Read on to learn more about calculating your disposable income and the best effort requirement in Chapter 13 bankruptcy.
After you file your repayment plan, the bankruptcy trustee is appointed to administer the case. The trustee and your creditors will review your proposed plan to ensure it complies with all bankruptcy requirements. Your repayment plan must also be approved (confirmed) by the court before being finalized. You’ll show that you are using your best effort to repay creditors if you’re paying your disposable income to nonpriority unsecured creditors (such as credit card companies) in your plan.
Your disposable income is the amount that remains after deducting allowed living expenses and mandatory payments, such as secured and priority debt payments. (Secured debts are guaranteed by collateral, such as a mortgage or car payment. Priority debts are those that are sufficiently important to move to the front of the payment line. Examples include domestic support obligations and tax debt.)
You’ll pay your disposable income toward your remaining debt (nonpriority unsecured debt, like credit card balances and medical bills).
Using the Chapter 13 Calculation of Your Disposable Income form, you’ll calculate your disposable income by deducting the following from your income:
The amount of disposable income you have each month is the minimum you’ll have to pay your nonpriority unsecured creditors over five years.
Example. Amara and Theo are married and have a combined annual income of $90,000. Their state has a median income of $60,000 for a household of two. After completing the disposable income calculation, they learn their monthly disposable income is $500. Since they have to be in a 60-month bankruptcy plan, they’ll have to pay nonpriority unsecured creditors at least $30,000 ($500 multiplied by 60) over the course of their Chapter 13 plan.
You can’t pay more than your disposable income in Chapter 13, because your disposable income represents all earnings that remain after paying required debts. However, there is another step in the Chapter 13 payment calculation, and if you don’t meet the criteria, the judge won’t approve your plan.
When deciding whether to confirm your repayment plan, the judge will look at another factor—whether your creditors are getting as much through your Chapter 13 plan as they would if you filed for Chapter 7 bankruptcy.
Here’s why this matters.
In Chapter 7 bankruptcy, the trustee sells all nonexempt property (assets you can’t protect with a bankruptcy exemption). The funds get used for priority creditors first, then, if anything remains, are divided among the nonpriority unsecured creditors.
By contrast, you’ll get to keep nonexempt property in Chapter 13 bankruptcy. But, your creditors won't allow you to get a windfall. To ensure your creditors receive as much as they would in Chapter 7, you must pay the greater of the following:
Example. Charlotte doesn’t make much money, but she owns a significant amount of property. Her disposable income is $200 per month. The house she inherited from her grandmother has $150,000 of nonexempt equity (the amount she’d lose in a Chapter 7 case). She also owes $5,000 in tax debt. Charlotte must pay the greater of:
Because of her relatively low income, it’s unlikely that she can support a confirmable Chapter 13 repayment plan. You’ll find more information about this aspect of the repayment plan calculation, along with helpful examples, in Exemptions in Chapter 13 Bankruptcy.
You won’t be required to calculate a monthly disposable income figure if you qualified for Chapter 7 but decided to file for Chapter 13 for another reason, such as to save your home. Your plan payment will be based on your budget. The bankruptcy court will usually approve your Chapter 13 plan even if you're paying little or nothing to your nonpriority unsecured creditors, regardless of how much disposable income you have. Also, your plan can be only three years long instead of five.
Example. Cody is single and makes $35,000 a year. The median income for a single-person household is $45,000 in his state. Since Cody’s income is below the median, he doesn’t have to calculate his disposable income. He might end up paying nothing to nonpriority unsecured creditors (known as a “zero percent plan”).
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]]>Also, if you qualify for Chapter 7 bankruptcy, you'll have the option of paying for three years instead of five.
A Chapter 13 zero percent plan is a repayment plan that doesn’t pay nonpriority unsecured debts, like credit card bills, personal loans, and medical balances. If your income is low enough to qualify for Chapter 7, your bankruptcy court might offer this option.
Chapter 13 filers usually have high incomes and must pay as much as possible toward unsecured debts. If you qualify for a zero-percent plan, the bankruptcy court won’t hold you to the same standards. Instead, you can focus your extra income toward saving your home or car and pay into a three-year plan instead of a five-year plan if that’s your choice.
Passing the Chapter 7 means test and qualifying to wipe out debt with a Chapter 7 discharge tells the bankruptcy court that you don’t have sufficient income to pay unsecured debts. So if you qualify for Chapter 7, it’s possible to use a zero percent plan if your court will allow it (not all do). The calculation won’t change just because you file a Chapter 13 case.
Most people prefer to file for Chapter 7 bankruptcy because it quickly wipes out qualifying debt without requiring creditor payments. However, if you’re behind on your mortgage or vehicle payment and want to keep the home or car, Chapter 7 bankruptcy won’t help you. Instead, you'll need to consider Chapter 13 because only Chapter 13 bankruptcy will let you catch up on missed payments and keep the property.
According to the contract terms, a debtor must pay as agreed. Otherwise, the lender will use its lien to foreclose on the house or repossess the car. In that situation, Chapter 13 bankruptcy is a better bet. It gives a debtor three to five years to catch up on arrearages so the debtor can save the home or keep the car.
