Download the planning worksheet to follow this discussion:
Okay. So, this is the heart and soul of a Chapter 13 analysis. What we’re trying to do is bring together in one analysis, all the different components that you’re going to see as part of a Chapter 13 plan. And another thing that I have just so we have it and it’s up and running is the Chapter 13 plan. This is a form, it’s a standard form that is used in cases around the country. Every district has its form for a Chapter 13, but they’re all based upon the national form. Some districts just like to put a lot more into the form than Maryland does. That’s based upon input from the lawyers and the judges and the trustees of that district. I’m just showing you this now. We are going to get back to this in a second to show you how what we do in the planning worksheet that results in populating the Chapter 13 plan. We’re back to the worksheet.
When we look at this thing here, these are the mortgage arrears. We’re assuming, at this point that we are in a Chapter 13 and that our client is behind on the mortgage. One of the most popular reasons to use Chapter 13 is to cure mortgage arrears. This number here typically comes from the proof of claim that the lender has filed with the court. Your client is going to come to you, and they’re going to say I’m about $14,000 behind on the mortgage. They’re going to have a stroke when the number comes in $5,000 or $6,000 higher than they projected because they’re usually omitting a month or two. They’re omitting the cost of the foreclosure sale and the attorney’s fees that the lender is permitted to include as part of its proof of claim. When you file your original plan, which you should file with the petition. There’s one reason, more than any other, that you should file your original plan with the petition. This reason is that the bankruptcy court will send a copy of it to all creditors that you include on the creditor list that you file with the petition. You’re going to get one mailing on the bankruptcy court’s dime. You know, that matters because if you have to amend the plans several times during the course of the case and every time you amend it, you have to serve all parties and interests.
That could get expensive between photocopying and postage after a while. I like to get one free bite, no matter what. Even if I’m filing a barebones case on the eve of a foreclosure sale, I at least like to file some kind of plan if I can and that will include the arrears that my client brings to me. So, here, we see that this amount, this $19,417 comes from their proof of claim. We’re going to go back to the sample plan. This is the plan, and this is the amount. Wells Fargo Financial is the lienholder of the mortgage and the amount of the arrears is $19,417. Let’s share the whole thing. So here it is, the $19,417 is what we saw in the plan and then – here, you know what, let’s see if I can make this a little bit cleaner going back and forth. Let’s see if I can get the plan up here as well. This will make it easier to go back and forth. I came up with this interest rate of 5.5 percent from the Supreme Court Till case in which you take the prime rate of interest and you add 1, 2, or 3 percent to compensate the lender for risk. And you’ll see here I’ve brought that in over here as well and then, this is prepopulated. This is a formula that’s prepopulated to come up with the payment.
So, if we change this, let’s say to $20,000, that will change the dollar amount here. If we change the length of the plan, that changes the dollar amount. It also changes the dollar amount down here. If you change the interest rate, that also changes everything. So, everything is incorporated here, that’s why it’s such a useful tool. So, we’re going to go back to what it was before. We’ll make it 60 months. Here’s the rule of thumb for how long your plan should be. If you have dollar amounts that have to be paid as part of the Chapter 13 case such as secured arrears or priority taxes or buying back the equity from the creditors. You usually want to stretch it out as long as possible so that the payment is lower because Chapter 13 debtors are intensely cash flow oriented. Perhaps you have a situation where you’re just trying to get rid of toll violations. I had a client who has $35,000 worth of toll violations. How you do that? I can’t figure it out, but they do. They have that many toll violations. They came to me. This was a funny case because I was going through their initial consult. We were talking about their credit cards and their medical bills and their evictions and their repo. I said is there any other debts that we ought to be talking about. They said well, I have some toll violations. I said how much. The client said $35,000. Right then and there, I said we’re going into a Chapter 13 because you can get rid of toll violations in a 13. You can’t get rid of them in a 7.
Because that’s what we’re trying, this would have been a no-asset case. They’re a below-median income debtor, so we want to make this a 36-month plan where we’re not going to pay anything to the unsecured creditors. He didn’t have any priority taxes. He didn’t have any equity in his property. The payment is going to be as low as it could be anyway. Let’s do it over 36 months yielding a much better outcome for the client. That’s how we analyze those cases.
