A TRUSTEE’S PERSPECTIVE
OK; no one wants a Chapter 13 debtor to budget so tightly he is destined to fail, or is left with no remedy when emergencies arise. Everyone wants a Chapter 13 debtor to complete his plan. Having a savings “emergency fund” can be just the trick to help the Chapter 13 debtor complete his plan. The controversy surrounding this issue is not over whether debtors should save, but rather how they do so and what amounts the debtors should pay themselves for savings when they are seeking a discharge of their debts without paying those debts in full.
Debtors are not prohibited from saving while in Chapter 13. In addition to saving for retirement, debtors, with very few exceptions, submit to the trustee a proposed plan payment out of which payments are disbursed for secured, priority and unsecured debts. Absent rare exceptions, the debtor retains funds for on-going living expenses, such as utilities or other regular household expenditures. With adequate budgeting, the debtor will have some excess funds each month and is not prohibited from putting those into a savings account. For example, if the debtor budgets $25 per month for clothing, he may “pay himself’ the $25 each month by putting those funds into a savings account and at the end of the year will have $300 with which to use to buy clothes. This example, while simple, illustrates how a debtor can “save” amounts for his future needs. This basic approach should be appropriate to accommodate ordinary living expenses even taking into account fluctuations in utility expenses, automobile maintenance, and out of pocket medical needs. This is appropriate budgeting. In my experience, debtors need guidance to determine this appropriate budgeting. The method is not simply proposing round numbers without any correlation to actual expenses and known or expected future expenses, but rather a projection that represents the amount that is needed for known actual expenses plus a cushion for reasonably likely increases or emergency expenses. This cushion should directly relate to the amount of the expected need. Under this method, the debtor should be able to show that he is budgeting for reasonable and necessary living expenses and proposing to pay his unsecured creditors his net disposable income above these expenses. Yet, in addition to the disposable income test, the debtor’s plan must be proposed in good faith. Paying more money per month to himself than to his unsecured creditors, may be an indication that the debtor is not proposing his plan in good faith. To test good faith, one should, first, compare the amounts the debtor is proposing for saving (rather than for actual out-of-pocket monthly expenses) against the amount per month that he proposes to pay to his unsecured creditors. If he is paying himself more than his unsecured creditors he may face a good faith challenge. Second, one should compare how much the debtor is saving against his gross income. If the debtor is saving, including amounts contributed to retirement, more than 10% to 15% of his gross income, and is not proposing to pay his unsecured creditors in full, he may face a challenge to his plan as not proposed in good faith.
Appropriate budgeting and short-term saving cannot, however, adequately protect the debtor from the financial consequences of job loss, divorce or high cost emergency needs. Fortunately, however, debtors are not without a remedy in Chapter 13 if they experience job losses, high cost emergencies or other changes to their financial circumstances. Bankruptcy Code section 1329 permits modification post-confirmation due to such a change. Indeed the confirmation requirements for a modified plan post-confirmation seem to contemplate this financial decline, as the new plan need only comply with the requirements of section 1325(a) and not (b).
In reality, appropriate budgeting on a Schedule J filed with the bankruptcy court is not sufficient to accomplish the actual budgeting. Most debtors lack the habit or discipline for successful saving. Therefore, some have suggested such alternatives as “plan payment insurance” or Chapter 13 trustee managed savings accounts for Chapter 13 debtors. “Plan payment insurance” is an insurance product designed to help cover plan payments when an unexpected emergency arises or an unanticipated change in finances. An alternative to this novel insurance product is a supervised savings plan, managed by the Chapter 13 trustee. Unfortunately, the Chapter 13 trustee is limited from retaining trust funds (except held for disbursement) or from collecting amounts other than what is necessary to fund the plan itself. Until legislative and regulatory changes are made, the Chapter 13 trustee may not be able to manage this controlled savings plan. Therefore, the Chapter 13 debtor is left to his own independent means to accomplish any savings. As long as the debtor exercises discipline, and realistic budgeting, the debtor can indeed save while in Chapter 13 and, if so, will have at least some insurance to protect against failure.
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By Rebecca Connelly
Ms. Connelly was appointed Chapter 13 Standing Trustee for the Western District of Virginia in 2000. |