A zero-percent plan doesn’t mean you’ll pay nothing at all. But you won’t pay anything to your nonpriority unsecured creditors, such as credit card balances, medical and utility bills, and personal loans. Any remaining debt you can discharge in Chapter 13 will be wiped out at the end of your case.
Your Chapter 13 bankruptcy lawyer can help you determine other amounts you’ll need to pay.
In the zero percent plan, most debtors will likely pay the following over three years:
However, you can spread out the balance owed over five years if it would be more affordable. As with any Chapter 13 case, you’ll need to demonstrate you have sufficient monthly income to make the plan payments. Learn how to calculate Chapter 13 plan payments.
Preparing a Chapter 13 bankruptcy plan is complicated, and most people need help from a bankruptcy attorney. A local bankruptcy lawyer will be in the best position to review your case and explain your options.
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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]]>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:
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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
Home, car, and other past-due secured debt payments (if you want to keep the property)
Find out how to keep your house and car in Chapter 13.
Priority unsecured debts
Learn more about priority debts in Chapter 13 bankruptcy.
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.
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:
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.
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.
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.
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.
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:
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:
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:
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:
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:
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.
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:
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.
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.
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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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.
]]>However, problems frequently arise, so if you want to explore converting from Chapter 13 to Chapter 7, seek a local bankruptcy lawyer who can:
You can prepare for your meeting by learning about eligibility issues and when the court might force you to convert to Chapter 7 bankruptcy. We explain these issues below.
Before you convert your case from Chapter 13 to Chapter 7, you’ll need to check whether you qualify and determine what will happen to your property. Many people convert because of an income reduction or job loss, so qualifying isn’t usually a problem. However, losing property you were hoping to protect when you filed for Chapter 13 can happen.
Here’s what you’ll need to consider and what you can expect when you convert from Chapter 13 bankruptcy to Chapter 7 bankruptcy.
Before switching to Chapter 7, you must clear an eligibility hurdle by passing the Chapter 7 means test. The means test looks at your income and expenses to determine if you can afford to pay some debts through a Chapter 13 plan. If you can, you won’t qualify for Chapter 7.
Even though some courts don’t require debtors to complete the means test before converting from Chapter 13 to 7, the Chapter 7 trustee assigned to your case will evaluate your updated income and expense disclosures. If you have a significant amount remaining after subtracting your expenses from your income, either the trustee or a creditor will likely object on the basis that you have the means to pay something to creditors.
The bankruptcy court will deny the conversion if your budget indicates you have money remaining to pay some or all of your debts. A local bankruptcy attorney can advise you about the practices in your area.
It depends on whether you've filed for Chapter 7 before. Simply put, you can't wipe out debts whenever you'd like. The multiple bankruptcy filing rule limits you to a Chapter 7 discharge every eight years, even when you convert from Chapter 13 to Chapter 7.
If you've never filed for Chapter 7 or filed over eight years ago, this rule won't be a problem. But if you filed within the last eight years and received a debt discharge, you’ll have to wait until the eight-year period elapses before erasing more debt.
That’s not to say you can’t convert your Chapter 13 case to Chapter 7—you can. But you wouldn’t receive a debt discharge. And because of that, if you’re like most, filing wouldn’t be worth your time.
The only benefit of filing for Chapter 7 when you aren't entitled to a discharge is that it might save you some work. Even so, it will likely cost you more money.
The major benefit is you won't have to sell your property yourself. The trustee will sell any “nonexempt” property you can't protect with a bankruptcy exemption and use the proceeds to pay creditors. The payments would reduce the amount owed to those creditors, but you’d still be required to pay the remaining balances when your Chapter 7 case ended. None of your debt would get erased.
The problem? Most people don’t find this helpful. Because you’d likely sell your property for more and avoid the bankruptcy trustee’s service fee altogether, you’d probably do better avoiding Chapter 7 and selling your property and repaying creditors on your own.
The bankruptcy court can order you to convert to Chapter 7 “for cause” or a good reason. However, courts don’t usually force conversions if you’re doing your best and paying in “good faith” or to the best of your ability.
For instance, suppose you miss a payment due to unforeseen car repairs. Or you can’t propose a repayment plan the bankruptcy court will approve or “confirm” despite your best efforts. The court would probably dismiss the Chapter 13 case instead of forcing you to convert to Chapter 7, which would be a much better outcome if you were at risk of losing property in Chapter 7.
It would be a different story if you were up to no good. The bankruptcy court would be more inclined to convert a case involuntarily if a debtor were manipulating the system to avoid paying creditors.
Here’s what you can expect after converting your case.
Paperwork. In most courts, the bankruptcy petition and forms filed in your Chapter 13 case become a part of your converted Chapter 7 matter, although some jurisdictions require a new set of schedules, even if nothing has changed. At a minimum, you should plan on taking the means test, updating your income and expenses, and listing any debts incurred after filing Chapter 13. The new debts can be discharged in your Chapter 7 case if they qualify.