Question: And was there any reduction in that because it is a municipal fine? Is there any reduction in that in a Chapter 13?
Ron Drescher: I’m going to jump back into the green section in an effort to answer your question. The amount of the dischargeable unsecured debt is not a factor in determining how your plan payment, unless your equity is greater than the amount of unsecured claims. You don’t have to pay back any part of the unsecured debt in a Chapter 13 case. Although around the country, there are some trustees and courts that say well, if you are not paying at least something to unsecured creditors, that shows a lack of good faith. Therefore, we’re not going to confirm your plan. That’s how they shoehorn a payment requirement into the plan process that is not there. There is no statutory requirement to pay anything to general unsecured creditors.
My gut feeling is if you have a jurisdiction where the trustee says, you are going to pay 25 percent to general unsecured creditors, otherwise, I’m not going to recommend confirmation of the plan. My feeling is you should push back at him or her and go to the judge. You say “Judge, this is my client, he’s an honest hardworking person that ran into some trouble and they just can’t afford 25 percent.” The judge may still confirm a plan that pays less. But you should know there is no requirement under the Bankruptcy Code to pay anything to general unsecured creditors. There is no need to stretch out that $35,000. It’s a dischargeable, general, unsecured claim in Chapter 13. But, in Chapter 7, it’s non-dischargeable because just as you said, it’s a municipal fine. Municipal fines that are civil in nature are dischargeable in Chapter 13 but not in Chapter 7. That’s one of the reasons why sometimes you’ll do a Chapter 13 because you’ve got a client with big fines.
By the way, we’re going to go now to this section. Here is the Chapter 7 test called the buy-back equity test. This is also prepopulated with a formula. These numbers can change because every situation is going to be different. Any time somebody has a house, I run these numbers–the fair market value. During the initial consult, I’ll quickly run numbers from redfin.com, Zillow.com, and realtor.com. I try to get a sense of an average between those three and then I’ll plug that number in over here. The cost of sale, you can see I stick that in here. I use an 8 percent cost of sale. You could probably get away with a 10 percent cost of sale. Then, this is the mortgage. If there is a HELOC, a home equity line of credit, or any second mortgage, I stick that in here. If there are judgments that have become liens against the property, I stick that in here. I stick the homestead and other available exemptions in here and come up with the net number. You’ll see the net number of $33,200.
You could see that I’ve put that up here as the formula that’s baked into the spreadsheet. This $33,200 appears over here and then it’s divided by 60 because that’s the proposed length of the plan. Now, let’s say the amount is $200,000. This amount comes down to $1,000 and that automatically populates over here. If this amount is negative, what you should do. You know what, I could probably make this so that this number can never be negative. If I were a little bit better in Excel. I could probably tweak this so that this is never negative. This is the dollar amount here. See, this matches here. This should never be negative. But once this is negative, then you never have to worry about this section. Then you’re only going to be talking about the amount of the arrears if you’re going to be paying a car through the plan or if you are going to have priority claims because there are taxes. So, now, do I have any questions about how the part regarding the arrears and the restructured value works? So, do you have a question? Oh, okay, you’ve got your answer, lower the hand.
Now, we’re going to talk about this restructured value. Sometimes, you want to pay the car through the plan. Usually, you want to do that when you have a client who comes in with this situation. They had a car that was underwater long before they came to see you. They decided they wanted to get out from under that car and they want to get a new car, so they go to the dealer and they’re going to trade in the car. Now, the dealer doesn’t care. The dealer is just trying to put this person into a new car. So, the dealer is going to figure out a way to roll the negative equity of the existing car into the new car. By the time your client drives off that lot, they are already crazy underwater with their new car, and they have a monstrous payment. Okay, in that situation which is way more common than it should be, it would be great if instead of having your client pay the amount of money that is due, the total amount of the claim, just pay the value of the car.
In that case, we go down to this yellow box here because this deals with the 910-day rule. The client must have had the car for 910 days before you can cram it down to the value of the car instead of to the amount of the debt. This is easy enough. This is the day you bought the car. This is the day you filed the case if that amount is over 910. You can go back up here and put in the dollar amount of the clean retail value of the car. It is going to be clean retail value. It’s not regular value. It’s certainly not trade-in value. It’s the clean retail value.
