The Chapter 13 Bankruptcy Plan
The Chapter 13 is a repayment plan. However, you do not necessarily have to pay back 100 percent of your debt. More importantly, you do not necessarily have to pay back all of your interest. Therefore, a major benefit of the Chapter 13 plan is that even if you have to pay back all of your debt, in most cases, you would pay a less amount then what you would have to pay outside of bankruptcy. Below are different scenarios of Chapter 13 cases.
3 or 5 year Payment Plan
Before we go into the details of the payment amount itself, the first thing we have to determine is whether your Chapter 13 plan is going to last for 3 or 5 years.
This depends on whether you pass the “means test.” More information on the means test can be found here: Means Test. If you pass this test then you will qualify for a 3 year plan. If you don’t then your payment plan will last for 5 years. Once we determine whether you will have to make payments for 3 or 5 years, then we can go on to the actual payment amount.
How much will have I have to pay each month?
A chapter 13 is unlike a normal repayment plan. For example, when you purchase a car, you continue to make payment until the amount is paid in full. The payment amount depends on how much you ow the auto finance company.
In a Chapter 13, the amount you pay each month can depend on a number of factors. These are: your disposable monthly income (DMI), equity you might have in your property and the amount of priority debts you owe.
Disposable Income Plan
The first type of plan amount is what I call the disposable monthly income (DMI) plan. This is what most people fall into. This plan can range from you paying nearly 0 to 100 percent of your debt DMI is the money you have remaining at the end of the month after you subtract all necessary expenses from your gross income. Necessary expenses included taxes, insurance, mortgage and car payments. It also includes food, utilities and other items that the government believes is necessary. After deducting these expenses, the number that is left over is your plan payment. For example, if you make $5000 gross monthly, and your necessary expenses are $4500, then your monthly plan payment will be $500.
The benefit of the Chapter 13 in this case is that you will not necessarily have to pay 100 percent of your debt and your plan payment is generally less than what your normal monthly unsecured debt payments would be.
Most people that file for Chapter 13 Bankruptcy, can barely make their monthly minimum payments for their credit cards. The Chapter 13 will allow them to pay only what they can afford each month. After the Chapter 13 plan is complete, any remaining unpaid debt will be discharged like a Chapter 7.
This is a plan used when you have equity or assets that are above the limit for which you can protect in bankruptcy. Equity is your property and money that is free and clear from any liens. For example, if your car is paid in full, then the value of the car is your equity. Also, if your home is worth $100k, and you owe $80k, then the house has $20k worth of equity. The easiest way to describe this plan, is that you will pay the court the amount of equity you have over Chapter 13 plan period. In the above example, if the car is worth $20k, and you have no other equity except for the home, then you will have to pay back at least $40k over the life of the plan. The reason behind this equity plan is that if you filed a Chapter 7 bankruptcy, then the equity would have been liquidated to pay your creditors. Therefore, if you want to save your equity, then the court requires you to pay that at least the amount of your equity to your creditors.
Priority Debt Plan
In many cases people file Chapter 13 to structure their priority debt. Priority debt includes back taxes, child support arrears and other debts other debts of this nature that are required to be paid in full under the bankruptcy code. When you file a Chapter 13, these debts must be paid in full during the course of the Chapter 13 plan. For example, if you owe $10k in back taxes and $10k in child support, then you will have to pay at least $20k over the 3 or 5 year Chapter 13 plan.
100 Percent Plan
The one hundred percent plan is for debtors who disposable monthly income is enough to pay 100% of their debt. The benefit of the 100% plan is that no interest accrues during the length of the plan. People who find themselves in this plan have cards with high interest rates and cannot keep up with the monthly payments. Filing the Chapter 13 will normally reduce their overall monthly payment and save themselves thousands of dollars worth of interest.
Administrative claims will be paid 100%. These include:
a) Filing Fee
b) The trustee’s commission (3% to 10% of each monthly payment), and
c) Attorney’s fees, if you hire an attorney for help with your Chapter 13 bankruptcy.
Priority debts will be paid 100%. These include:
a) Back alimony and child support
b) Most tax debts (including state and federal income taxes)
c) Wages, salaries, or commissions you owe to employees, and
d) contributions you owe to an employee benefit fund.
a) Mortgage defaults will be paid 100% if you want to keep your house.
b) Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments fall into this category.