Learn what debts you must pay in full over the course of your Chapter 13 bankruptcy and then calculate whether you have enough income to do this.
Certain debts must be paid in full in over the course of a Chapter 13 repayment plan. If your current monthly income, less reasonable living expenses, won’t allow you to pay off those debts within the required plan period, then the court will not confirm your plan. (To learn more about Chapter 13 repayment plans, see The Chapter 13 Bankruptcy Repayment Plan.)
Even if you qualify for a three-year plan (because your income is less than your state’s median), you may wish to ask the court to allow a five-year plan if you will need that much time to pay your mandatory debts.
Read on to learn which debts must be paid in full, and how to calculate whether you will be able to cover these in your repayment plan.
Here’s a list of the debts you must pay in Chapter 13 bankruptcy.
Priority debts are unsecured debts (that is, debts for which you haven’t pledged collateral and for which the creditor has not filed a lien against you) that are considered sufficiently important to jump to the head of the bankruptcy repayment line. The general rule is that priority debts must be paid in full over the course of a Chapter 13 case.
The most common priority debts that knock people out of Chapter 13 are back taxes and child support arrearages. (However, child support arrearages don’t have to be paid in full during your repayment period if you owe the debt to a government agency rather than to your child or former spouse.)
Here’s the full list of priority debts:
Your plan must provide that you will keep current on secured debts that will last longer than your repayment plan (such as mortgages). You must also pay off any arrearages you owe during the life of the plan, unless you are willing to surrender the collateral.
All other secured debts must be paid in full under the plan. Typical of such debts are tax liens on your property, promissory notes securing personal property collateral, and judgment liens that can’t be removed for one reason or another.
To determine whether you could pay these mandatory debts during your repayment period, you must find out whether you will have enough income left over each month after paying your reasonable living expenses. (Remember, even though your income may be low enough to make you eligible for a three-year plan, you may propose a five-year plan if it will take you that long to pay off your mandatory debts.)
Here’s a quick way to figure out whether you can make these required payments:
Step 1: Compute your household’s gross income over the past six months, divide it by six, and then multiply it by the number of months in your repayment period (60 for a five-year plan).
Step 2: Compute your actual monthly living expenses, including monthly installment payments on your car and other property necessary for your family’s welfare, and multiply by the number of months in your repayment plan.
Step 3: Deduct your expenses computed in Step 2 from your income computed in Step 1.
Step 4: Add up all of your priority debts, secured debt arrearages for property you plan to keep, and secured debts, as described above.
Step 5: Subtract your total mandatory debts, as calculated in Step 4, from the total amount of income you will have left over after paying expenses, as calculated in Step 3. If this amount is a positive number, it means you may have enough income to pay your mandatory debts. If the amount is negative, you may have to make some adjustments, such as giving up property on which you are making payments or lowering your expenses, to propose a confirmable Chapter 13 plan. Remember, however, that your expenses must appear to be reasonable to the court. If your expenses look too low, the court may reject your plan as unreasonable.
Excerpted from How to File for Chapter 7 Bankruptcy, by Attorney Stephen Elias, Albin Renauer, J.D., & Robin Leonard, J.D. (Nolo).