Cost of Chapter 13, Part 2: How Your Lawyer Calculates your Plan Payment – South Alabama Bankruptcy Lawyer Judson E. Crump

Part 2 – How Your Lawyer Calculates Your Chapter 13 Plan Payment

So just how does the lawyer arrive at that number?  Now, as much as I love to warn people about the signs of a bad bankruptcy lawyer, there usually is no pressing need for the lawyer to explain to you how exactly your plan payment is calculated.  It can be quite complicated, really, and your time would be better spent discussing whether or not bankruptcy is your best option in the first place, or who is going to with the National Title in the first post-BCS College Football Playoff.

First, a disclaimer: every case is different and there are other factors that go into the monthly payment.  If you want to know what your bankruptcy should cost – then you need to talk to a good lawyer.  Or two.  Lawyers like to think that they’re special and that the calculation of a bankruptcy plan payment is some arcane craft that one can only comprehend after years of grueling training.  That, of course, is not true.  Most people don’t learn bankruptcy in law school, and even those that do spend most of their free time drinking beer and eating pizza at Mellow Mushroom or trying to romance hot undergrads.  The truth is that it takes about a week for a young bankruptcy lawyer to learn how to calculate a plan payment.  Less than that if they’re decent at math.

Basically, what your lawyer does is this:

Add up the amount of debt that must be paid: (Secured debt, Priority debt, and a percentage of unsecured debt) plus their attorney’s fees, and they come up with a subtotal.  Multiply the subtotal by the trustee’s fee, which is a fixed portion of every single monthly payment.  Then you have the total amount of money that must be paid into your plan.  Divide that number by the total number of payments, and bingo.  There’s your monthly payment amount.

Of course, determining what must be paid is the trick.  But it isn’t magic at all.

Here’s the math formula:

{[P + S(1+rn) + Ud]Ft}/n

Where:

P = Priority Debt
S = Secured Debt
r = Till Interest (usually around 5%)
U = Unsecured Debt
d = Unsecured pro rata dividend
Ft = Trustee’s Fee (usually between 5 and 10%)

and d (the number of pennies per dollar that your unsecured creditors receives is the greater of Ie/Ut or An/Ut

Where Ie is your excess disposable income based on the means test and An is your nonexempt asset value.

Simple, right?

Don’t get lost in the symbols.  When you use real facts, it is easy.

You have a 2007 Silverado worth $10,000, and you owe $10,000 on it.  You owe $5,000 of taxes.  You have $25,000 of unsecured debt, but unsecured debt is easy to deal with because it gets paid at anywhere between 0% and 100% of the amount owed, based on how much income and assets you have.  Most debtors have few nonexempt assets and no excess disposable income, so the unsecured guys get paid like 3% of their claims.  In this example, say the debtor also has $5,000 of nonexempt home equity.

So the calculation would go like this:

$10,000 (plus interest at 5%) = $11,320 of secured debt.  This must be paid in full.

$5,000 of taxes = $5,000 of priority debt.  This must be paid in full.

$25,000 of unsecured debt.  This is not paid in full, but only in proportion to the total value of your nonexempt assets or excess income over the next 5 years.  Unless your income is well above average for your family size, it will be your assets that drive the payment.  Here, debtor has $5,000 in nonexempt assets, so he pays $5,000 to unsecured creditors, whether he has $10,000 of unsecured debt or $10,000,000 of unsecured debt, they share the same $5,000 pie.

Attorney’s fee = $3,000 (standard in Southern District of Alabama circa 2014).  This must be paid in full.

Subtotal = $24,320.

Trustee’s fee here is 9%.  $24,320 x 1.09 = $26,509.  This is the total cost of Chapter 13.

$26,509/60 = $442.  This is the monthly payment for a 5 year (60 months) Chapter 13 bankruptcy case.

See, I told you it wasn’t impossible.  Now, it can be more complicated, and your situation is certainly going to differ from this hypothetical debtor, but the basic process is the same, and anyone can do it.

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