When our clients are faced with filing a Chapter 13 bankruptcy, their first concern, inevitably, is that magic number that represents what they will have to pay each month to the bankruptcy court as repayment of their debts. Chapter 13 is kindly referred to as the “wage earner’s” bankruptcy. This means people who have higher incomes, but still need bankruptcy assistance, will generally have to file under Chapter 13 and make a repayment of their consolidated debts. While Chapter 13 can be a useful tool for many bankruptcy filers, it often strikes fear in our clients’ hearts as it creates a monthly payment, which many people are afraid they will not be able to maintain.
Well, the Supreme Court of the United States has just given us a tool to lessen this fear and has made filing Chapter 13 a bit easier. In March of last year, the Supreme Court heard and ruled on a case titled, Hamilton v. Laning. This case determined that a Chapter 13 monthly payment should be based on the income and expenses a debtor is reasonably expected to have in the future. Before this decision, the bankruptcy court, in some states, would base the monthly payment on the average of income received within the six months prior to the bankruptcy filing. To top it off, the Court would then require expense deductions based on standards and not actual payments made by the debtors. So, if you filed bankruptcy in February after you received a permanent reduction in overtime, the court was able to look at your income for August – January and use that to determine your disposable income and monthly payment. Now, that is scary!
Obviously, this standard approach to calculating a monthly payment for debtors who have had an unexpected or non-reoccurring change in income can lead to unrealistic results. But now we have the ultimate legal authority telling us that we have the go ahead to take into consideration our clients’ change in circumstances going forward and to develop a realistic and manageable Chapter 13 payment.
What does all of this mean for our clients? It means that Chapter 13 isn’t as scary as it once was. Clients don’t have to fear payments that are too high and do not have to avoid a Chapter 13 bankruptcy and all of the benefits it has to offer.