You’ll also file the Statement of Intention for Individuals Filing Under Chapter 7, a form that tells the court and creditors whether you plan to keep “secured” property you’re still paying for, such as a car or home.
Creditors’ meeting. You must attend another meeting of creditors, even if you attended one in your Chapter 13 case.
Exemptions. In most cases, the court will determine your property exemptions as of the date you filed for Chapter 13 bankruptcy. However, a creditor might object to this date if you’re discharging debts incurred after the initial Chapter 13 filing.
Creditor payment claims. Existing creditors’ proofs of claims, the forms creditors submit for payment in bankruptcy, carry over to your Chapter 7 case. If the Chapter 7 trustee sells nonexempt property, making money available for creditors, new creditors will be given time to file a proof of claim.
Debtor education course. You’d need to take the second education course if you hadn’t already before you'd be entitled to a Chapter 7 discharge. Learn about the two education courses you'll take in bankruptcy.
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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]]>A bankruptcy judge has the final say and will either approve or reject the proposed plan at the Chapter 13 confirmation hearing. Read on for more about what's involved in confirming your Chapter 13 plan, including:
You’ll also learn when the bankruptcy court will set your confirmation hearing and whether you’ll have to attend.
A Chapter 13 confirmation hearing is a court proceeding where a bankruptcy judge determines whether the proposed repayment plan meets bankruptcy requirements. Simply put, you must show you have enough income to pay everything required in a Chapter 13 plan.
Unlike the 341 meeting of creditors, the Chapter 13 confirmation hearing takes place in a courtroom before a judge, not in a hearing room. When your case is called, you and your lawyer will take your places at the front and answer the judge's questions about your plan.
Before the hearing, a creditor or the Chapter 13 trustee appointed to manage your case can file written objections to your plan. When that occurs, the judge will listen to the creditor or trustee's oral arguments about why a plan shouldn’t be approved or “confirmed.” You or your attorney will have an opportunity to refute the arguments.
Everyone who might receive money through the repayment plan can review it and decide if they agree with the provisions. You'll likely be well aware of the objection long before the confirmation hearing and, like many filers, will have made an effort to resolve the problem informally.
Here’s who might object to your Chapter 13 plan and why.
The Chapter 13 bankruptcy trustee’s job is to review the plan to ensure it complies with bankruptcy laws. The process includes reviewing the income and expense information you included with your bankruptcy petition. The review helps the trustee determine if your creditors are getting adequate repayment.
A bankruptcy trustee might object to your plan doesn't appear "feasible" because you should be paying more, don’t make enough income to afford your monthly payments, or for some other reason.
Most Chapter 13 trustees will talk to you about any plan issues they see at the 341 hearing and attempt to resolve them because they are interested in your plan approval. Chapter 13 trustees receive up to 10% of every dollar you pay your creditors through your plan. Learn more about how trustees get paid.
Most objections involve how much a creditor should get paid, although an unsatisfied creditor can object to anything that affects the creditor. For instance, a creditor can object to something filed by the debtor, a course of action proposed by a bankruptcy trustee, or even a position taken by the judge.
So even though filing for bankruptcy is an efficient way to stop creditor collection efforts in their tracks, it doesn’t silence creditors altogether or prevent them from participating in a bankruptcy case.
If you do one of these things, the trustee or a creditor might object to a Chapter 13 plan confirmation:
The trustee or a creditor might file an objection in one of these areas because they all have the potential to increase the amount a creditor might receive.
Other payment-related objections can arise at different times during the Chapter 13 case. For instance, the trustee, creditor, or debtor might object if a creditor seeks payment for an uncollectible proof of claim or the debtor’s attorney or a court-appointed professional requests an unreasonable fee.
Learn more about your obligations under a Chapter 13 bankruptcy plan.
If the original or amended plan is satisfactory, the judge will confirm the plan. If confirmed, expect the court to ask you or your lawyer to submit a confirmation order for the court’s review.
If the trustee or a creditor raises a valid problem, most judges will give the debtor time to fix the issue and prepare an “amended” or new proposed plan, and set a new confirmation hearing date.
The judge will dismiss the case if it’s obvious you can’t remedy the problem, or if you fail to fix the issue after several attempts.
Some judges require debtors to be present at the Chapter 13 confirmation hearing for questions. However, in many districts, your appearance won’t be necessary if counsel represents you and attends on your behalf. In other districts, the court might not hold a hearing if no one objects to your plan.
A confirmation hearing will occur within 45 days of the meeting of creditors date. Some courts schedule a confirmation hearing soon after the 341 meeting of creditors, while others don’t calendar it until weeks later. You’ll likely have enough time to work with the trustee to modify your proposed plan.
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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]]>In this article, you’ll learn how much you’ll pay unsecured creditors. For more about the Chapter 13 plan and how much you must pay on claims, see The Chapter 13 Repayment Plan.
In Chapter 13 bankruptcy, you’ll divide debt into secured debt, priority unsecured debt, and general unsecured debt. How much you must pay for each type of debt differs.
