Your Obligations Under a Chapter 13 Bankruptcy Plan

Learn which debts you must pay back when you file for Chapter 13 bankruptcy.

By , Attorney · University of the Pacific McGeorge School of Law

Chapter 13 bankruptcy can be a great way to resolve financial problems if you meet all Chapter 13 plan requirements. People who are eligible for Chapter 13 can use this bankruptcy chapter to save a home from foreclosure, avoid embarrassing collection actions, and more.

But not everyone can afford Chapter 13 payments, and even individuals with income exceeding Chapter 7 thresholds don't automatically qualify for Chapter 13. If you're considering filing for Chapter 13, you'll want to learn:

  • how Chapter 13 works
  • how long a payment plan lasts, and
  • what you'll pay in a five-year Chapter 13 plan.

We explain how to determine whether you qualify for Chapter 13 below and what you can expect from the Chapter 13 bankruptcy process. If you're new to bankruptcy, find out if you're better off filing for Chapter 13 rather than Chapter 7.

How Does Chapter 13 Bankruptcy Work?

Chapter 13 differs from Chapter 7 because you must repay creditors some or all of what you owe over three to five years. Most people prefer the quicker and significantly cheaper Chapter 7 process and file for Chapter 13 only if they don't qualify for Chapter 7.

But that's not always the case. Chapter 13 offers valuable benefits that aren't available in Chapter 7. Here are a few.

Catch Up on Payments and Keep a House or Car

If you're in foreclosure and don't want to lose your home, Chapter 7 won't help. However, the payment plan in Chapter 13 gives you time to catch up on past-due payments so you can keep a house, car, or other "secured" property that would go back to the lender if you didn't pay as agreed.

Keep Property You'd Lose in Chapter 7

Everyone who files for bankruptcy can protect the same amount of property using bankruptcy exemptions. Even so, if you file for Chapter 13 bankruptcy, you don't have to hand over any assets.

In Chapter 7, you keep exempt property, and the Chapter 7 trustee sells "nonexempt property" not covered by an exemption. By contrast, the Chapter 13 trustee doesn't sell property.

But that doesn't mean you keep more property than someone who files for Chapter 7. Instead, you pay the nonexempt property's value through your repayment plan. Discover more about what happens to property in Chapter 13.

Pay Less for Cars, Homes, Rental Property, and More

If your car, home, or other property depreciated significantly, leaving you owing more than what it's worth, you might be able to pay less in Chapter 13. The availability of a "lien strip" or "cramdown" will depend on whether the property is a home, vehicle, rental unit, or some other property type.

Do You Pay Back Everything in Chapter 13?

A filer's Chapter 13 plan rarely pays off all debt. It's one of the benefits of Chapter 13. But you won't know whether you'll pay everything you owe until you learn more about what's required in a Chapter 13 payment.

Keep reading. We'll take you through the process.

How to Calculate Chapter 13 Plan Payments

Calculating a Chapter 13 plan payment is somewhat complicated, so we've eliminated a few steps for simplicity. Even so, this approach will give you a reasonably close estimate of the amount you'd pay in a typical five-year plan.

  1. Determine the plan length.
  2. Add up the debts you must pay in full.
  3. Divide the debt amount by 60 months.
  4. Determine whether you have enough income to pay the required amount plus your monthly expenses.
  5. Determine whether you have "disposable income" remaining for debts you don't have to pay in full.
  6. Check whether you meet the "best interest of creditors" test.

The explanations that follow will help you navigate the steps when you're ready to begin your calculations. Be sure to meet with a Chapter 13 lawyer for an accurate payment assessment.

How Long Is a Chapter 13 Payment Plan?

The length of your payment plan—three or five years—depends on your income level. Here's what you'll do to check your plan length:

  1. Add the gross income you and contributing family members earned over the last six months and multiply by two.
  2. Compare the figure to your state's median income listed on the U.S. Trustee Program website (clicking "Means Testing Information" will take you to the state median income charts).

If your figure exceeds your state's median yearly income for your household size, your plan must last five years. You can propose a three-year plan if your income is less than the median.

How Much Do You Have to Pay Toward Debts in Chapter 13?

Chapter 13 plans follow specific payment rules. Some creditors must receive 100% of what you owe, while others receive a much smaller percentage or nothing at all. Here are the breakdowns.

Debts That Receive 100% Payment

You'll pay all of these obligations in full through your plan. Add the amounts and divide by 60 for this category's monthly payment amount.

Administrative claims

  • the trustee's 10% commission on average
  • your attorney's fees, and
  • other court-approved professional fees.

Home, car, and other past-due secured debt payments (if you want to keep the property)

  • overdue mortgage payments
  • overdue car loan payments, and
  • other secured debt arrearages.

Find out how to keep your house and car in Chapter 13.

Priority unsecured debts

  • wages, salaries, or commissions owed to employees, and
  • contributions you owe to an employee benefit fund.

Learn more about priority debts in Chapter 13 bankruptcy.

Debts That Receive 0% to 100% Payment

Your remaining debts fall into the "general unsecured" debt category and receive a "pro rata" or percentage share of your disposable income. Your disposable income is the amount remaining after paying the debts above and reasonable living expenses.

However, you might have to pay more because you must also meet the "best interest of creditors" rule, which requires you to pay priority and general unsecured creditors at least as much as you would have in Chapter 7. In other words, an amount equal to the value of your nonexempt property—those assets you can't protect with a bankruptcy exemption.

Learn more about your best efforts rule Chapter 13.

Understanding Priority and General Unsecured Debts

Unlike secured debt, unsecured debt isn't guaranteed by collateral a creditor can take if you fail to pay your bill. Priority unsecured debt, such as domestic support obligations and newly incurred tax debt, has a higher payment priority status in bankruptcy.

