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Mom Says Don?t Forget to Propose a Reasonable Chapter 13 Plan

By John Fox

Every bankruptcy attorney knows that the process can put tremendous strain on family relationships. But a recent South Carolina case demonstrates that bankruptcy coupled with an unreasonable chapter 13 plan can also bring a family together, although probably not in the way the husband and wife debtors had in mind. In the case of In re Benincasa (Bankr. D.S.C. 2010), the bankruptcy court held that a $1,600 monthly mortgage payment to maintain a separate residence for the husband-debtor?s 72 year-old mother was an unreasonable and unnecessary expense in the debtors? Chapter 13 Plan.

Disputes over whether expenses are reasonable and necessary continue to protect most bankruptcy attorneys from the financial insecurity that haunts their clients. Bankruptcy Code sections 707 and 1325 and various cases interpreting them decide the issue. Generally, all of a chapter 13 debtor?s disposable income must be used to make payments to unsecured creditors. ?Disposable income? is income received by the debtor that is not reasonably necessary for the maintenance or support of the debtor or the debtor?s dependents. The focus of the reasonably necessary test is whether a proposed expense would allow the debtor to live an ?excessive lifestyle? to the detriment of unsecured creditors.

Remarkably, the Benincasa?s attorney apparently didn?t think the proposed chapter 13 plan would allow his clients to live an ?excessive lifestyle.? But before getting into the plan?s specifics, some factual context is in order. In 2005, the debtors bought two virtually identical townhouses nearby each other. The debtors lived in one and the mother lived in the other. The debtors and the mother both had unoccupied bedrooms. The townhouses had identical first mortgages, but the debtors? townhouse also had a $100,000 second mortgage.

In 2009, as part of their exemption planning, the debtors switched townhouses with the mother in order to maximize their homestead exemption. By that time, the debtors had also amassed over $152,000 of credit card debt. Their chapter 13 plan proposed to repay 7.5% of that amount. The plan also proposed to pay in full the amount owed on the debtors? 2009 Dodge Journey at $437 a month. To top it off, the plan called for the debtors to keep $156 a month in disposable income that was not devoted to plan payments. Little wonder the court didn?t approve the plan.

Ultimately, what lesson can be drawn from this case? That a plan proposing to pay in full large secured claims for two houses and a new car while paying very little to unsecured creditors owed over $152,000 is unlikely to be approved? That?s certainly true, but I think there?s a more subtle and valuable lesson.

When a bankruptcy attorney ?helps? a debtor prepare a chapter 13 plan that has almost no chance of confirmation, the attorney provides little of value to the client. Like many other chapter 13 cases that came before it, Benincasa was dismissed shortly after the order denying confirmation because the debtors failed to file a new plan. From the debtors? perspective, all they got out of the bankruptcy process was another debt, this time owed to their attorney?and maybe a closer (both literally and figuratively) relationship the mother.

Image credit: Daniel Greene (Flickr)

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Full post as published by Bankruptcy Law Network on October 19, 2010 (boomark / email).