Chapter 11 v. Chapter 13 Part 2

For part two on Chapter 11 v Chapter 13, I am going to dispose of lengthy discussions about exclusivity period, 1111(b) elections, disclosure statement hearings and absolute priority rules.  Instead, I'm going to do this law school style with a hypo.  This post will be about the Chapter 13 side to the hypo

So here are the facts:

The Debtor Joe Sixpack has $90,000 in unsecured debt.  His non gerrymandered form 22C gives him projected disposable income of $500 per month.  He has a car payment of $300 per month for the next 36 months.  He also has a 401k loan of $200 per month that ends in 24 months.  Further, his non gerrymandered and properly re-allocated schedules I and J show a positive $600.  The Chapter 13 trustee's vig is estimated to be 5.0%.

So Joe files for Chapter 13.  When he retains his brilliant attorney, he pays him $2,000 and his counsel will receive $2,000 "through the plan".  Joe's plan proposes to pay $600 per month for 60 months.  This will pay his creditors the $30,000 they are required to recieve, his counsel gets his extra $2,000 and trustee gets his vig and there is a little left over.  All documents are in order, Joe brings his properly completed cashiers check to the 341a he is good to go, right?

No he is not.  While not specified in the code or really backed up by reality, the common law of Chapter 13s state "when a periodic obligation that is not treated under the plan is paid off, that amount of payment is disposable income more or less irrefutably".  So Joe would now being staring down a plan that looks something like:

Month 1-24:  $600 per month

Months 25 -36:  $800 per month (401k loan paid off)

Months 37-60:  $1100 (Car paid off)

Plan base is now $50,400.

Joe is good now, right?  He is only 60 months and 50 grand away from being back in the High Life....

Not quite.  The trustee's hands grabbing all that they can, will (usually) take possession of the Joe's tax

refunds.  Let's say Joe's average tax refund is $500 per year, so his outlay is now $55,400 (includes his $2,000 retainer to counsel).  For simplicity sake I am not going to present value this cash flow.

Next up is Chapter 11