How is a Chapter 13 Bankruptcy Plan Payment Determined in Colorado?
April 27, 2011
By: David M. Serafin
As a Denver bankruptcy lawyer, I frequently represent debtors who file for chapter 13 in Colorado for numerous reasons. Those who do not pass the Means Test or who have filed for chapter 7 in Colorado within the past 8 years are not eligible for chapter 7. Others (even if eligible for chapter 7) file chapter 13 attempting to pay back non-dischargeable tax debt, eliminate a second mortgage or to stop a foreclosure. Invariably, for all chapter 13 clients, the critical questions asked are how much the plan payment will be and for how long. The following is an analysis of the factors which determine a chapter 13 plan payment:
- Means Test – Under the new bankruptcy laws, the Means Test looks at a debtor’s monthly income and statutorily allowed expenses for the six full months preceding the month in which bankruptcy is filed. For example, for a bankruptcy filed on August 15, the Means Test considers monthly income and expenses from February 1- August 1. Payments for secured debts (such as a mortgage or car loan), taxes which cannot be discharged, payroll deductions for income and FICA taxes, health insurance, and retirement contributions all may lower monthly disposable income (and the plan payment) under the Means Test.
- Priority taxes – Priority taxes owed to the IRS or state of Colorado cannot be discharged and are required to be paid back in full in a chapter 13 plan, albeit without any further interest and penalties being assessed. Chapter 13 plans which include priority taxes correspondingly lower monthly disposable income to be paid to (the lower priority) unsecured creditors.
- Secured taxes – A pre-bankruptcy tax debt, for which a Notice of Federal Tax Lien was filed, before the bankruptcy was filed, must be paid back in full in the chapter 13 plan.
- Pre-petition mortgage arrears – Although mortgage arrears incurred prior to bankruptcy can be paid back over 3 to 5 years in a chapter 13 plan in order to keep the home and stave off foreclosure, such arrears will be paid back in addition to monthly disposable income and priority taxes. (Note that the chapter 13 debtor must continue to also make regular monthly mortgage payments to the lender in addition to the plan payments.)
- HOA debts – pre-bankruptcy arrears owed to a homeowners association are a secured debt which must be paid back in order to keep the home.
- “Cram Down” of a car loan – Chapter 13 debtors (only) who have owned a vehicle for at least 2.5 years with negative equity are eligible to reduce the balance of the car loan down to the vehicle’s fair market value. A cram down can also reduce the interest rate AND allow a debtor to stretch out car payments over 3 to 5 years. A chapter 13 plan with a cram down provision can serve to mitigate a plan which would normally require higher monthly payments due to disposable income/Means Test issues and priority taxes.
- Non-exempt equity – Colorado exemption laws allow a bankruptcy debtor to protect certain property from creditors. For instance, Colorado allows for the first $60,000 of home equity (in a primary residence) for most debtors or $5,000/$10,000 of equity in motor vehicles for single/joint filers. But, for properties with equity exceeding the Colorado exemptions, the chapter 13 payment plan allows for the payback of the non-exempt portion divided over 3 to 5 years.