If you file Chapter 13 bankruptcy after you buy an expensive new car, the high loan payment can make it difficult for you to propose a plan that the court will confirm (approve). In this article, you’ll learn how a luxury purchase can jeopardize a Chapter 13 case.
In Chapter 13 bankruptcy, debts such as unsecured credit card balances, medical bills, and personal loans, don’t need to be paid in full. Any remaining dischargeable debt balance will get wiped out at the end of the plan.
A filer must pay creditors a monthly Chapter 13 payment that equals the disposable income available to the filer (the amount remaining after subtracting expenses) for three to five years, depending on how the family income compares with the state’s median income. The plan length will be three years for filers whose income is lower than the median, and five years for those that are higher.
(You can find your state’s median income on the U.S. Trustee website. Select “Means Testing Information.”)
The assigned Chapter 13 trustee is tasked with ensuring that a proposed payment plan represents the filer’s best effort at paying down debt—and this means, in part, that the filer’s expenses can’t be unreasonable. The trustee has the authority to challenge any expenditures outside the norm. If the court agrees, the unreasonable expense can be disallowed and added back into the Chapter 13 payment.
Example. Gus agreed to finance a $40,000 sports car for five years at $850 per month. When he filed for Chapter 13 bankruptcy, he deducted the $850 monthly payment from his income, leaving him with $150 in disposable income. Over 60 months, the proposed payment would pay $9,000 toward his $50,000 of unsecured claims. The Chapter 13 trustee objected to the high car payment as unreasonable and the bankruptcy court agreed, disqualifying $300 of the $850, and increasing the Chapter 13 payment from $150 to $450 a month for 60 months, giving the unsecured creditors a total of $27,000, instead.
Disallowing all or part of an expense can leave you with a bit of a dilemma. If you choose to keep a car with an expensive car payment, the trustee will likely file an objection and argue that your plan isn’t feasible because you don’t have enough disposable income to cover your Chapter 13 payment. Many debtors will choose to get rid of the expensive car and find something more affordable, instead.
Example. Gus decided to keep his $850 car payment even though the court ruled that only $550 of it was a reasonable expense and increased his plan payment from $150 to $450. His budget showed that he would be short $300 every month if he made both the car payment and the higher Chapter 13 plan payment. As a result, the Chapter 13 trustee objected to the plan, arguing that it was unfeasible because of his expenses, including the high car payment. The only way the court would confirm (approve) a Chapter 13 plan would be if Gus increased his income, reduced other expenses, or got rid of the high car payment.