One of the primary differences between Chapter 7 and Chapter 13 is that in Chapter 13 bankruptcy, you repay some or all of what you owe creditors through a three- to five-year repayment plan that you’ll propose when you file your case. The plan tells the court and creditors how much each creditor will receive and how long the plan will last. If it complies with all of the bankruptcy payment rules, the court will confirm (approve) it.
Completing a Chapter 13 plan isn’t easy because you’re required to commit all your income for three to five years. First, you’ll need enough income to make your regular payments, such as rent or your mortgage, car payment, utility bills, and other monthly expenses. But your responsibilities won’t end there.
If you’re behind on your mortgage, car payment, or another secured debt (an obligation secured by collateral), you’ll need to make up the missed payments through the plan. You also must pay certain important debts known as priority debts in full. Common priority debts include support arrearages and recently incurred tax bills. Any amount of income remaining must be used to pay your other debts, like credit card balances, medical bills, and personal loans. Any portion of these balances that you aren’t able to pay in full (with the exception of student loans) gets discharged (erased) after your complete your payments.
But your payment responsibilities don’t end there. Unlike in Chapter 7, the Chapter 13 trustee doesn’t sell any of your property. However, you must pay for all assets that you can’t protect with an exemption through your plan. An easy rule of thumb is that if you would have lost the property in Chapter 7, you’ll have to pay for it in Chapter 13.
If you can’t meet all of these requirements, the bankruptcy judge won’t confirm your plan. Keep reading to learn more about calculating a Chapter 13 repayment plan.
Here is a more detailed explanation of the debts your Chapter 13 plan must address.
Priority debts (other than child support owed to a government agency.) Priority debts must be paid in full through your plan. Priority debts include:
Secured debts that come due within the life of your plan. If you have a secured debt that is contractually due to end within the life of your plan (for example, a home equity or car loan), you must pay it in full through the plan. You might be able to reduce the balance of a car loan or another secured debt in certain circumstances, however. Learn more about how a cram down works in a Chapter 13 bankruptcy.
Secured debts that aren’t due within the life of your plan. You must also pay these through your plan. An example is a tax lien on your home.
Arrearages on your home, car, or other secured property. If you want to keep the property, you must pay off the arrearage through your plan.
The amount that your unsecured, nonpriority creditors would have received if you filed for Chapter 7 bankruptcy. This is the minimum amount you must pay through your plan. You may have to pay more based on your disposable income (see the last item on this list). If you can’t afford to pay this amount, you won’t qualify for Chapter 13 bankruptcy. Keep in mind, however, that because your creditors probably wouldn’t have received full payment in a Chapter 7 bankruptcy (the amount they get depends on how much of your property is exempt), you probably won’t end up paying these creditors in full through your Chapter 13 plan either.
Administrative expenses incurred as part of your bankruptcy. These include the bankruptcy filing fee, the trustee’s fee, and attorney’s fees.
Your “disposable” income must be devoted to your plan. The idea is that whatever income is left over after you’ve paid certain allowed expenses must be devoted to paying your creditors. That is, you can’t devise a payment plan and still have money left over each month to go to the spa, or take a trip to Europe. To learn how to calculate your disposable income, see Chapter 13 Bankruptcy Laws: Your Disposable Income.
Some debts are paid directly to the creditor, and some might be paid to the creditor through your plan, depending on what your bankruptcy court requires.
Mortgage payments. If you want to keep your home, you’ll have to continue making your regular, monthly payments through the duration of the bankruptcy. Courts are split as to whether you make your mortgage payments directly to your lender, or whether you have to make them through the Chapter 13 plan. If possible, opt to make the payments outside of the plan. If you make them through the plan, you’ll pay more in the long run since the trustee gets about 10% on all payments made through the plan.
Car payments. If you are paying off an arrearage on your car loan through your plan, you may have to make your regular car payments through your plan as well. This goes for other secured debts as well (if you are paying an arrearage on them through your plan).
Current payments for other things. During your Chapter 13 bankruptcy, you make your current payments outside of the plan for things like utilities, rent, telephone, child support, and taxes.
Higher-income filers pay more to their creditors in Chapter 13. You’ll determine whether your plan must last either three or five years by comparing your income to the median income of your state. If your income is less than the state’s median income, you can propose a three-year plan. If your income is more than the median income in your state, your plan must last five years.
For purposes of this rule, you must use your average gross income for the six months before filing for bankruptcy. You can find your state’s median income on the U.S. Trustee Program website (look under “Means Testing Information”).