For instance, you’ll pay all of your priority debt—such as support obligations and most tax debt—in your Chapter 13 repayment plan. You’ll make your secured debt payments (such as a mortgage and car loan) if you intend to keep the car or house serving as collateral (the house or car).
All debts other than priority and secured obligations are general unsecured debt—and the amount you’ll pay to your unsecured creditors in Chapter 13 bankruptcy will be the greater of your disposable income or the amount your creditors would have received had you filed for Chapter 7 bankruptcy.
Keep in mind that priority creditors are also unsecured. After paying secured creditors, you’ll pay priority unsecured creditors. Any funds remaining go to general unsecured creditors.
In Chapter 13 bankruptcy, you must devote all of your "disposable income" to the repayment of your debts over the life of your Chapter 13 plan. Your disposable income first goes to your secured and priority creditors. Your unsecured creditors share any remaining amount.
Disposable income is what you have left over at the end of every month after you pay your reasonable and necessary living expenses. The court determines your disposable income by reviewing the Chapter 13 means test forms. The forms are similar to the Chapter 7 means test forms used to decide whether or not you qualify for a Chapter 7 bankruptcy.
The "best interest of creditors" test calculates the minimum amount you must pay to your nonpriority unsecured creditors through your Chapter 13 plan. The test ensures that creditors won’t be disadvantaged just because you filed for Chapter 13 rather than Chapter 7 bankruptcy.
The court will not “confirm” or approve your Chapter 13 plan at the confirmation hearing if you can't repay this minimum amount. You won’t be able to proceed with your case.
The amount you must pay unsecured creditors is the greater of your disposable income, as discussed above, or the value of your “nonexempt” property—property a bankruptcy exemption doesn’t protect.
In essence, your creditors will always get an amount equal to your nonexempt property or more, regardless of whether you file for Chapter 7 or 13 bankruptcy. Your creditors will get even more if your disposable income exceeds the value of your nonexempt property.
However, the way creditors get paid for your nonexempt property differs depending on the chapter you file.
As a result, the best interest of creditors test determines 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.
Example. Suppose you own a car worth $10,000 and 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 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.
The income of some filers is high enough that they’re required to repay all of their creditors fully in the repayment plan. Other filers must pay back all their debt because they own (and keep) a substantial amount of nonexempt property. The repayment plan in either situation is commonly known as a 100% plan.
In Chapter 13 bankruptcy, a zero percent plan is a three- to five-year repayment plan that doesn’t pay anything to nonpriority unsecured debts, such as credit card balances, medical bills, student loans, or personal loans. Instead, a filer can use all available income to catch up on a mortgage or car payment or to pay off priority debts, such as back taxes or domestic support arrearages.
Each bankruptcy chapter offers different benefits to filers. For instance, even though Chapter 7 bankruptcy is an excellent way to quickly wipe out qualifying debts without paying into a repayment plan, Chapter 7 bankruptcy doesn’t have a mechanism that allows a debtor to catch up on secured debt, such as an overdue mortgage or car payment.
So, even though filing a Chapter 7 case might temporarily delay foreclosure or repossession, the filer would likely lose the house or car secured by the defaulted loan. To keep the property, a debtor behind on a house or car payment would need to file for Chapter 13.
Not all courts allow a zero percent plan, but for those that do, a debtor who qualifies for a discharge in a Chapter 7 bankruptcy (or a three-year repayment plan) is in the best position to get a break on a Chapter 13 monthly payment.
Unlike most Chapter 13 filers, a debtor who qualifies for a zero percent plan doesn’t need to pay anything toward general nonpriority debts, such as most credit card balances, personal loans, medical bills, and student loans. The best part is that these nonpriority debts will still get wiped out (discharged) in a bankruptcy case (but not student loans).
You won’t be able to use a zero percent plan if you have priority debt you must pay in your Chapter 13 case unless you have the funds to cover it.
A debtor will need enough income to pay any monthly mortgage payment, plus the following amounts spread out over three to five years:
Of course, the debtor will have to be able to pay monthly living expenses, too. And, as with any Chapter 13 case, a debtor must prove that sufficient income exists to cover the plan payment before a bankruptcy court confirms (approve) the plan.
If the required repayment plan payment seems overwhelming, there are ways to make it more affordable. For instance, you can lower the monthly payment amount by stretching a financed car balance, arrearages, and priority debt balances over three to five years if it helps make the plan payment work.
Example. After falling ill, Josh found himself three months behind on his $1,000 mortgage payment and his $300 car payment. Also, he couldn’t make the $250 payment on an $8,000 credit card balance.
Because Josh wanted to keep his house and car, he filed a Chapter 13 case even though he qualified for Chapter 7 bankruptcy. He proposed a zero percent five-year plan at $1,083 per month, which covered his monthly mortgage payment, $3,000 in mortgage arrearages, and his $2,000 car loan balance.
His low income allowed him to avoid paying anything on the credit card debt, making it a zero percent plan. Better yet, his payment was substantially less than the $1,550 he typically paid, and at the end of five years, he was caught up on his mortgage payment, had paid off his car in full, and wiped out his credit card debt. (In an actual case, a debtor must pay bankruptcy trustee fees, too.)
