10 Aug Chapter 13: No Minimum Time Length For The Ninth Circuit: Part 2 of 2.
In my last blog, I discussed how the Ninth Circuit has now eliminated minimum plan lengths in Chapter 13 cases, as well as eliminated payments to unsecured creditors from disposable income. This blog will focus further on the “means test” used to get to that result and the artificial income and expenses created using that test.
If your chapter 13 plan receives no objection, then you are home free with your proposed plan. But what if the Chapter 13 Trustee or unsecured creditor objects? You must then do 1 of 2 things under 1325(b): You must either propose to pay all the unsecured creditors in full; or You must pay your Projected Disposable Income (PDI) to the unsecured creditors for at least 3 to 5 years, depending upon your level of average previous gross income.
So what is PDI? PDI is an artificial number completely derived from two other artificial numbers: Past average Income and Fake Expenses. To determine the past income to be used in the “means test,” the average of the previous six months of gross income prior to the bankruptcy filing date is used (known as current medium income (CMI)). Nevertheless, the debtor, and only the debtor, may also petition the Court to use a different 6 month time period. For expenses, either fake IRS expenses are used, or “reasonable expenses” are used, depending how your past average gross income calculates the CMI number.
CMI: In most cases, simply take the month ending prior to the month in which your case is filed and go back 6 months. Then average this number out by dividing by 6 to come to CMI. For examply, suppose your case was filed 7/15/08. You would then use the average of all income earned and actually received from 1/1/08 thru 6/30/08.
Without getting into all the complexities that arise here, also keep in mind the following: If you earned income on 6/25/08 but the paycheck was not delivered to your hands until 7/2/08, you would not use that paycheck since it was not received. If you worked only 3 of those months, then your average income for CMI purposes might actually be 1/2 your actual income. If you solely receive social security, then your CMI is $0.00 since social security was carved out by Congress so as to not be considered part of CMI (yes, essentially everyone on social security has no plan length requirement and does not need to pay any unsecured creditors). These are but a few of the most common nuances.
Expenses: The expenses that are subtracted from the past income calculated above are either fake IRS expenses, or “reasonable expenses,” neither of which have anything to do with the debtor or what their “actual” expenses are that they list on their “Schedule J Statement of Expenses.” The level of your past income(CMI) is compared to an artificial chart which then determines whether you use fake IRS expenses or reasonable expenses. High CMI requires fake IRS expenses whereas low CMI (and no income as is considered with social security) uses reasonable expenses.
If you have high past income (CMI), then the IRS’s fake expenses are used, regardless of what your actual expenses are. The IRS, in their infinite wisdom, created these universal expenses for different geographic regions of the country. These expenses in most instances have nothing to do with reality, but must be used nevertheless. For instance, in Southern California, the Housing Allowance from IRS in some cases is $1,939.00 per month. This is the figure that is used in the artificial test, even though actual rent might be less at $1,300.00 per month or higher at $2,500.00 per month. These artificial expenses are created for food, clothing, healthcare, and vehicle expenses, just to name a few. Again, they have nothing to do with the debtor’s actual expenses.
If the debtor has under medium income, then reasonable expenses are used. Unlike the fake IRS expenses, these expenses are nowhere defined. Rather, 1325(b)2 simple states that you subtract amounts reasonably necessary from past income. So once again, they have nothing to do with your present expenses. For instance, if you always eat Top Ramen and your food is actually $100 per month and you never buy new clothes, but for the typical person the Court determines that amounts reasonably necessary should be $200.00 per month for food and $50.00 per month for clothes, then you use the $200.00 and $50.00 figures instead just the $100.00 figure. Typically, most debtors are living way under their means as to what is reasonable, so generally these amounts reasonably necessary are usually higher than most expenses actually incurred by the debtor.
So once done with the forgoing artificial test consisting of CMI that has nothing to do with present income and expenses that have nothing to do with present expenses, an artificial DMI number is finally created. This is the magic number that must be paid to unsecured creditors in the Chapter 13 plan. But if this magic number is $0.00 or less, then nothing needs to be paid to unsecured creditors from DMI and there is no minimum time frame to pay into the Chapter 13 plan.
So if you had sporadic income prior to filing, your CMI is lower which may produce a $0.00 or negative DMI. If you have virtually no expenses because of what you were accustomed for living due to your previous debt load, you still get to use reasonable expenses or fake IRS expenses. If your CMI is higher, you still get to use fake IRS expenses, even though they are higher than your actual expenses. And dont forget, some income is not counted like Social Security and other income derived under the Social Security Act.
The bottom line is that your CMI might average considerably less than your actual income or your fake expenses might average considerably more than your actual expenses. In either case, you may likely end up with a negative DMI number, which then means NO MINIMUM PLAN LENGTH REQUIREMENT and NO PAYMENT TO UNSECURED FROM DISPOSABLE INCOME REQUIREMENT. In other words, your chapter 13 plan is Cheaper, Quicker, and Easier!
Bankruptcy Law Network (BLN)
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