Bankruptcy Payments: What to Expect on a Low Income

If you file for Chapter 13 bankruptcy, your plan payments will depend on your disposable income.

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When you file for Chapter 13 bankruptcy, you must commit to a repayment plan that will pay off some or all of your debts over three to five years. Your monthly payments will depend on your debts and your income. Some debts must be paid in full in Chapter 13, regardless of your income. If you don't earn enough to pay off these debts, the judge won't confirm your Chapter 13 repayment plan. 

How Much Must I Pay in Chapter 13?

There are a few factors that determine how much you'll have to repay in your Chapter 13 plan. 

Some debts must be paid in full. Priority debts, which include back child support and alimony, most tax debts, and any wages or other compensation you owe to employees, must be paid 100% in your repayment plan. The same is true for arrearages you owe on secured debts, such as your mortgage or car note, if you want to keep the property. And, you'll have to pay off administrative costs, which include your filing fee, the trustee's fee, and your attorney's fee (if you hired one). These debts must be paid fully regardless of how much you earn. If you don't have enough income to pay at least these debts during the three- to five-year repayment period, you won't be allowed to use Chapter 13.

Your unsecured creditors must receive at least the value of your nonexempt property. If you file for Chapter 7 bankruptcy, you don't have to make any payments. Instead, you must surrender any property you own that isn't exempt under your state's law (or federal law, if your state allows you to choose between the state or federal exemptions). The trustee can take this property, sell it, and distribute the proceeds to your unsecured creditors (those whose debts aren't priority debts and aren't secured by property the creditor can take if you default). If you file for Chapter 13, your plan must provide that these creditors receive at least as much as they would have received if you used Chapter 7. In other words, all of them combined must receive at least the value of your nonexempt property. If you own valuable property that isn't exempt (such as a vacation home, luxury cars, or valuable artwork), this rule might greatly increase your plan payments. And, this rule applies regardless of your income.

All of your disposable income must be paid into the plan. During the three to five year repayment period, you must pay all of your disposable income into the plan. Your disposable income is your total income less your allowed expenses (these expenses are set by law and may not include everything you spend money on). Any monthly income you have left must go into your plan to repay your creditors. 

Can Low-Income Filers Use Chapter 13?

Some low-income filers won't be able to use Chapter 13 because they can't afford to pay off their required debts (priority debts, arrearages on secured debts, and administrative costs) during the repayment period. 

As long as your plan meets the requirements set out above, however, and you have enough income to make the payments, the judge should approve it. Many low-income filers have little or no nonexempt property, and no disposable income left after paying their bills and expenses. If you are in this situation, your plan can propose to pay off only your required debts, making no payments on your unsecured debt. Because you have no nonexempt property, your unsecured creditors are still getting as much as they would have if you had used Chapter 7: nothing. And you have no disposable income left over to pay into the plan. 

At the end of your Chapter 13 plan, all dischargeable debts will be wiped out. This includes your unsecured, nonpriority debts, whether your plan pays these creditors in full, pays them in part, or pays them nothing at all. 

What If I Lose My Job or Take a Pay Cut During the Chapter 13 Case?

If you lose your job, take a pay cut, or otherwise lose your ability to make your Chapter 13 plan payments, you may be able to modify your Chapter 13 plan or to temporarily suspend your plan payments. If you are in this situation, you should immediately tell the trustee, who can explain your options. Any change to your Chapter 13 plan must be approved by the court.

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