Filing for Chapter 13 is a complicated process that most people can't file without help. Not only will you need to draft a proposed Chapter 13 repayment plan that complies with all of the bankruptcy rules, but it's common to run into problems over the course of the three- or five-year plan.
A local bankruptcy attorney is in the best position to explain your options and choose the best bankruptcy chapter for you. Find out what to expect from your bankruptcy lawyer and options if you can't afford to hire an attorney.
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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]]>(Learn about the Chapter 13 plan, including what it is, what you must pay in it, and more, in The Chapter 13 Repayment Plan.)
If your Chapter 13 payments are too high, you might be able to modify your plan to make it more affordable. Reducing your payment amount will be easier if your payments are based on your income and expenses and how much disposable income you have each month.
Many bankruptcy debtors miss plan payments because of a temporary financial emergency, like an unexpected car repair or medical bill. Deferring a payment or two might be all the help you need. Most debtors can get caught up if given enough time.
If you’re risking dismissal for nonpayment, your first step is to speak with the trustee. If you miss a payment, or even two, the trustee might let you catch up over a month or two. If the trustee isn't reasonable (which is rare), you can explain your circumstances to the court by filing a written opposition to the motion to dismiss and arguing your side at the motion hearing. You’ll request more time to catch up on your plan arrears and explain how you’ll be able to do so. If you make a convincing argument, most courts will allow you more time or add a specific catch-up plan to your Chapter 13 plan to cure your default.
If it isn’t possible to resolve your financial emergency (for example, you lost your job, or your employer permanently reduced your pay), you might be able to reduce your payments by asking the court to modify the amounts paid through your repayment plan.
In your motion, you’ll need to propose a new payment amount and provide the court with documentation showing your changed circumstances. However, keep two things in mind:
Example: Paul owes $12,000 in income tax and $15,000 in child support, for a total of $27,000. Both of these debts are priority debts that must be paid in full by the end of the five-year plan. Paul’s plan payments are $450 per month. This is the minimum amount Paul can pay each month to complete his plan in 60 months. If the minimum amount is too much, Chapter 13 isn’t a good option for Paul.
This example illustrates what happens when Margo has trouble making her $300 plan payments near the end of her five-year plan.
Example:
Margo loses her job when she’s four years into her plan. She has twelve payments to go, which total $3,600. She misses three payments before she gets a new job. She still has $3,600 left to pay in her plan, but only nine payments in which to do it. She would have to modify her plan to raise her payments to $400 in order to pay all she owes by the end of her five-year plan period. If Margo’s new job didn’t pay enough for her to afford the new higher payment amount, the court might not approve the modification.
Next, imagine that Margo was 54 months into her 60-month plan. At that point, she owes just $1,800 and has only six months left. She loses her job and must skip three months. That leaves her just three months in which to pay $1,800, or $600 per month. Unfortunately, Chapter 13 plans can’t be extended beyond 60 months after the date the first payment was due. Therefore, Margo will have to make sure those three $600 payments are made before the end of the five-year plan period.
(For more information on how to reduce your plan payment amount, see Modifying Your Chapter 13 Plan Payment.)
If you can’t continue with your Chapter 13 bankruptcy, you might be eligible to receive a hardship discharge even though you haven’t completed all of your required plan payments. The court will analyze your financial situation and what’s best for your creditors before granting a hardship discharge.
However, most filers won’t get any debt wiped out through a hardship discharge. Because the court won’t sell any of your property when you ask for a hardship discharge, to wipe out any debt, your nonpriority unsecured debts—such as credit card and medical bills—must have received through the Chapter 13 repayment plan as much as they would receive if the case had been filed as a Chapter 7.
It’s rare for this to happen because most trustees wait until the end of the plan to pay these creditors (trustees pay higher priority debt first). Also, a hardship discharge won’t wipe out your priority debts that you’re required to pay, such as certain taxes or domestic support obligations (like child support and alimony). So, you will still owe those priority debts after the bankruptcy case is closed.
(To learn more, see Getting a Chapter 13 Hardship Discharge.)
If you can’t make or modify your monthly payment, and if you won’t get any benefit from a hardship discharge, you might want to consider converting to Chapter 7. Converting to a Chapter 7 is different than a hardship discharge in several ways—but especially in one crucial aspect: The Chapter 7 bankruptcy trustee will sell your nonexempt property—property that you can’t protect with a bankruptcy exemption—for the benefit of your creditors. And all of your qualifying debt will get wiped out.
You’ll have to qualify for a Chapter 7 discharge (most courts require you to pass the means test, and you’re entitled to a discharge only once every eight years). Also, it won’t get rid of your priority debts or allow you to catch up on your mortgage arrears.
(To learn more, see Converting a Bankruptcy Case From Chapter 13 to Chapter 7.)
If none of the options above allow you to meet your goals, you can always let the court dismiss your case and refile another Chapter 13 bankruptcy. This might be your best option if you can’t afford your Chapter 13 plan payment right now and a Chapter 7 bankruptcy doesn’t make sense.