The reason for that is for years and years and years, there were fights in the bankruptcy court about what value to use. Lenders always wanted the highest possible value; debtors always wanted the lowest possible value. Finally, in 2005, they changed the Bankruptcy Code, hard to believe it was that long ago, they established clean retail value. If the debtor is going to keep the vehicle, you always use clean retail value for this analysis. So, I have this at zero dollars. If the clean retail value is $16,000 and this is the till rate of interest. We don’t use the contract rate. We use the prime rate plus that 1, 2, or 3 percent that the Supreme Court told us we could use. We’re going to have a payment of $306 a month. If they come to your office or they talk to you on the phone, and their payment is $600 a month, you’re saving them a ton of money over the life of the plan—60 times $200, that’s $12,000. To me, that’s probably worth this $6,000 that we’re charging them. We’re going to get to this in a second. This is very important. The trustee’s commission which I always calculate as 10 percent.
Sometimes, you’re going to have a client that’s going to come to you that’s paying 19 or 20 or 21 percent on the car but they haven’t had it for 910 days. You can still pay that through the plan and lower the interest rate to this 5.5 percent which, sometimes, is miraculous. But don’t forget, you’re going to have to add this trustee commission which I figure at 10 percent. So, even if you can reduce it to 6 percent or 5½ percent, you still going to add that 10 percent on because the trustee is charging 10 percent for every dollar that comes through his or her hands. So, you need to consider that in deciding if it’s worth the effort to restructure a car to reduce the interest rate. For me, I think it’s usually not worth it. Also, because at some point during the Chapter 13 case, you’re going to get a call and the client is going to say, I want to get a new car. Can I get a new car? In the best-case scenario, you’ll have to modify the plan, surrender the car, get into a fight with the lender about whether or not you can surrender the car, and then discharge the deficiency claim along with the other unsecured claims. It’s a headache.
You have to consider from the get-go, whether it’s worth doing that at all. It may not be. In my opinion, it’s seldom worth reducing the interest rate but it is almost always worth it if the car has been in your client’s hands for more than 910 days, reducing the amount of the claim to the value of the car. One caveat for the 910-day rule is that only goes to purchase money. You’re going to have clients that are going to come to you, and they took out a title loan on a car. Some lender was willing to give them a loan against the value of the car—maybe the car had been paid off, but they’ll give you a title loan. For that loan, you don’t have to wait the 910 days. So, that’s a question you always ask. Did you ever do a title loan? All right, so let’s go back and let’s make this, what was this, I think this was 230. I think that was $235,000. Right, and that brought us back to the $33,200. Let’s put this back at 0. We have decided not to pay a car through the plan and this unsecured debt payout is $33,200 because they’ve got substantial equity in their home. Now for fees, this is important because they’re paying your fees through the plan.
That’s a great thing for them and it’s a great thing for you. And now, if we go to the plan, we see where that appears. That’s going to appear in this section where they’re talking about administrative claims. That’s going to be $6,000. So, that’s $6,000 here and that $6,000 appears here. I put that in there and I explain to the client that it’s going to turn out that they’re not paying this out-of-pocket. They are paying over to the trustee and I’m going to be paid $100 a month from their payment. And you know, clients don’t typically oppose $100 a month during the Chapter 13 case. The important thing is I’m setting this up psychologically, right here, during the initial consult that this is going to be my additional fee. In addition to the $1,500, I’m going to charge to put them into the Chapter 13 in the first place. That’s the important function that discussing this over here does. Besides the fact that you must calculate your fee to have the client have an idea of what they’re going to pay as part of the Chapter 13 case. Next, we come to priority claims. This is an extremely high number. You are seldom going to see a case with a number this high. They are typically IRS taxes. The IRS in Chapter 13 cases is great. Seldom are you going to have the words IRS and great in the same sentence.
