A recent case out of Kansas, In re Dana Werts, held that each debtor in a Chapter 13 was entitled to debts within the debt ceilings for Chapter 13 eligibility. Judge  Karlin recognized that a joint case is simply two separate cases administered together.

Previously,  courts have treated a joint case as though it were a single person and required that the debts of the couple be combined to look at Section 109 eligibility.

This is a marvelous decision for Californians where hard times and underwater real estate increasingly find married couples with collective debts in excess of the limits.  I have found myself deconsolidating cases filed jointly when it was determined that the total debt rendered the couple ineligible, if you assume that the 109 limits apply to the sum of the debts.

It then raises the question of exemptions:  if a joint case is really two cases, are not the debtors entitled to two sets of exemptions?

My thanks to my friend Doug Jacobs for pointing me to this case.

It’s tax season:  don’t forget to write off the deductible expenditures made by your  Chapter 13 trustee on your tax return.  Many Chapter 13 plans are paying mortgage arrears (which are almost exclusively deductible interest), taxes of some sort, or business expenses.  These items should be deductible to you.

You can get a report from your Chapter 13 trustee of the distributions she’s made during 2008.  Many trustees have this information on line for your convenience. The report will itemize payments  made with your money, on your debts.

If you’re in a Chapter 13 and  have a bushel of lemons, make lemonade, and reduce your current tax burden.

My newest colleague in the Bankruptcy Law Network, Adrian Lapas, discussed the critical importance of developing a budget in connection with a Chapter 13 plan.  Spend the plan payment on something else and your case may be dismissed.

Budgeting for your post filing life is made more complex by a number of factors:

• Many people underestimate the actual  cost of transportation, health care, and running a household
• The official bankruptcy form for budget includes no line item for vacations, birthdays, Christmas, or the routine replacement of appliances and soft goods
• Debtors have been doing without everything that can be postponed in an effort to pay their debts
• The little things have become “standard” in people’s lives and add up:  cell phones, meals away from home, manicures, hi end cable

My charge to my clients is to figure out where the money needs to go and to rethink  what is essential.  What is at stake, often, is keeping the house, discharging the debt, and saving for emergencies and retirement.

First things first.

I’ve spent the last three days at the annual meeting of the National Association of Chapter 13 Trustees in San Francisco. Strewn through the convention site are banners thanking those who have contributed money to put on the gathering of Chapter 13 trustees. Those three sponsors at this event are exclusively big creditors and lawfirms who represent them.

The parties in interest in a Chapter 13 form a triangle: trustee, debtor, creditors. The trustee has obligations to both of the other parties. Debtors come in onesies and twosies. Creditors tend to be national and big money players. There is no organization of bankruptcy debtors; there is an organization of debtor’s attorneys, the National Association of Consumer Bankruptcy Attorneys. By the nature of the practices of its members, NACBA is not a big money player.
At the gatherings of debtor’s lawyers, the usual sponsors are those who want to sell something to the attendees. It’s not the opposing parties.

I don’t think that Chapter 13 trustees can be “bought” by free breakfast and afternoon snacks. But just like influence of lobbyist money on politicians, this feels uncomfortable to me as a debtor’s lawyer.

More on education efforts by the Chapter 13 Trustees.

Peter Orville wrote about the impact of the Chapter 13 trustee’s commission

The point he makes goes to the heart of the debate about whether car loans or current mortgage payments are paid by the Chapter 13 trustee or directly by the debtor. Here in California, with mortgage payments regularly in the $3,000-6,000 a month, requiring debtors to pay their mortgages through the trustee increases the debtor’s cash requirements significantly.

Proponents of making payments through the trustee note the advantages in the event of accounting disputes and the added visibility it gives the trustee. My fear is that at 7-10% commission, routing mortgage payments through the plan is just another barrier to a successful Chapter 13 plan.

My colleague at the Bankruptcy Law Network Pam Stewart addressed the question “should I pay off my Chapter 13 plan early?”.

Her conclusion addressed the policy in some jurisdictions that a payoff earlier than the plan proposed may trigger a requirement to pay 100% of the debt. That isn’t the rule where I practice, at least under pre “reform” law, thanks in part to an appellate decision I won allowing early payoff without an increase in the pay in.

I think there remains a reason not to pay off a plan early: the plan payments, at least to the extent they are going to general unsecured creditors, represent an interest free loan. Why rush to pay off a debt where there is no cost to paying later?

One danger in proposing to pay off a plan early is the possibility that the trustee might seek an increase in the monthly payment if the debtor now has more available money each month.

I see the continuance of the Chapter 13 plan in circumstances where the debtor’s situation has improved as a chance to build up cash reserves. None of my clients have sufficient money set aside for the unexpected. It’s a chance to put some extra money into delayed maintenance, whether it’s on your possessions or your own health. Practice saving money while the Chapter 13 still exercises some control over your spending.

My advice might differ where the clients are younger or might have a real chance to rebuild to buy a house, etc. where getting the discharge behind them has a tangible, rather than a psychological, advantage. But absent that need, sit back, make the payments, and pocket any improvement in your situation for a rainy day.

I’m a real fan of Chapter 13: it’s powerful, flexible, and cost effective. One of its few downsides is that there are caps for how much debt a filer may have and qualify for Chapter 13. Mercifully, those debt limits adjust every three years.

Effective April 1, 2007 the cap on debts in Chapter 13 will increase to $336,900 for unsecured debts and $1,010,650 for secured debts. These limits apply to liquidated debts only; unliquidated debts are not included in the test.

More about Chapter 13.