Many people that file bankruptcy, file because they are financially unable to maintain the lifestyle they once had due to a recent job loss, unexpected medical expenses, and/or a divorce or separation. People that file bankruptcy are hoping to receive some sort of financial relief from their creditors that insist on harassing them and pursing them for money that they would gladly pay, in most instances, if they had it. However, since the inception of the Bankruptcy Reform Act of 2005, it has caused many people to only find themselves in an even more financial bind than if they had never filed for bankruptcy.
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Specifically, individuals that file for Chapter 13 bankruptcy in order to protect their home from foreclosure or their car from repossession find that their monthly payment to the Trustee appointed in their case is more than they can afford and eventually lose the items they hold dear. The main reason for this is under the Bankruptcy Reform Act individuals that file a Chapter 13 case must complete a test to determine if they have any money over and above what they already need to pay into their Plan of Reorganization to pay to their unsecured creditors (credit cards, medical bills, signature loans, etc.). In many instances prior to the Reform Act, people did not have to worry about this. They only had to pay into their Plan for items that they wanted to keep.
Recently, things that seemed already bad have gotten worse. In the Northern District if Texas, Fort Worth Division it was recently held in In re Zinser, that any 401K loans or child support payments that will be completed prior to the completion of an individuals bankruptcy case, must be calculated back into the individuals income, which may cause the individuals plan payment to increase. The rationale behind this is that people who are paying for a 401K loan or child support and their obligations will end prior to their case being concluded will have additional money to pay into their Chapter 13 Plan for the benefit of their unsecured creditors.
Prior to this holding, people were able to take a deduction for their 401K loans and child support payments in order to show their expenses exceeded their income for the duration of their Chapter 13 Plan. Now, even though an individual can still use the deduction, it is not as sweeping as it once was thought to be. For example, if Bill was paying for a 401K loan at $300.00 per month, he could conceivably use that as a deduction to show that he was unable to pay any money to his unsecured creditors regardless of when the 401K loan was going to be paid off.
However, under the holding, Bill can only use the $300.00 deduction until the loan was paid off in full. Therefore, if Bill is in a 60 month plan, and his 401K loan will be completed in month 24 of the plan, the remaining 36 months of the Plan the Chapter 13 Trustee will be entitled to have Bill pay an additional $300.00 per month. This is an additional $10,800.00 that Bill will be paying into his Plan that goes to his unsecured creditors, when he may have originally scheduled them to receive nothing. Eventually this may cause Bill to not afford his Chapter 13 Plan payments whereby his case will be dismissed and he will be back in the same position he was in prior to filing his bankruptcy case. The ruling in Zinser is not only limited to 401K loans, but also Child Support payments.
The argument behind the holding in Zinser is that the Chapter 13 Trustee is entitled to all of an individual's disposable income. Therefore, if a 401K loan repayment or Child Support obligation is concluded prior to the Chapter 13 Bankruptcy case, legally the money that is no longer being paid can be used to pay the individuals unsecured claims because now it is income that the individual is entitled to, where he once was not.
It is important for an attorney to understand this when setting up an individual's Plan of Reorganization prior to filing a Chapter 13 Bankruptcy case so that the individual is aware of the problems that may be encountered if they are paying for a 401K loan or have a child support obligation that will be ending in a short period of time after filing for bankruptcy.
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