Unsecured Debt in Chapter 13: How Much Must You Pay?
How much you must pay to your general unsecured creditors in Chapter 13 bankruptcy depends on your disposable income and the "best interest of creditors" test.
Chapter 13 bankruptcy divides debts into several categories. How much you must pay on each type of debt differs. General unsecured claims in Chapter 13 bankruptcy are those debts that are not secured (examples of secured debts include mortgages and car loans) and not deemed as "priority" by bankruptcy law (examples of priority debts include child support and certain incomes tax debts).
For the most part, you must pay 100% of your secured and priority debts (there are some exceptions). This is not the case with nonpriority, unsecured debts. How much you must pay to your general unsecured creditors in Chapter 13 bankruptcy depends on several factors.
- Disposable income. You must devote all of your disposable income to your plan -- so what your unsecured creditors get depends on how much money you have left over each month after paying expenses, secured debts, and priority claims.
- Best interest of the creditors. In addition, at a minimum, your unsecured creditors must get what they would have received had you filed for Chapter 7 bankruptcy.
(To learn more about the Chapter 13 plan, the difference between secured, unsecured, and priority debts, and how much you must pay on secured and priority claims, see the articles in The Chapter 13 Repayment Plan.)
Disposable Income - How Much You Can Afford?
In Chapter 13 bankruptcy, you must devote all of your "disposable income" to repayment of your debts over the life of your Chapter 13 plan. Disposable income is what you have left over at the end of every month after you pay your reasonable and necessary living expenses. Your disposable income first goes to your secured and priority creditors, and the remainder is split among your unsecured creditors.
The court determines your disposable income first by reviewing your means test, then by reviewing your income and expense schedules.
What is the means test? When you file for Chapter 13 bankruptcy, you fill out a "means test" form, which calculates your income based on the six-month period prior to the month you filed bankruptcy. The test compares your average income to the median income of others in your county or state of the same household size.
If your income is higher than the median. If your income is higher than the median, you must complete the entire means test, taking deductions for certain expenses, including secured debt payments such as car payments and mortgages. The result will show a monthly figure which, multiplied by 60, will decide how much your unsecured creditors will receive over the life of your case.
If your income is lower than the median income. If your income is lower than the median, you do not have to complete the rest of the means test, and your disposable income is based on your income and expense schedules. When you file Chapter 13, you will also file a Schedule I, which lists your actual monthly income from all sources, and a Schedule J, which lists your actual monthly expenses. Reasonable and necessary living expenses include items such as rent, groceries, utilities, cable, pet care, gas, and insurance. The difference between your income on Schedule I and your expenses on Schedule J will be your Chapter 13 plan payment. Your unsecured creditors will receive whatever percentage that income yields after other secured and priority creditors are paid.
Best Interest of Creditors: The Hypothetical Chapter 7
The "best interest of creditors" test calculates the minimum amount you must pay to your nonpriority unsecured creditors through your Chapter 13 plan. If you can't repay this minimum amount, the court will not confirm your Chapter 13 plan (which means you can't proceed with your case).
The best interest of creditors test figures out how much your creditors with nonpriority, unsecured claims would have received had you filed for Chapter 7 bankruptcy. You must repay these creditors at least this much in your Chapter 13 bankruptcy. The idea is that creditors should not be disadvantaged just because you filed for Chapter 13 rather than Chapter 7 bankruptcy.
How much your unsecured creditors get in Chapter 7. A Chapter 7 bankruptcy is a liquidation; if you have any property in a Chapter 7 case that you cannot exempt, the Chapter 7 trustee can sell the property and pay your creditors with the money. However, bankruptcy law allows Chapter 7 debtors to protect some of their property through exemptions. Exemptions allow you to keep certain property up to a certain value. If you have property that the bankruptcy exemptions don't protect (called nonexempt property), the value of this property goes to the bankruptcy estate and will be distributed to your unsecured creditors. (To learn how exemptions work, which ones you can use, and more, see our Bankruptcy Exemptions topic area.)
The minimum amount your unsecured creditors get in Chapter 13. The Chapter 13 trustee will look at what your unsecured creditors would have received in Chapter 7, and then make sure those creditors get at least this much through your Chapter 13 plan.
Example. Say you own a car worth $10,000 and you can only exempt $3,450. The nonexempt value is $6,550. If you had filed Chapter 7, hypothetically the trustee would have sold your car, paid you your exemption, and paid the remaining $6,550 to your general unsecured creditors pro rata. That means that in your Chapter 13 case, your general unsecured creditors must receive, as a group, at least $6,550. Each creditor will receive a percentage of that amount, depending on the amount of its claim.