You will get it here because they file their claims on the first day, most of the time, or in the first week. Most of the time, you know right away what the IRS debt is going to be that you’re going to have to pay through the plan. I don’t have an example here. I’m going to put up in the course, an example of the IRS claim. It’s nice. They have it spread it out as these are the priority claims. These are the general unsecured claims. If there is a notice of tax lien that they filed and they are secured claims, they put that in the years. Enormous practice tip, all right? This is a writer-downer. Let’s say your client comes to you and tells you that they’ve got tax debts and there’s a notice of lien that’s been filed. They usually know that the IRS has a lien. Let’s say they don’t have any equity in any of the other assets that they have. They would otherwise be a perfect no-asset case. But, for whatever reason, we have them in a Chapter 13. The notice of tax lien filing hits all their assets. The debtor does not have any right to exempt any part of their assets relative to the IRS, unlike judgment creditors where you get the benefit of your exemptions.
You don’t get the benefit of your exemptions from the IRS. Maybe you’re in Florida or Texas or California or Delaware or one of those states that has a great homestead exemption, it doesn’t do any good against the IRS. They defeat that. But let’s say you don’t have a lot of assets and you would have ordinarily a no-asset case and the debtor, the client, says, “Well, I’ve got furniture worth $2,500; I’ve got an IRA that has $5,000; I’ve got a bank account with some money. Whatever they have, those assets, that’s going to be the amount of their secured claim that needs to be paid as part of the Chapter 13 case. Now, the value of furniture and clothes and jewelry and artwork and your kids’ bicycles, and such, is highly subjective. Nobody ever loses this stuff in a bankruptcy case. But whatever dollar amount you put on those bankruptcy schedules for the value of those assets, you’re going to be stuck with that with the IRS secured claim that you’re going to have to pay through the Chapter 13 plan. That number is going to go up either here or here depending on the situation. And you’ll have to run that analysis.
So, if it turns out it’s $11,000, that’s going to add $210 a month to the plan, plus the trustee’s commission. If you know that the IRS is going to be asserting a tax lien, maybe you err on the side of a lower valuation on your assets of household goods. There’s wiggle room in the valuation of furniture. No one’s coming to their house to value this stuff. It’s not fraudulent. Right? Who knows? I got a crib. What’s that crib worth? Is that crib worth $200? Is it worth $75? I use Craigslist values which, frankly, is free if you’ll come and get it. That’s an important practice tip when you are dealing with somebody who has an IRS tax claim. We’ve gone down here. These are the priority claims. We talked about that. What we did here is we added all the different constituents of the claims to configure the trustee’s commission of 10 percent. That’s how we come up with the $9,583. Now, for the estimated plan payment, we just add all of the sub-payments and we come up with the plan payment right here. This is not intended to be a primer on how to draft a Chapter 13 plan. We’ll get to that at another time.
Much of what I’m talking about is going to come into play but it’s more how, when you’re on the fly, to come up with a dollar amount that you can tell your clients. Yeah, this is what your payment is going to have to be. Now, this number, they will always underestimate. This number, we usually have a fairly good idea. Very seldom is a Chapter 13 trustee going to challenge you on the value that you put in for the real estate. That is rarely going to happen. So, you can predict easily what you’re going to get there. Priority claims, they’re going to crazy underestimate this amount. I thought I owed the IRS $22,000 and then the priority claim comes in at $37,000. Another thing that, I used to have a full head of hair before I did this. Another thing that drives you crazy is the state. While the IRS typically files their proof claim in the first week, the state taxing authorities may wait until the deadline, a day before the deadline which is 180 days in most Chapter 13 cases. So, a lot of times, you must go to your confirmation hearing before you know what the state’s tax claim is going to be. But, in that case, that’s all right, you modify the plan. You want to modify the plan, great, you do your motion to modify. I don’t have a form up there yet on that, but we’re going to. You have the proposed modified plan. You are going to circulate that to all parties and interests. That’s another $28, $32, $17, whatever. You keep doing that and it does strip away at your fee, especially if you have the no-look fee in your jurisdiction. This is the dollar amount. I have this in the plan over here. Estimated plan payment, $1,912; $1,912 for 60 months. So, now you have an idea of how your plan is beginning to take shape just through using this tool.
