Private School Tuition in Chapter 13 Bankruptcy: An Allowable Expense?
A Chapter 13 bankruptcy is a monthly payment plan in which your debts are repaid some or all of what is owed based upon what you can afford to pay over the 3-5 year payment plan term. What "afford to pay" means is that you are required to pay into the Chapter 13 payment plan whatever income you have that is left over after your regular monthly household expenses are paid. The question, from the point of view of the Chapter 13 Trustees who are assigned to your case by the Bankruptcy Court after your case is filed and whose job it is to review proposed Chapter 13 Plans and either approve or object to them, is: what is a necessary household expense? Some expenses are obviously necessary: food, gas for your car, medical expenses, household utilities, even cable television (if it is not a terribly high "premium" package), and many others are allowed by the Chapter 13 Trustees in the Eastern and Western Districts of Michigan are necessary usually without comment or objections. When certain expenses do seem "too high" relative to the number of people in the household or seem like "luxury" expenses, the Chapter 13 Trustees may object to the approval of the payment plan by the Court.
Private School Tuition: Usually Not Allowable Unless You Are Repaying 100% to Your Creditors
Private school tuition is generally not considered to be a necessary expense in bankruptcy, and, thus, in Chapter 13, and monthly average funds allocated to such tuition would have to be paid into the Plan. The exception to this is if you are what is called a "100% Plan," meaning that, based on your proposed monthly Plan payment, you are already paying 100% of what you owe to your creditors. If this is the case, private school and other non-necessary expenses will usually be allowed as there is no further need for more money to be paid into your Plan. You cannot pay your creditors more than 100% of what is owed to them!
Private School Tuition as a Religious Contribution?
However, one expense that is considered necessary to a certain monetary limit by the Bankruptcy Code (the Federal statute describing the bankruptcy process) itself is charitable giving, or tithing. Congress specifically allowed this expense in order that a person filing for bankruptcy not be prevented from engaging in the exercise of their religious freedom and, to some, their religious obligations. Under the Religious Liberty and Charitable Donation Clarification Act of 2006, which clarified the Bankruptcy Code's allowance of tithing, bankruptcy filers are allowed to tithe up to 15% of their gross annual income. Is, then, tuition for a minor child's private school considered in Chapter 13 to be a charitable contribution if the private school is a religious-based school, such as a Catholic school? The case-law is divided on the subject, but there is room for argument that at least up to 15% of the tuition---the allowed tithing limit---may be considered a necessary allowable expense. It is an argument that can be presented, but it is not one with a predictable outcome in a Michigan bankruptcy.
Necessary Expenses in Chapter 13 Bankruptcy: The Bottom Line
The important thing to remember is that, in a Chapter 13, once the Plan is "confirmed" (approved) by the Court, there is no ongoing scrutiny of your budget, unless you miss Plan payments or your subsequent tax returns show a drastic improvement in your income. What the Trustees are really arguing, when they argue that an expense is not "necessary for an effective reorganization," is that your Plan payment should be a little more than has been proposed. In other words, what you do with the sum total of the money you don't pay into your Plan each month is up to you after Confirmation. It is not a process to be feared, and the benefits may drastically outweigh the annoyances involved, particularly if you are saving your home from foreclosure or getting rid of a second mortgage entirely along with discharging unsecured debt. But it is a process which may require you to make hard decisions about your expenditures and to take a look at what is really necessary for you and your family. It may be that private school for your children is an absolute "must" for you for a variety of very good reasons, but, unless your income is high enough that you can repay all that you owe to your creditors and still pay the tuition, you will likely be asked to consider whether that is really true for you. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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