The hallmark of a Chapter 13 bankruptcy case is the repayment plan you’ll propose to the bankruptcy trustee, creditors, and the court. To a significant degree, three factors will determine your Chapter 13 plan type and monthly payment amount:
A debtor whose income doesn’t exceed the state’s median income can submit a three-year plan. All others must last five years.
Every three- to five-year Chapter 13 repayment plan must fully pay the following:
But that’s not all. Most people must pay something to the holders of any remaining debt, such as medical balances, utility bills, personal loans, and credit card bills (your unsecured debt).
To determine the amount you’ll pay to unsecured creditors (called disposable income), you’ll subtract actual and predetermined expenses from your income, such as:
The remaining amount is disposable income that the filer must pay to unsecured creditors. It’s distributed on a pro-rata basis with each creditor receiving a portion equal to its percentage of overall debt.
After completing the repayment plan, most unsecured debt balances will get wiped out, but not all. For instance, even though unsecured student loans get paid with other unsecured debt—which will likely reduce your payment during the plan period—you’ll remain responsible for any remaining balance after the case closes.
This is a simplified explanation. To determine your disposable income, complete Chapter 13 Calculation of Your Disposable Income (Form 122C-2) or speak with a bankruptcy lawyer.
This factor (and the following factor) are often the two that derail a filer's ability to propose a feasible Chapter 13 plan. Recently incurred tax debt and domestic support obligations are examples of priority debt that you must pay in full through the plan. If you can't afford to do so, the judge won't confirm your plan.
Another factor that you’ll have to consider is this: At a minimum, your unsecured creditors must get as much as they’d receive if you filed for Chapter 7 bankruptcy. Determining how much that is isn't as hard as it sounds. It’s the value of your nonexempt property (assets that aren’t protected by a bankruptcy exemption) minus the amount it would cost to sell the property (liquidation costs). Here’s how it works.
Debtors can protect (exempt) a certain amount of property in a bankruptcy case. The debtor’s state decides the type and value of exempt property and maintains lists in its exemption statutes. Nonexempt property must be either:
Figuring out how much nonexempt property you own will do two things: give you a good approximation of the minimum amount that your unsecured creditors must receive in a Chapter 13 plan and tell you how much you stand to lose in Chapter 7 bankruptcy.
Example. Jesse’s monthly payments on $50,000 of unsecured credit card debt were more than he could pay each month, so he wanted to file for bankruptcy. His primary asset was a vacation home worth $200,000 that he owned outright. He consulted with an attorney and found out that his state, like all others, didn’t offer an exemption that would cover the property, leaving all of his equity nonexempt. The attorney explained that if he filed for Chapter 7 bankruptcy, the bankruptcy trustee assigned to his case would sell it, pay off all of his creditors, and return the remaining balance to Jesse. If Jesse wanted to keep the property, he would have to repay all of his unsecured creditors the same amount—meaning in full—by filing a 100% plan (more below) in a Chapter 13 bankruptcy. To keep his payment down, however, Jesse could make monthly payments for up to five years.
These three factors—your disposable income, nondischargeable debt, and the amount of your nonexempt property—will likely determine your plan type, and a bankruptcy attorney can provide you with the exact Chapter 13 monthly amount you’d pay.
In the typical Chapter 13 bankruptcy plan, the amount a debtor will pay to unsecured creditors will depend on the debtor’s overall financial picture. The percentage a debtor must pay is often used as shorthand between bankruptcy attorneys and court staff to describe the plan. For example, “Ashley is paying into a 17% plan.”
This article’s purpose is to provide general Chapter 13 plan information. Given that this bankruptcy chapter is especially complicated, potential filers are strongly encouraged to retain counsel.