Last year, I wrote about the U.S. Supreme Court’s decision in Hamilton v. Lanning. This case is the one that allows us to reconcile large discrepancies between the Means Test and the budget by citing changes in income and expenses that are not reflected on the Means Test – which are known or virtually certain.
Though this represents a huge win for debtors and debtors’ counsel, the standard set for allowing debtors to deviate from the Means Test is still fairly rigid. Over the years, I have had several cases where debtors were convinced that they could not afford plan payments under the Means Test, and there wasn’t a known or virtually certain change that justified deviation. Two of these in recent days.
Once a Chapter 13 Plan is confirmed, debtors are no longer beholden to the Means Test. They can amend their plan at any time under 11 U.S.C. sec. 1329, and the standards at that point become less stringent. So long as their is an actual, necessary, substantial, and long-term change in income and expenses, it is relatively easy to amend the plan to reduce monthly payments.
However, barring a Lanning-esque circumstance, to get to confirmation, debtors still need to file plans in accordance with their Means Test result. A lot of times, when there is a huge discrepancy in the Means Test result and the budget, it’s because the debtor has unreasonable expectations about maintaining a certain lifestyle. While Chapter 13 certainly isn’t intended to turn you into a pauper, there is an expectation that you will tighten your belts and life relatively frugally while in Chapter 13.
The purpose of this blog is to demystify the process an attorney uses to calculate plan payments.
First, the attorney has to determine which debts are required to be paid in full inside a Chapter 13 Plan. This is going to include all secured debts (mortgage arrears, property tax arrears, vehicle loans, and other small secured loans), all priority debts (child support and tax arrears), administrative fees (the trustee’s cut and balance of the attorney’s fees), and floor amounts (such as floors for non-exempt assets, fraudulent incursion of debt or transfer of assets, and recreational vehicles).Then the attorney runs the Means Test. The Means Test is only calculating the amount of money required to be paid to unsecured creditors, although payments for secured and priority debts are eligible deductions on the test, along with a host of IRS living expense allowances. The income for the Means Test is based on gross wages from the past six months, which includes unreliable sources of income like commissions and overtime. And while we are looking at your gross wages, your taxes, insurance, and other withholdings are deductions elsewhere on the test.
Because the Means Test only affects unsecured creditors, simply surrendering a home or vehicle doesn’t necessarily lower your plan payments, because those payments are otherwise used as deductions. So by giving up a home or vehicle, you’re simply paying more to unsecured creditors because the funds are being diverted from one class to another.
The Means Test result (for unsecured debts) plus the debts that have to be paid in full (secured and priority), are added up to determine a total required monthly payment. Then, the attorney has to reconcile that minimum requirement with your budget. If your budget shows that you don’t enough money to make plan payments, then the plan is not feasible. If the budget shows too much money (as was the case for you), then you have to pay the higher amount – even though the means test requires a lesser payment – because in Chapter 13, all of your disposable income is to come into the Plan. Most attorneys at this stage do some creative budgeting. For example, if he typically allots $200/mo per person in the household for groceries, he can easily adjust that to $150/mo or $250/mo as needed to get the budget to where it needs to be. There is some leeway with what numbers are allowed in the budget. However, that leeway comes with reasonable limitations. Every trustee I know would go into coniptions if I dared to put in a $500/mo recreation budget. Sometimes, we add as much reasonable padding to the budget as is possible, and we still can’t match the minimum threshold in the Means Test, and the debtor has to pay more per month.
Again, if you – as the debtor – are unhappy with the Means Test result, your options are (1) to complain to your Congressman about how much BAPCPA sucks, (2) find a change in circumstances that meets the scrutiny needed under Lanning, or (3) tough it out until your Plan is confirmed by the Bankruptcy Court. With the last option, again, you can amend your plan payments using much less stringent criteria.