How much do I have to pay unsecured creditors in my Chapter 13?

A less experienced Bankruptcy Lawyer I know recently asked me about his Chapter 13 Bankruptcy client who owned a rental property that actually had some equity in it; very rare these days.

He wanted to know whether it would have to be liquidated (sold) to pay unsecured (usually credit card) debts in the case? 

The real question is not whether it has to be sold, as Chapter 7 is liquidation whereas Chapter 13 is an individual reorganization and no liquidation occurs.  The real question is if he keeps the rental property and it has non-exempt equity, what does that mean?

The answer is that the non-exempt equity in the rental house establishes the “floor” or minimum amount required to be paid pro rata to all allowed unsecured claims but no liquidation occurs.

My less experienced Bankruptcy Attorney friend forgot or did not realize that there are actually two (2) tests to determine how much gets paid to the unsecureds in a Chapter 13 bankruptcy case. 

The above example of non-exempt equity establishing the minimum payout to the unsecureds is called the liquidity test.  The other test is whether there is any excess disposable income left for the unsecureds after payment of priority and secured debts in the Plan.

A new third test may result soon based on the recent U.S. Supreme Court decision of Hamilton v. Lanning; more to come on that one.

This issue points out an advantage to filing Chapter 13 Bankruptcy.  The Debtor remains in control of assets and can keep them.  They may have to repay some portion of their debts but it could be pennies on the dollar relative to what they gain in keeping assets. I call these cases “Liquidity 13s.” 

The rule is that the unsecured creditors have to come out as well in Chapter 13 as they would in a Chapter 7 case where assets are liquidated to pay unsecureds.  The advantage of the 13 is control over the asset is not in the hands of a Chapter 7 Trustee.  By Consumer Bankruptcy Attorney Richard R. Baker at BAKER LAW, PLLC. www. LegalQuestion.com

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Offices in Winter Park, Florida.

Many people contemplating filing for Bankruptcy want to know what happens to their tax refunds.  It depends on when you file your case.  At this time of year (December/January) there are two ways to play it: 

Option #1 is that you file your 1040 as soon as you can in the new year, get your refund and spend it on the cost of filing your bankruptcy case or other necessary living expenses (not on debts and friends and family). 

Option #2 is to file your case and exempt the refund if you have enough room to also exempt all other assets.  The problem with option #2 is that it uses up exemptions you could use to keep other assets and it only works where you can fully exempt the tax refund and still have other assets protected (exempt) as well.  This we determine case-by-case with each client based on their situation.