I had a meeting this morning with a couple that needed to file bankruptcy. They are upside down on their home loan, tons of credit card debt, medical bills, significant tax liabilities for the past 3 years, recent loss of income, etc. At issue is that the wife has either a remainder interest in her parent’s homestead (they quitclaim deeded the property to her but reserving a life estate), or she is a tenant in common/joint tenant on the property with them….they weren’t certain.

In either situation that interest in real property becomes part of the bankruptcy estate. Since there is a significant amount of equity in the property in question in this instance there is a large amount of the equity that is not exempt and in chapter 7 the trustee would attempt to sell the interest….or would just keep the bankruptcy estate open until the property sold. Not likely the trustee would attempt a partition of the property and a forced sale for homesteaded residential property.

In a chapter 13 case the issues are different and the focus is on the payout to the unsecured creditors. In order for a plan to meet muster and be confirmed by the court the debtors must meet the standards of what is known as the “Best Interest of the Creditors Test”. This basically means that over the course of however many months the plan term is set for that the distribution to the unsecured creditors must equal or exceed the amount of money that they would have gotten had the debtors filed a chapter 7 case and the assets that are not exempt were liquidated and the proceeds paid on their claims. When doing this analysis there are no deductions for cost of sale, etc. So in a hypothetical situation where there is $70,000.00 in non-exempt assets (as there potentially was in the scenario presented in my office today) that means that the unsecured creditors must receive at least that much over the course of the plan. Typical maximum length 60 month plan…figure in some attorney fees, the trustee’s administrative fee (currently 9.4% in MN) plus the debtor’s had some taxes to pay (about $35K)…so that meant for them a plan payment of about $2,000.00 per month. Not a typical payment in a “normal” chapter 13 case. However…there is no “normal”…all chapter 13 cases and plans are tailored to the debtor’s individual circumstances. This scenario is a prime example where the payment is what I call “reverse engineered”. In other words it isn’t a simple equation of what they make, what their reasonable and necessary living expenses are and what is left over is the “disposable income” available to fund a plan payment. In this situation the plan has to do certain things and as in many similiar circumstances the budget (within reasonable parameters and never involving “sum certain” types of expense or income) is manipulated to arrive at the result required in order to get the plan my clients need to get the relief they need.