Once your financial situation improves, you can file another Chapter 13 to pay your debts. But keep in mind that once you’ve dismissed your case, you won’t have the benefit of the automatic stay (the order that stops your creditors from collecting while you’re in bankruptcy). Also, the automatic stay isn’t always put in place when you file successive bankruptcy cases. Depending on when you file, you might have to ask the court to extend the automatic stay in your matter.
(To learn more, see How Bankruptcy Stops Your Creditors: The Automatic Stay.)
]]>In Chapter 13 bankruptcy, you’re allowed to keep all of your property and repay your debt over a period of three to five years through a court-approved repayment plan. (Learn about the Chapter 13 repayment plan.)
You fund your plan with your “disposable income,” or the amount remaining after paying allowed monthly expenses. Because bankruptcy law assumes a reasonable lifestyle, not the filer’s actual lifestyle, you won’t be able to use all of your actual expenses. For instance, reasonable rent, food, and utility payments are predetermined according to your area. So most people must live frugally under a Chapter 13 plan.
Also, your disposable income is not static. The amount you’re expected to pay can change throughout your repayment period. For instance, if your income increases but your expenses stay the same, your disposable income—and your plan payment—will increase. (Learn more about calculating your disposable income.)
In Chapter 13 bankruptcy, you agree to pay your disposable income to the bankruptcy trustee appointed to administer your case for three to five years. On successful completion of the plan, any remaining balance on nonpriority unsecured debt (credit card balances, personal loans, medical bills, and the like, but not student loans), gets discharged (wiped out).
Your income determines the minimum length of time you must make payments, called the applicable commitment period. Here’s how it works.
It’s unlikely that the court will grant you a discharge wiping out a debt balance if you don’t pay your disposable income for your entire commitment period. Much like a contract, you must do certain things before you’re entitled to the discharge. Here are the terms you agreed to:
If you don’t fulfill all the terms, you don’t receive a discharge.
If you want to pay off your plan early, you must notify your creditors and get court approval. Creditors and the bankruptcy trustee will have the opportunity to object to your early payoff—and you should expect them to do so.
Because it’s no secret that a Chapter 13 bankruptcy filer must live frugally, your creditors will suspect that you're trying to avoid paying more into the plan due to an income increase. Your creditors will argue that the funds you intend to use to pay off the plan (employment bonus, inheritance) should be used to increase your payment to creditors, not to shorten the duration of your Chapter 13 bankruptcy.
They’ll further argue that if you’re allowed to pay off your debt early, they’ll lose the benefit of any future increase in your disposable income from a pay raise, bonus, inheritance, and the like, or a decrease in expenses over the life of your Chapter 13 plan. If the court agrees, the court will deny the early payoff and likely require you to increase your payments to reflect your additional income.
There is one situation where the court will allow you to pay off your plan early—and that’s when you pay creditors 100% of their claimed amounts. If you pay all that you owe, there won’t be a need for a payment plan. You won’t need a discharge, and your creditors will be made whole.
If you suffer a financial setback, and your plan pays less than 100% of what you owe, the court might end your plan early if your situation doesn't look like it will improve. Here are the requirements for a hardship discharge:
If you successfully prove these criteria, the court will end your plan early, grant you a hardship discharge, and wipe out your nonpriority, unsecured debt (except student loans).
Learn more by reading Debts Discharged at the End of Chapter 13 Bankruptcy.
While calculating a Chapter 13 repayment plan can be tricky, learning the basics will help you understand what to expect.
Filing for bankruptcy under Chapter 13 requires regular income. You have to be able to make required plan payments from wages and commissions earned either in the ordinary course of a job or through self-employment.
Why does this matter? The commitment period for your plan—or plan duration—is determined by comparing your monthly earnings to the median family income in the state where you live.
Here’s how it works.
Five years is the maximum length of any Chapter 13 repayment plan.
You can reduce the commitment period for your Chapter 13 plan if you can pay all of your unsecured debt (such as credit card balances, medical bills, and personal loans) sooner. Most Chapter 13 debtors, however, earn too little and owe too much to make required plan payments in less than five years.
Even if you qualify for a three-year plan, you might opt for a five-year plan instead. There are several reasons why debtors who could proceed under a 36-month plan would do this:
Five years is a long time. It’s normal for things like job losses and medical issues to happen. If your circumstances change, you might be able to modify your Chapter 13 plan length, with the court’s approval.
Many things go into drafting a Chapter 13 plan. In fact, most attorneys use a computer program to do the calculations. The best way to find out your obligations and options is to consult with a knowledgeable bankruptcy attorney.
]]>Learn how you’ll pay each of these claims as part of a repayment plan in Chapter 13 bankruptcy.
How you or the trustee will pay secured claims will depend on how long your ongoing payments will last, the rules of your court, and in some cases, whether your loan is underwater.
Secured claims are secured by collateral. For instance, a house secures most mortgages, and a car guarantees most vehicle loans.
If you don’t pay a secured debt, the creditor can take the collateral and sell it to obtain payment. If you file a Chapter 13 and intend to keep the property securing the loan, you must stay current on the payments while paying off any arrearages over the repayment plan period.
