Chapter 13 Bankruptcy Payments: What to Expect on a Low Income

How much you pay in a Chapter 13 bankruptcy case comes down to your owed priority debts and secured arrearages, the value of property that isn't protected by a bankruptcy exemption, and your disposable income remaining after monthly household expenses and required payments. Some debts must be paid in full no matter how much you earn, and if you don't have enough income to cover them, the judge won't confirm your plan. If you can cover them, you pay what remains toward your other debts for three to five years.

How Much Must I Pay in Chapter 13?

You must pay three things in a Chapter 13 plan: your priority debts and secured arrearages in full, at least the value of your nonexempt property to unsecured creditors, and all of your disposable income for the life of the plan.

Some Debts Must Be Paid in Full

Priority debts, which include back child support and alimony, certain recent tax debts, and any wages or other compensation you owe to employees, must be paid 100% in your repayment plan (with a few statutory exceptions that don't apply in most cases). 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 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 in full 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 able to use Chapter 13. (11 U.S.C. § 1322.)

Unsecured Creditors Receive at Least the Value of Your Nonexempt Property

Your unsecured creditors must receive at least as much through your Chapter 13 plan as they'd receive if you filed for Chapter 7 instead. This is called the "best interest of creditors" test, and it ensures creditors aren't paid more in Chapter 7 through property sales than in Chapter 13, which allows filers to keep all of their property.  (11 U.S.C. § 1325(a)(4).)

Here's why that matters.

If you file for Chapter 7 bankruptcy, you don't make payments. Instead, you surrender any property you own that isn't exempt under your state's exemption laws (or federal law, if your state allows you to choose between the state and federal exemptions). The trustee sells nonexempt property and distributes the proceeds to your unsecured creditors. Unsecured debts are those that aren't secured by property the creditor can take if you default. Typical examples include credit cards and medical bills as opposed to mortgages or car loans, which are secured debts guaranteed by a home or vehicle.

If you file for Chapter 13 instead, your plan must pay these creditors at least as much as they would have gotten had the trustee sold your nonexempt property in a Chapter 7 sale. Essentially, that amount is the value of your nonexempt property, minus sales costs and the trustee's fee. If you own something valuable that isn't exempt, like a vacation home, a luxury car, or fine art, this rule can significantly raise your plan payments, regardless of your income.

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, and the law, not your budget, decides which expenses count. Whatever's left over each month goes to your creditors. (11 U.S.C. § 1325(b).)

This is a separate measure of payment from the priority payment and best interests of creditors rules. You must meet both, and anything that remains after allowed monthly expenses and home and vehicle loan arrearage payments is your disposable income. If you can't meet the priority payment rule and the best interests of creditors rules, or if you don't have enough for your monthly expenses (plus arrearage catch-up), you automatically won't have any disposable income. 

How Long Will My Chapter 13 Plan Last?

Your plan runs for either three or five years, depending on your income. If your household income falls below your state's median for a family your size, your plan generally lasts three years, though you can propose a longer plan if you need more time to catch up on secured debts or priority debts. If your income sits at or above the state median, your plan generally must run five years, known as your "applicable commitment period." Either way, five years is the cap. (11 U.S.C. § 1325(b)(4).) 

Can Low-Income Filers Use Chapter 13?

Yes, but only if you can afford your required debts: priority debts, secured arrearages, and administrative costs. Otherwise, the judge won't confirm your plan. But if you can meet those requirements and have enough income to make the payments, the judge should approve your plan.

Many low-income filers have little or no nonexempt property and no disposable income left after covering their bills. If that's you, your plan can propose paying only your required debts and nothing toward your unsecured debt. Bankruptcy lawyers call this a "0% plan." 

Since you have no nonexempt property, your unsecured creditors still get what they'd get in Chapter 7: nothing. And with no disposable income left over, there's nothing more to add to the plan. At the end of your Chapter 13 plan, all dischargeable debts get wiped out, including your unsecured, nonpriority debts, whether your plan paid those creditors in full, in part, or not at all.

Tip. Filers with significant income or nonexempt property may land a "100% plan," paying unsecured creditors in full. Most plans fall somewhere in between a 0% and 100% plan.

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

If your income drops during your case, you can typically ask the court to modify your plan or temporarily suspend your payments. If you lose your job, take a pay cut, or otherwise lose your ability to make your Chapter 13 plan payments, tell your lawyer (or the trustee) right away.

Your lawyer can walk you through your options, whether that's modifying your Chapter 13 plan or pausing payments for a while. Either way, the court must approve any change to your plan. (11 U.S.C. § 1329.)

Navigating Your Bankruptcy Case

Your Chapter 13 payment comes down to what you owe, what you own, and what you earn, and a bankruptcy lawyer can run those numbers for you before you ever file. Chapter 13 is complicated, and meeting with counsel up front is the best way to learn your options and sidestep problems from the start. Here are a couple of articles you might want to read next.

• How to File Bankruptcy and Keep Your Car
• How to Value Your Car in Bankruptcy