By: Trev E. Peterson
Congress adopted a series of changes to the Bankruptcy Code in connection with the current pandemic. This article focuses on changes applicable to cases involving consumer debtors. Consumer cases are cases where the debts are primarily consumer debts—such as medical debt, home loans, car loans and credit card debt.
Congress modified the definition of income in Chapter 7 and 13 cases to exclude corona virus related payments from the federal government from being treated as “income” for purposes of the means test and for purposes of computing disposable net income under Chapter 13 plans. The exclusion of aid package payments from the means test may make Chapter 7 available to more consumer debtors.
The means test typically requires debtors whose average monthly income exceeds the median income in their state of residence file a Chapter 13 case and make monthly payments over three to five years under a plan. The means test is computed based on the debtors’ income earned over the six months prior to the filing of a bankruptcy case. For example, consumer debtors who file today, April 13, 2020, include their actual income from October 1, 2019 through March 31, 2020. If the debtors wait to file until after May 1, 2020, the income from October, 2019 drops out of the calculation and income for April, 2020 is included. This gives debtors who have lost their job, or had their hours reduced in March and April, 2020 the ability to both use the lower monthly income for March and April and NOT include the federal government payments in determining their monthly income for purposes of the means test.
For Chapter 13 debtors, the pandemic payments do not need to be included in computing the income available to pay creditors over the term of the Chapter 13 plan. This exclusion will reduce payments to creditors, but allow the debtors to retain the stimulus payments to pay for current living expenses.
The second modification, applicable to consumer debtors, is the ability to extend payments under pending Chapter 13 plans. Prior to the Act, a Chapter 13 plan could not extend beyond five years from the date of the initial payment due under the plan. For debtors who are suffering a financial hardship from the pandemic, the plan can be modified to require payments for up to seven years after the initial plan payment was due. There has to be a financial hardship and the hardship has to be tied to the pandemic, but assuming that debtors can make such a showing, there is a limited ability to extend plan payments for seven years. The ability to modify the plan expires one year after the passage of the Act, or on March 26, 2021. If you are currently experiencing a financial hardship due to the pandemic and are performing under a Chapter 13 plan, you should consult with your attorney to determine whether extending the plan would provide relief in your current financial circumstances.
If the reason for filing the Chapter 13 was to save your home, reducing plan payments may provide some relief on paying the arrearage due on the home loan, but the relief does not extend to post-filing monthly payments to your home lender.
Congress requires that I disclose that our firm is a “debt relief agency” under the Bankruptcy Code. We help people file for bankruptcy relief under the Bankruptcy Code. As with all articles on this website, the contents of this article are not intended as legal advice for any specific legal problem. Nothing in this article is intended to create an attorney-client relationship between the author and the reader. The author is licensed to practice law in Nebraska only, if you are involved with a bankruptcy in a state other than Nebraska you are encouraged to consult with an attorney licensed in the state in which the bankruptcy case is pending