When the Bankruptcy Laws changed in October, 2005, little did Congress know that they actually made Chapter 13 repayment plans quicker, cheaper, and easier in many cases. At least this has now been determined the law of the land in the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Oregon, Nevada, Washington, Guam, and Northern Marianna Islands) because of a landmark case, Maney v. Kagenveama (In re Kagenveama), 2008 U.S. App. LEXIS 13299 (9th Cir. Ariz. June 23, 2008)
When the new Bankruptcy Laws were created (BAPCPA), Congress also created an artificial test to determine Chapter 13 monthly payments called the “means test,” to be filled out on Official Form B22C. This test in most cases has nothing to do with any of the realities of a debtor’s current budget since it relies on past income and subtracts artificial expenses. �
Nevertheless, so long as the end result of this artificial test results in $0.00 or a negative number, then there is no need for ANY PLAN LENGTH nor ANY PAYMENTS TO UNSECURED CREDITORS FROM PROJECTED DISPOSABLE INCOME.
Huh? No Plan Length? No payments? How could this possibly be? Under the Old Laws, Chapter 13 plans typically went from 3 to 5 years in most cases and were funded by subtracting the debtor’s actual expenses from actual income. They were actually based upon reality.
Under the new laws, the wording of the statute concerning the funding of a chapter 13 plan in 11 USC 1325 drastically changed, whereby plan funding and length only arises if there is Projected Disposable Income (PDI). Precisely because of this new language, the highest Court in the Ninth Circuit has now eliminated the 3 and 5 year plan length requirements and Disposable Income funding requirements for debtors with no PDI.
In other words, if there is no PDI, then there is no longer any minimum time length requirements to stay in Chapter 13, nor any requirements to pay any unsecured creditors from disposable income. So does that mean 1 year plans are possible? 1 week plans? Plans with payments to be made from other sources? Plans where only the car or house gets paid?
Yes! The dissent in the Ninth Circuit Opinion of In re Kagenveama specifically addressed this issue: “The majority lays down a rule: So long as the debtor can calculate no “disposable income” at the time his creditor plan is confirmed, he can rest easy. The debtor can propose as short a time period as he wants: a day, a week or a month.
So what does this really mean? In simple terms, as long as you pass this artificial test, and as long as you meet the other requirements of Chapter 13 (file in good faith, have income, complete your credit counseling courses, etc) then you can restructure your home, car, and other debts without ANY MINIMUM PLAN LENGTH REQUIREMENT and DO NOT NEED TO PAY ANY UNSECURED CREDITORS like credit cards, loans, medical bills etc., and you can FUND THE PLAN WITH OTHER SOURCES OF MONIES.
*** Part 2, Means Test
If your chapter 13 plan receives no objection, then you are home free with your proposed plan. But what if the Chapter 13 Trustee or unsecured creditor objects? You must then do 1 of 2 things under 1325(b): You must either propose to pay all the unsecured creditors in full; or You must pay your Projected Disposable Income (PDI) to the unsecured creditors for at least 3 to 5 years, depending upon your level of average previous gross income.
So what is PDI? PDI is an artificial number completely derived from two other artificial numbers: Past average Income and Fake Expenses. To determine the past income to be used in the “means test,” the average of the previous six months of gross income prior to the bankruptcy filing date is used (known as current medium income (CMI)). Nevertheless, the debtor, and only the debtor, may also petition the Court to use a different 6 month time period. For expenses, either fake IRS expenses are used, or “reasonable expenses” are used, depending how your past average gross income calculates the CMI number.
CMI: In most cases, simply take the month ending prior to the month in which your case is filed and go back 6 months. Then average this number out by dividing by 6 to come to CMI. For examply, suppose your case was filed 7/15/08. You would then use the average of all income earned and actually received from 1/1/08 thru 6/30/08.
Without getting into all the complexities that arise here, also keep in mind the following: If you earned income on 6/25/08 but the paycheck was not delivered to your hands until 7/2/08, you would not use that paycheck since it was not received. If you worked only 3 of those months, then your average income for CMI purposes might actually be 1/2 your actual income. If you solely receive social security, then your CMI is $0.00 since social security was carved out by Congress so as to not be considered part of CMI (yes, essentially everyone on social security has no plan length requirement and does not need to pay any unsecured creditors). These are but a few of the most common nuances.
Expenses: The expenses that are subtracted from the past income calculated above are either fake IRS expenses, or “reasonable expenses,” neither of which have anything to do with the debtor or what their “actual” expenses are that they list on their “Schedule J Statement of Expenses.” The level of your past income(CMI) is compared to an artificial chart which then determines whether you use fake IRS expenses or reasonable expenses. High CMI requires fake IRS expenses whereas low CMI (and no income as is considered with social security) uses reasonable expenses.
If you have high past income (CMI), then the IRS’s fake expenses are used, regardless of what your actual expenses are. The IRS, in their infinite wisdom, created these universal expenses for different geographic regions of the country. These expenses in most instances have nothing to do with reality, but must be used nevertheless. For instance, in Southern California, the Housing Allowance from IRS in some cases is $1,939.00 per month. This is the figure that is used in the artificial test, even though actual rent might be less at $1,300.00 per month or higher at $2,500.00 per month. These artificial expenses are created for food, clothing, healthcare, and vehicle expenses, just to name a few. Again, they have nothing to do with the debtor’s actual expenses.
If the debtor has under medium income, then reasonable expenses are used. Unlike the fake IRS expenses, these expenses are nowhere defined. Rather, 1325(b)2 simple states that you subtract amounts reasonably necessary from past income. So once again, they have nothing to do with your present expenses. For instance, if you always eat Top Ramen and your food is actually $100 per month and you never buy new clothes, but for the typical person the Court determines that amounts reasonably necessary should be $200.00 per month for food and $50.00 per month for clothes, then you use the $200.00 and $50.00 figures instead just the $100.00 figure. Typically, most debtors are living way under their means as to what is reasonable, so generally these amounts reasonably necessary are usually higher than most expenses actually incurred by the debtor.
So once done with the forgoing artificial test consisting of CMI that has nothing to do with present income and expenses that have nothing to do with present expenses, an artificial DMI number is finally created. This is the magic number that must be paid to unsecured creditors in the Chapter 13 plan. But if this magic number is $0.00 or less, then nothing needs to be paid to unsecured creditors from DMI and there is no minimum time frame to pay into the Chapter 13 plan.
So if you had sporadic income prior to filing, your CMI is lower which may produce a $0.00 or negative DMI. If you have virtually no expenses because of what you were accustomed for living due to your previous debt load, you still get to use reasonable expenses or fake IRS expenses. If your CMI is higher, you still get to use fake IRS expenses, even though they are higher than your actual expenses. And dont forget, some income is not counted like Social Security and other income derived under the Social Security Act.
The bottom line is that your CMI might average considerably less than your actual income or your fake expenses might average considerably more than your actual expenses. In either case, you may likely end up with a negative DMI number, which then means NO MINIMUM PLAN LENGTH REQUIREMENT and NO PAYMENT TO UNSECURED FROM DISPOSABLE INCOME REQUIREMENT. In other words, your chapter 13 plan is Cheaper, Quicker, and Easier!