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How to calculate disposable income for a Chapter 13 Plan

Often times a consumer realizes that they will need to file a Chapter 13 bankruptcy in order to catch up on some missed payment to their mortgage, car loan, or simply need to file due to the fact that their household income exceeds the median income in their state.  The biggest question that needs to be asked at this point is, how much do I have to pay into the reorganization plan each month?  The answer to this question is not always a simple calculation.  There are a few things that need to be taken into account in order to determine how much one must pay to propose a confirmable Chapter 13 plan.

The first issue to analyze is whether the Debtor has any arrears which must be paid back.  What this means is that if there are any missed payments to a mortgage, car loan or some other type of secured debt, the Debtor must propose to pay back 100% of those missed payments if they want to retain the property.  Additionally, if there are any taxes or other priority debt in arrears, those must also be paid back in full, interest and penalty free over the course of the plan.

The second issue to consider is whether the Debtor owns any property that is not exempt in a Chapter 7 case.  For example, if the Debtor has an investment property that has $30,000 of equity, which cannot be protected with any applicable exemptions under either state law or Section 522 of the Bankruptcy Code, then the Debtor must propose to pay his or her creditors through the plan at least as much as the non-exempt equity is valued.  This test is called the liquidation analysis.

The final step that must be taken is to determine how much actual disposable income a Debtor has available to fund his or her Chapter 13 Plan payment.  What this means is that any income left over after payroll deductions, and reasonable living expenses are taken into account, how much money is left to pay into the plan each month.  A Debtor is required to propose 100% of that disposable income in order to meet the best interest of the Creditors test.  This final step is where many people run into problems, in that your disposable income must demonstrate you can fund a plan to at least meet the requirements under the first to issues of secured debt and non-exempt assets.

It is clear from this blog post that in order to calculate a Chapter 13 bankruptcy plan, one must understand not only how much debt they owe, but also what kind of debt and how much their assets are valued in order to move their case forward.  For this reason, it is important when filing a Chapter 13 case to consult with an experienced bankruptcy attorney before filing anything.

Can Bankruptcy Help If Your Offer In Compromise Fails?

Discharge Tax DebtI heard the story all too many times. You filed an Offer in Compromise over 12 months ago and you received a letter simply rejecting your offer. The explanation for the rejection makes no sense to you for this was the best offer you could make to resolve your tax liability. I will tell you that you are not alone in your experience for only about quarter of Offers get approval each year. This means that nearly 75% of the people who have faith In the Federal Government to help them in a bad situation with their taxes are in for a rude awakening.

Offer in Compromises are a nice idea and a great way for the Internal Revenue Service (IRS) to extend the three year statute of limitations to collect against a tax debtor. Once an Offer is submitted the statute of limitations is stayed in order to allow the IRS the 12 to 24 months to process your Offer. Meanwhile, the tax debtor’s life is put on hold and the IRS is able to prevent the tax debtor from pursuing options that will discharge tax debt.

So what can you do if your Offer is rejected and that the odds are not in your favor to get an Offer actually accepted?

We see a lot of people in our office with tax issues and a lot of people completely devastated by rejections of Offers. If we had our chance to meet with anyone considering putting all the work into submitting an Offer in Compromise, we would save the tax debtor the time, energy, and frustration. Offers statistics clearly indicate that this process is not going to be a success for the tax debtor. If the IRS was a sports team, the fans would be complaining to get a new coach with nearly 75% rate of loss.

Nevertheless, there is a successful option for tax debtors and the success rate is in the control of the tax debtor and not some third party IRS agent pushing paper. A Chapter 13 bankruptcy case is your best option for tax debt. Now, I know the word “bankruptcy” scares people off which is unfortunate for it is the only Federal Government law that can with absolutely cure a tax debt issue without question.

Why a Chapter 13 case is the best option is because Title 11 allows a tax debtor to cure tax debt over a payment plan of 60 months without the threat of the IRS collecting against the debtor. That is right you put up a big STOP SIGN to the IRS thanks to the automatic stay pursuant to 11 U.S.C. §362. So no more worries of threatening IRS debt or increasing of your overall tax debt due to the fact that the IRS is stayed from issuing out penalties of interest while you are in a Chapter 13 case.

Additionally, a Chapter 13 case allows you to treat the interest and penalties as unsecured debt. In other words, you will pay a minimum amount like maybe 5% (this amount depends on your disposable income) and the rest of the interest and penalties will be discharged. So all that interest and penalties tact upon your tax debt will not need to be paid in full and will no longer hinder your ability to cure your debt.

Finally in a Chapter 13, you can avoid tax liens. Anyone with a tax lien knows how trapped you feel. Often tax liens lead to levying of your bank accounts as well as your wages. Chapter 13 stops all levies on bank account as well as wages. So you can have your life back as you knew it was before you got into tax debt.

The reasons to file a Chapter 13 bankruptcy case is overwhelming. You the tax debtor are in control and you can have 100% success rate.