A number of factors come into play, but for the most part, you’ll continue to make payments and pay interest on these debts. Here are a few other things to know:
Mortgage debt example. Although your mortgage is a secured debt, you don’t have to pay it in full in a Chapter 13 case. You’ll make your monthly mortgage payment and continue to pay on it when your case ends. Any past due balance, however, must be paid in full through your plan. For instance, suppose your monthly mortgage payment is $1,000 and you were three months behind when you filed. You incurred $450 in interest and fees. You (or the trustee) would make the $1,000 payment and pay $3,450 (which represents the three months of arrears, plus the overdue interest, and fees) with interest over the life of the plan. To learn more about mortgage debt options, see Your Home and Mortgage in Chapter 13 Bankruptcy.
Property tax example. If you are paying past due property taxes through your Chapter 13 plan, you must pay the entire past due balance in full with interest over the life of the plan.
Car payment example. If your car loan balance becomes due before the end of your Chapter 13 plan, you must pay the balance in full over the life of your plan. How much you end up paying, however, will depend on if you qualify to cram down the loan to the amount its worth. You’ll qualify if you bought the car more than 910 days ago. You’ll pay market value plus interest through your plan and the remaining balance will get paid with general unsecured debt. Learn more in Reducing Loans and Non-Residential Mortgages in Chapter 13 (Cramdowns).
Unlike secured claims, unsecured claims aren’t backed by collateral. If you don’t pay your bill, the creditor can’t take your property.
Two types of unsecured claims exist: priority and nonpriority (general) unsecured claims.
Learn more by reading Unsecured Debt in Chapter 13: How Much Must You Pay?
]]>When you file for Chapter 13 bankruptcy, you propose a plan to pay back all or a portion of your debts. How much you’ll pay back will depend on your income, expenses, assets, and debt type. The “best effort” rule requires you to contribute all of your disposable income to your Chapter 13 repayment plan for the benefit of your unsecured creditors.
So what is disposable income? It’s any income left over after paying all expenses reasonably necessary to support you and your dependents. Of course, having unreasonably high expenses won’t get you out of paying creditors. The bankruptcy rules determine what are reasonable. Your plan won’t be determined by your actual costs.
Making retirement contributions during Chapter 13 bankruptcy means you’ll have less money each month to contribute to your repayment plan. If you were allowed to do this, you’d be saving money at the expense of creditors.
With a few exceptions, the only expenses that reduce your disposable income are those that are reasonably necessary for your support and maintenance. Certain bankruptcy courts don’t consider voluntary retirement contributions necessary expenses. So, while, it’s best to assume that you won’t be able to make these contributions, talking to a local bankruptcy attorney will be the simplest way to find out the practices of your court.
Not all courts agree whether debtors can make voluntary retirement contributions during Chapter 13 bankruptcy. Some courts don’t consider them to be reasonably necessary expenses; however, in other jurisdictions, voluntary retirement contributions aren’t considered unreasonable automatically.
If you live in a jurisdiction that doesn’t automatically prohibit retirement contributions, the court will typically look at each debtor’s circumstances on a case-by-case basis. In general, the court will be more likely to allow retirement contributions if they aren’t excessive, your other expenses are reasonable (you don’t have an extravagant lifestyle), and you’re nearing retirement. The reasoning behind this is that debtors with modest lifestyles who are nearing retirement will need those contributions to support themselves. If not able to support themselves, the burden will likely fall on the government and taxpayers.
Because the rules in each bankruptcy jurisdiction are different, consider hiring a knowledgeable bankruptcy attorney in your area before filing your case.
If your employer requires retirement contributions as a condition of your employment or if you are paying back a retirement account loan, you can typically continue those payments during Chapter 13 bankruptcy. These contributions aren’t voluntary. They’re necessary expenses that will reduce your disposable income. But keep in mind that if your retirement loan is paid off before the end of your Chapter 13 repayment period, you will probably have to increase the amount of your plan payment.
(Learn more about your retirement plan in bankruptcy.)
]]>The court will grant your request for a hardship discharge if you can prove three conditions:
If you don’t qualify for a hardship discharge, it’s likely because you need to pay money to your unsecured creditors. If that’s the case, you can convert from a Chapter 13 to a Chapter 7 bankruptcy. The Chapter 7 trustee will sell your nonexempt property (assets you can’t protect with a bankruptcy exemption) and distribute the funds to your creditors.
If the court grants your motion for a hardship discharge, only unsecured nonpriority debts get discharged. The following debts typically aren’t wiped out in a hardship discharge:
Some debts will be wiped out in a hardship discharge unless the creditor objects to the debt by filing and winning a lawsuit called an adversary proceeding. These debts include:
If you have a debt that falls into one of these categories, your best strategy is to do nothing and hope the creditor does the same. If the creditor files the lawsuit, you’ll need to respond if you want the debt to remain dischargeable.
