Calculating a Chapter 13 plan isn't easy, but it's essential to the Chapter 13 bankruptcy qualification process. The first step? Determining whether you'll pay into a three- or five-year plan.
If you're like most, you'll pay for five years, and you'll need the following information to determine your monthly payment:
- the total amount of debt you must pay
- your disposable income, and
- the value of all property that isn't protected by a bankruptcy exemption.
The step-by-step instructions below will get you on the right track. If you get lost, skip to "Chapter 13 Calculation Shortcut" at the end of the article and use this Chapter 13 calculator to check your figures. It will help.
Calculating Required Debt Payments in Chapter 13
Chapter 13 is costly. Unless your income is low enough to qualify for Chapter 7, you must pay all your monthly income into a five-year plan. And even then, you might still be unable to afford the required Chapter 13 payment. It will depend on your debt type.
To figure out your monthly payment amount, you'll start by calculating the bills you must pay in full, which are your secured and priority debts. Your unsecured creditors will share any remaining income, so you'll address unsecured obligations last.
Priority Debts: Pay in Full
These are the "important" obligations your plan must pay in full. Add up the entire amount owed for these common priority debts:
- recently-incurred federal and state taxes (go back three years)
- back spousal and child support owed to an ex-spouse or child
- personal injury and wrongful death awards from driving under the influence, and
- fraud-related court judgments.
You'll divide the total amount by sixty. That's the monthly amount you'll pay. Here's where you can find more priority debt categories (they're the same in Chapters 7 and 13).
Debts Secured by Property: Pay in Full
If you want to keep your home, car, or other property securing debt, in most instances, you'll pay your usual monthly payment amounts. A "secured" debt is an obligation guaranteed by collateral—usually, the property you purchased.
If you don't pay, the lender can use lien rights to take the property back, even in bankruptcy. But the lender must ask the court to lift the automatic stay first.
If you have a mortgage or vehicle loan, you'll make one of two choices: Return the property to the lender or keep the property and pay as agreed, with a couple of exceptions. Here are the basics:
- Arrearages. If you're behind on the payment when you file, you'll catch up by paying the overdue amount through the plan. You can spread the balance over the plan.
- Monthly payment. Filers must stay current. Your bankruptcy court's rules will determine whether you pay the lender directly or through the plan. For instance, some courts require you to make the monthly payment through the plan if you owed arrearages when you filed, but not otherwise.
- Lien strip exception. Sometimes, you don't have to pay a junior home mortgage payment in the plan. Suppose you have multiple mortgages on a home worth less than you owe. If, after selling your house, you wouldn't have enough money to pay even a dollar on one of the junior mortgages (making it "wholly unsecured"), you can strip off the lien in Chapter 13. The benefit? You wouldn't pay the entire monthly payment in your plan. Instead, you'd pay less because the stripped mortgage would be an unsecured debt (more below). The court would discharge the balance after plan completion.
- Cramdown exception. A filer can reduce the amount owed on other types of secured property to the property's value through a "cramdown." This rule doesn't apply to the filer's residence. The tricky part here? You must pay the entire cramdown amount in full through the plan. Learn about cramdowns and lien stripping in Chapter 13.
If your income doesn't cover priority and secured payments, you won't qualify. If you have money left over, move on to the next step.
Unsecured Debts: Pay 0% to 100%
Anything that doesn't fall into the priority or secured debt category will be a nonpriority unsecured debt. These obligations share your monthly disposable income, which is the amount remaining after paying priority and secured obligations and allowed monthly expenses. It's only up to the total amount owed to your unsecured creditors. You don't have to pay more than you owe if you have a lot of disposable income.
But the calculation isn't complete. The last step will determine whether you must pay more than your disposable income. If you do, you won't qualify.
Calculating How Much Income You'll Need in Chapter 13
Here's where the calculations can get confusing. You're going to compare these two things:
- The value of the property you would have lost in Chapter 7. You can get this figure by adding up the value of the assets you can't protect with a bankruptcy exemption, minus expenses and trustee fees.
- The amount your plan will pay to unsecured creditors. Most people can add up all amounts other than home and car obligations. But keep in mind that sometimes, priority debts are secured.
If the amount your plan pays your unsecured creditors (the second figure) is the same or more than what your unsecured creditors would have received in Chapter 7 (the first figure), you'll qualify. Otherwise, you won't be able to propose a confirmable plan that the bankruptcy court will approve.
Putting Your Chapter 13 Calculations Together
Now you should have an idea about what you need to pay. But it's not easy to grasp the first time through. Try using the "Chapter 13 Payment Calculation Shortcut" below. It addresses each step in a streamlined manner, but pay close attention to number 5.
Chapter 13 Payment Calculation Shortcut
This simplified calculation will give you a general idea about whether you can afford a five-year Chapter 13 plan, the most common plan length. Here's what you'll do:
- Add together debts you must pay in full, then divide the total by 60 (we're getting a monthly payment amount that we'll build on):
- child or spousal support arrearages
- recently-incurred tax debt (look back three years), and
- arrearages on a home or car loan if you want to keep the property (include arrearages on equity credit lines).
- Add required monthly payments for:
- child or spousal support
- a house you want to keep, and
- a car you want to keep (if you owe less than five years, divide the balance owed by 60 and include that number).
- Add monthly living expenses (use the US Trustee expense multipliers for more accuracy):
- rent, utilities, food
- car insurance and repairs,
- pet expenses, and more.
- Determine whether you make enough to support a plan.
- Add any remaining "disposable income" to the monthly plan figure. (Use Form 122C-2 for more accuracy—it's in the box below.) The total will be the amount available to pay toward your plan. But you might need more. Go to step 4.
- If you can't cover everything to this point, you won't qualify.
- Final check—are you paying your unsecured creditors enough?
- Add the total amount you're paying toward unsecured debt. In other words, count all payments other than those for your house, car, or another secured debt.
- Add the value of your unprotected property or all property not covered by a bankruptcy exemption. You can subtract sales costs and Chapter 7 trustee fees.
- Compare the two amounts. If your plan pays unsecured creditors the same or more than the value of your nonexempt property, you will qualify.
This figure approximates the minimum amount you'd need to pay in a confirmable plan. Keep in mind that you'll also add in other priority debts like claims for death or personal injury due to driving under the influence and other secured lien amounts, but these are relatively rare.
Navigating Your Bankruptcy Case
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.
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.