $362.64/mo in disposable income (or more) you are okay. If not, you need to look at your client's budget to see if you can help them trim it or tighten their belt. If not, depending on how bad they want to protect the $100,000 asset, they may need to surrender the car to lower the Plan payment, etc. If this doesn't work, their only choice may be Chapter 7 and lose the asset to the trustee for liquidation.

 

Of course, different jurisdictions may have a different way of calculating BIT, but that is how it is done in my jurisdiction.

Good luck,

Joe

LEGAL NOTICE: I am only licensed to practice law in certain state(s) and I cannot give legal advice to someone who does not reside in a state in which I am licensed, nor shall anything I say in the above answer or elsewhere on this site be deemed legal advice, even to someone who resides in a state in which I am licensed. Funds I receive from JustAnswer.com are gratuities paid to me for taking the time to respond to questions, not for legal advice. This forum is designed to provide general information only, and information herein is not warranted to be correct or applicable in any way since laws may have been misinterpreted herein, since laws change from time to time, and since the impact of those laws on any particular situation varies. The information presented in this site shall not be construed to be formal legal advice nor the formation of an attorney-client relationship. Persons accessing this response are encouraged to seek independent legal counsel in their jurisdiction for guidance regarding their individual circumstances. Do not take any action or inaction based on information presented herein since it is informational and may not be accurate or applicable to you; it merely attempts to give you a basis of knowledge to help you formulate questions to ask a legal or other professional in a face-to-face meeting in your jurisdiction. JoeLawyer is an attorney but does not hold himself out to be a specialist or expert in any area, regardless of assertions made by any third party, and any implication of being an expert or specialist herein is made in error. I hope the information presented above is useful to you. Answer above is (c) JoeLawyer. All rights reserved.

Customer: replied 1 year ago.

Joe,


 


Thank you for the quick response. What, if anything, must the debtor do to indicate that best interest payments are to be paid from the Chapter 13 Plan? Also, what must the debtor do to indicate that he wants to retain the partially exempt property in exchange for making best interests payments? Is a motion necessary for either of these, or can it all be taken care of in the Chapter 13 Plan/Schedules?

Expert:  JoeLawyer replied 1 year ago.
In my jurisdiction, you don't have to specify the BIT amount or do anything other than file a Plan that satisfies the Trustee. I suppose in some jurisdictions there may be a local rule, but nothing in the Code or Rules requires anything other than a Plan with sufficient funding to satisfy BIT.

So, normally it is all taken care of in the Plan. The Trustee will look at the assets and exemptions in the bankruptcy schedules and make his or her own determination about how much is needed to satisfy BIT, and then he or she will look at the Plan to see how much unsecured creditors are getting through the Plan. If the unsecured creditors are getting enough to satisfy BIT in the Trustee's estimation, the Trustee won't object and you are one step closer to confirmation.

If you file a Plan that the Trustee thinks does not satisfy BIT, the Trustee will normally file an Objection indicating such. Then, you can file an Amended Plan to address the objection, by increasing funding until the Trustee is satisfied, or you can go to the objection hearing and state your case to the Judge why you think funding is adequate to satisfy BIT.

Joe

LEGAL NOTICE: I am only licensed to practice law in certain state(s) and I cannot give legal advice to someone who does not reside in a state in which I am licensed, nor shall anything I say in the above answer or elsewhere on this site be deemed legal advice, even to someone who resides in a state in which I am licensed. Funds I receive from JustAnswer.com are gratuities paid to me for taking the time to respond to questions, not for legal advice. This forum is designed to provide general information only, and information herein is not warranted to be correct or applicable in any way since laws may have been misinterpreted herein, since laws change from time to time, and since the impact of those laws on any particular situation varies. The information presented in this site shall not be construed to be formal legal advice nor the formation of an attorney-client relationship. Persons accessing this response are encouraged to seek independent legal counsel in their jurisdiction for guidance regarding their individual circumstances. Do not take any action or inaction based on information presented herein since it is informational and may not be accurate or applicable to you; it merely attempts to give you a basis of knowledge to help you formulate questions to ask a legal or other professional in a face-to-face meeting in your jurisdiction. JoeLawyer is an attorney but does not hold himself out to be a specialist or expert in any area, regardless of assertions made by any third party, and any implication of being an expert or specialist herein is made in error. I hope the information presented above is useful to you. Answer above is (c) JoeLawyer. All rights reserved.
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