]]>If the Chapter 13 trustee is holding any plan payments for your creditors, the funds will be returned to you. However, because Chapter 7 bankruptcy is a liquidation chapter—meaning that the trustee sells property that you can’t protect with a bankruptcy exemption—you might lose other assets. The Chapter 7 trustee can sell nonexempt property that you owned when you filed the Chapter 13 case.
A Chapter 13 bankruptcy filing is often the only option available to people who make too much to qualify for a Chapter 7 bankruptcy (more below). It also works well when someone wants to:
But it isn’t unusual for someone’s financial situation to change over the course of a three- to five-year repayment plan. For instance, a debtor who suffers a job loss and can’t continue making the required monthly payment might ask the court to convert the case to a Chapter 7 bankruptcy or request a hardship discharge.
As long as the conversion isn’t an attempt to manipulate the system to the detriment of creditors—often referred to as “bad faith”—a filer can convert a Chapter 13 to a Chapter 7 case at any time (assuming Chapter 7 eligibility).
(Learn more in Converting Your Bankruptcy Case From Chapter 13 to Chapter 7.)
Although unusual, you can also convert a Chapter 7 to a Chapter 13 case. This conversion usually happens when the filer’s income is too high to pass the means test, indicating that there’s sufficient income to repay creditors some amount through a Chapter 13 repayment plan. This conversion cannot occur without the debtor’s consent.
(Learn more about Converting a Chapter 7 Bankruptcy to Chapter 13.)
Filing for bankruptcy creates a “bankruptcy estate” in which all of your assets and property rights get held. The bankruptcy chapter you file—or convert to—will determine what happens to the property in the bankruptcy estate.
When you start a Chapter 13 case, you file a packet of documents with the court. One of those documents is your proposed Chapter 13 plan. At this point, your proposed plan is temporary until the court, trustee, and your creditors have a chance to review and object to it if they wish. If no one objects or all objections get resolved, then the court will "confirm" (finalize) your plan.
After you file your Chapter 13 case, you must begin making monthly plan payments to your bankruptcy trustee—even before confirmation (approval) of the plan. If you fail to make timely plan payments at any point, then your matter will likely get dismissed by the court.
(Learn more in Chapter 13 Repayment Plan.)
Since a Chapter 13 bankruptcy lasts three to five years, it’s only natural that your life won’t remain constant during that time. Events such as job loss, illness, or an emergency can affect your ability to afford your bankruptcy plan payments. If this happens to you, then you might be able to ask the court to modify your Chapter 13 plan payments to an amount you can afford.
You can modify your plan both before and after confirmation.
You must pay particular debts in your Chapter 13 plan, including some taxes and all domestic support obligations (these are priority debts), as well as any mortgage arrears on properties you wish to keep. Filers with this kind of debt often run into problems when attempting a modification. Here’s why.
If your plan payment amount was sufficient to pay off required debts, then you probably won’t be able to reduce your plan payment unless you give up a property on which you were paying arrears. However, if your previous plan paid a percentage to your nonpriority unsecured creditors (such as credit cards), then you can reduce your plan payment by reducing or eliminating the portion going to these creditors. (To learn more, see Debts That Must Be Paid in a Chapter 13 Bankruptcy.)
If you can’t complete your plan payments because of some event that’s beyond your control, you might want to convert your case to a Chapter 7 bankruptcy. But sometimes it isn’t feasible. Another option is to request a “hardship discharge” by filing a motion with the bankruptcy court.
Before receiving a hardship discharge, you’ll have to convince the bankruptcy judge that you’re suffering from more than just a temporary job loss or disability. Qualifying for a hardship discharge requires you to show that your circumstances will likely be permanent, meaning that you probably won’t be in a position to make your Chapter 13 plan payments before your plan term ends.
Also, you’ll have to meet “best interests of creditors” test by showing that you’ve paid your unsecured creditors at least as much as they would have received had you filed a Chapter 7 case.
Example: When Ashley filed her Chapter 13 case, she had company stock worth $10,000, but no exemption to cover it. Therefore, before she could get a hardship discharge, her Chapter 13 plan payments needed to be enough to pay unsecured creditor claims at least $10,000 total. Three years into her plan, she suffered an accident. At that point, the trustee was still paying secured claims, like her mortgage arrearages and car loan, and hadn’t paid anything to unsecured creditors yet. Because she hadn’t paid anything toward the $10,000 necessary, Barbara wouldn’t qualify for a hardship discharge.
(Read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority to learn about claim types in bankruptcy.)
People often modify their Chapter 13 plans to lower or increase payments as their income changes. If you suffered an accident and your income dropped but will return to work at your full salary after six months, you might be able to reduce the plan payments to accommodate your lower income, then increase payments when you returned to work.
If the reduction in your income is permanent, or you’re so far into your Chapter 13 plan that you wouldn’t have enough time after you return to your regular income to make up the missed payments, then modifying your Chapter 13 plan wouldn’t be practical. You might then qualify for a hardship discharge.
A hardship discharge isn’t as broad as a regular Chapter 13 or Chapter 7 discharge. Although most general unsecured debts get eliminated, you’ll likely remain liable for other claims, including:
(For more details, read Getting a Chapter 13 Hardship Discharge.)
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