How long is a Chapter 13 Bankruptcy?

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News | by — September 10, 2013

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First, the disclaimer: The article below is for informational purposes only. It is not designed, nor is it intended to offer specific legal advice or create an attorney-client relationship.  To do that, you’ve got to meet with us.

 

You may know that a Chapter 13 bankruptcy requires a partial, and in rare cases, full repayment to creditors over a period of time. But, how long must a debtor remain in bankruptcy? The answer to this question is complex and depends on various factors that are very specific to each individual. For example, debtors may use the time in a Chapter 13 to get caught up on payments owed for taxes, child support or mortgage arrearages. Some debtors will opt to file a Chapter 13 to protect an asset that otherwise would not be protected in a Chapter 7, the value of which can extend a Chapter 13 plan. The extent to which these variables apply to you all impact how long you are in a Chapter 13.

Beyond the amount and type of debt owed, another factor in determining the time you will spend in a Chapter 13 is your income.  The Ninth Circuit recently clarified how a debtor’s income affects how long a debtor must stay in a chapter 13 bankruptcy. (In re: Flores, 2013 U.S. App. Lexis 18413)

This can be confusing, so first some definitions:

Applicable Commitment Period: This is how long a debtor must remain in a chapter 13 bankruptcy.

Above Median Debtor: A debtor who, after taking gross income from all sources in the 6 months prior to filing bankruptcy makes above the state’s median income for that debtor’s household size.

Current Monthly Income (CMI): The gross income from all sources in the 6 months prior to filing bankruptcy, averaged to a monthly amount.

Projected Disposable Income:  A debtor’s Current Monthly Income, less allowable expenses reasonably necessary to support the debtor or the debtor’s dependents.

 

Prior to the Ninth Circuit’s recent ruling, there was some question as to whether an above median debtor, who after deduction of reasonable expenses was left with negative projected disposable income, had to remain in a chapter 13 bankruptcy for 5 years.  The argument was this: that the applicable commitment period only applied with regard to a debtor’s projected disposable income, and if that projected disposable income was a negative number, then there could be no applicable commitment period.

With the publication of In re Flores, entered on August 29, 2013, we have clear instructions with regard to applicable commitment period. An Above Median Debtor must remain in bankruptcy for 5 years, unless creditors can be paid in full earlier.

Debtors with income that fluctuates, or who have experienced unusually high income in the 6 months prior to an anticipated bankruptcy filing may be wise to wait to file. In some cases, shifting the 6 month look-back window forward will drop higher income months and replace them with lower income months, resulting in an overall lower CMI number. If this results in the debtor’s income falling under median, it may save the debtor from 2 additional years in a chapter 13 bankruptcy.

If you are contemplating bankruptcy, please contact us to schedule a free consultation.

 

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