All right, I have a couple of other items. I’m almost done. That’s the guts of the tool. Sometimes, I will go through this pink section here with the client where I try to go through what their net disposable income is going to be. This is not as useful a section, in my opinion, as the green section because you are estimating a lot of things. It doesn’t include all the expenses; although this is a fairly decent summary of the expenses that they’re going to see and that they’re going to be allowed to take. This is a fairly good estimate of their take-home pay. I can come maybe within shooting range of net disposable income using this. So, I put it in here. I think it’s a useful tool. If you want to play with this document, feel free to make whatever changes you want to it. It’s yours to use however you want to, but this typically is relatively close to getting within a stone’s throw of this you’re an NFL quarterback and you’re throwing the stone.
You’re more likely to hit your target than if I’m throwing the stone. These other two sections here, we talked about this. This blue section is a useful tool that has nothing to do with the dollar amount of the Chapter 13 payment. I created this to kind of give my clients an idea as to whether or not they’ll qualify for a Chapter 7 case because their non-consumer debt is higher than their consumer debt. This is a great back door when you have a client that had a business that failed and they’re holding the bag for the business debt but they’ve got another job or their spouse has a good-paying job, and they’re above median and they’ve got a mortgage. I put this mortgage up high. This mortgage of $655,000 versus all these different debts relative to their failed business of $381,000. Because the mortgage is higher than the $381,000, this client would not qualify for Chapter 7. Even though I’m paying the mortgage current and we’re going to keep it out of the bankruptcy, it had nothing to do with anything and it’s not why I’m filing bankruptcy. Doesn’t matter. Doesn’t matter. Because it’s a consumer debt, you have to count it.
In comparing the consumer debt versus the non-consumer debt, I want you to notice that I don’t call it business debt because it’s not consumer debt versus business debt. It’s consumer debt versus non-consumer debt. Consumer debt is defined as debt that was accrued primarily for personal, family, or household purposes. If it doesn’t fit into one of those three categories, it goes on the non-consumer side. So, for example, taxes are never consumer debt. That’s key, that’s huge. A mortgage is almost always consumer debt, but let’s look at a situation where your client had a home equity line of credit that they used to finance their failed business operations. That debt was incurred for other than primarily personal, household, or family purposes. You can include that in the non-consumer side. You must ask the question. You’re going to have clients that will come to you because they had a failed business and they will be high-income debtors. You are going to see those clients. If you can get them to have this non-consumer side higher than the consumer side when every other lawyer in town told them they’re going to be stuck in a Chapter 13, but you can get them into a Chapter 7. You’ll be the most amazing superhero and that is going to happen.
I’m going to throw two things at you that has nothing to do with this, but I think they’re great little tidbits if you’re trying to get your client into a Chapter 7. One is if they’re a franchisee. After COVID, many, many, many franchisees are going to be going into bankruptcy. You might handle their personal. You might handle their business case. What’s more likely is that you’re going to handle their individual case and a lot of the franchisees opened up the franchise after they have another high-paying job, their spouse has a high-paying job, and they’re going to over median. The franchise failed. There are royalty fees and other franchise fees in connection with a franchise agreement. That might go for 8 to 10 years. I think you can calculate that out over 10 years and include that on the non-consumer side.
I’ve had several clients that I have been able to get into Chapter 7 cases that never thought they were going to get into a Chapter 7 case because of all the reasons we have discussed. That is the tip, and this is a spreadsheet. This is a calculation that you will find yourself doing. I have it in this spreadsheet. You’ll also notice that I use Chrome, and this is a Google Sheets document. Initially, it was in Excel, but I brought it over to Google Sheets. I have it right here in the upper left-hand corner. I will go to this all time. I’ll make a copy of it and save it in the client’s file on their Google drive. This way, it is the easiest possible access to this document because I use it so often. I hope you found this deep dive into this tool to be useful. I know I kinda threw it at everybody during bankruptcy week. I did that semi-intentionally because I thought that if you took the time to analyze, you might have been able to figure it out. I knew that it would come in handy to have this time to go through it. I hope that this was time well spent for you. Does anybody have any questions about this tool or any of the things that we have talked about?