General unsecured debt falls last on the bankruptcy payment hierarchy. Common examples include:

  • major credit card and department store balances
  • medical bills
  • personal loans, such as payday loans
  • utility bills, and
  • club memberships.

You don't have to pay general unsecured debts fully, and the bankruptcy court erases any balances remaining at the end of Chapter 13, except for student loan balances.

What Is the Average Monthly Payment for Chapter 13?

While an average Chapter 13 payment doesn't exist, you can safely assume it will be significantly higher than what you'd hoped to pay when you first began exploring the feasibility of Chapter 13. You might have already reached that conclusion if you've completed a rough calculation using the steps above.

Even though an average monthly Chapter 13 payment doesn't exist, filers using a five-year plan will pay one of two amounts, with most people falling into the first category.

Your Disposable Monthly Income

You'll pay every penny of your monthly income on your expenses and bankruptcy plan. Creditors are entitled to receive your "disposable income," which is the amount that remains after required payments and allowed expenses.

It's a tight budget that isn't easy to maintain for five years, but it's rewarding when successful. Not only will filing Chapter 13 stop creditors, but most filers come out of Chapter 13 debt-free except for mortgage payments and student loan debt.

100% of Your Debts Except for Mortgages and Student Loans

People with significant disposable income sometimes pay everything they owe other than mortgages, student loans, and other long-term obligations in what's known as a "100% plan." Your budget won't be as tight because you'll likely have income remaining after paying your monthly expenses and Chapter 13 payment. Why would someone file a 100% plan? To shield themselves from collection actions while paying the debt over time.

How Income, Debt, and Property Affect Chapter 13 Plan Obligations

These examples help illustrate how income, debt, and property differences will change how much you'll pay in a typical five-year plan. All four assume the following facts:

  • You have $120,000 in debt you must pay through your plan (overdue mortgage and car payments, tax debt, and domestic support arrearages).
  • You have $80,000 of debt you don't have to pay in full (credit card balances, medical and utility bills, and a gym membership).

We've omitted the trustee's fee and other minor amounts for simplicity.

Example 1. If your allowed monthly expenses are $3,000 per month, you'd need to make $5,000 per month to make a five-year plan work:

  • $3,000 allowed for living expenses, and
  • $2,000 per month for required debt payments ($2,000 x 60 payments = $120,000).

You wouldn't have any disposable income to pay dischargeable debt, so you wouldn't pay anything toward it. The bankruptcy court would erase those balances at the end of your plan.

Example 2. Assume the same facts, but you also have $30,000 in home equity you can't protect with an exemption. In this case, you'd need to make $5,500 per month to make a five-year plan work:

  • $3,000 allowed living expenses
  • $2,000 per month for required debt payments ($2,000 x 60 payments = $120,000), and
  • $500 per month toward dischargeable debt ($500 x 60 payments = $30,000).

This plan pays the filer's disposable income while complying with the "best interest" rule. The remaining unpaid dischargeable debt balance of $50,000 would be wiped out at the end of your plan.

Example 3. Assume the same facts, but you don't have any nonexempt equity and make $10,000 per month. Here's what your plan would look like:

  • $3,000 allowed living expenses
  • $2,000 per month for required debt payments ($2,000 x 60 payments = $120,000), and
  • $1,333.33 per month toward dischargeable debt ($1,333.33 x 60 payments = $80,000).

Because of the high income, this 100% plan pays all debts in full while leaving you a significant amount of disposable income each month.

Example 4. Assume the same facts, but you have $30,000 in nonexempt equity, and make $5,000 per month. Here's what you'd need to pay through your plan:

  • $3,000 allowed living expenses
  • $2,000 per month for required debt payments ($2,000 x 60 payments = $120,000), and
  • $500 per month toward dischargeable debt ($500 x 60 payments = $30,000).

In this case, you'd be short $500 per month and wouldn't qualify for Chapter 13. The bankruptcy court wouldn't confirm a plan because you wouldn't be able to prove sufficient income.

What to Expect in Chapter 13: The Process

In Chapter 13, you make monthly payments to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. After the trustee collects a commission based on the amounts paid under your plan, the trustee forwards the remaining payment to your creditors. After completing your plan, you get a debt discharge erasing any remaining balance on qualified debts.

The Chapter 13 process starts when you file a packet of forms listing your income, property, expenses, and debts, along with a certificate showing that you've completed credit counseling with an approved agency listed on the U.S. Trustee Program website. You'll also file your payment plan proposing how you intend to handle your debts over the payment plan period or soon after.

You should also be prepared to give the trustee appointed to your case:

  • four years of tax returns (you'll file these with the court in some jurisdictions)
  • several months of paycheck stubs
  • bank, retirement, and investment statements,
  • and other documents required by the trustee.

Business owners should also expect to provide profit and loss statements.

You'll begin paying the proposed monthly payment approximately 30 days after filing the case. If the bankruptcy court approves or "confirms" your plan at the confirmation hearing, you'll continue making the payments for the duration of the plan period.

Can I Start a Business During Chapter 13?

By now, you've likely realized that most Chapter 13 filers must operate under strict budget limitations and wouldn't have much money to put into a business during their Chapter 13 plan. But it would depend on your financial situation.

Starting a business shouldn't be a problem if you're in a 100% plan and have extra monthly disposable income. If the company grows in value, it should be considered an asset you acquired after filing for bankruptcy and excluded from your bankruptcy case.

However, suppose you're paying creditors less than 100%, and the business starts generating income. In that case, you might need to pay the revenue to your creditors instead of reinvesting it in the company. A local bankruptcy lawyer will be in the best position to explain what to expect and to help you formulate an effective strategy.

Learn more about starting a new business after bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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Helpful Bankruptcy Sites

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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