How Much Are Chapter 13 Bankruptcy Payments?
Understand the financial realities of Chapter 13 bankruptcy. Learn how repayment plans are set, what they include, and the approval process.
Chapter 13 bankruptcy offers individuals a structured path to financial recovery, allowing them to manage overwhelming debt through a court-supervised repayment plan. This type of bankruptcy is designed for individuals with a regular income who wish to repay all or a portion of their debts over a defined period, typically three to five years. Through this process, debtors can often retain valuable assets that might otherwise be liquidated in a Chapter 7 bankruptcy. This article clarifies how the monthly payments within a Chapter 13 plan are determined.
Factors Determining Payment Amount
The calculation of a Chapter 13 monthly payment involves several interconnected elements, starting with an assessment of the debtor’s financial capacity. A primary determinant is the debtor’s “disposable income,” which is the income available for debt repayment after necessary living expenses. This amount is established through the “means test.”
The means test evaluates the debtor’s current monthly income (CMI) over the six months before filing. From this, allowed living expenses are deducted based on IRS standards and actual expenses. The remaining amount is disposable income, setting a minimum for payments to unsecured creditors.
Secured debts, like home mortgages or car loans, also influence payment amounts. If a debtor wishes to keep collateral, the plan must provide for regular payments and cure any existing defaults. For example, missed mortgage payments can be spread over the plan’s life to avoid foreclosure.
“Priority debts” must be paid in full through the plan. These include recent income taxes, past-due child support, spousal support, and administrative expenses like attorney and trustee fees. Full repayment of these debts is required for plan confirmation.
The “best interest of creditors” test also impacts the payment. It requires unsecured creditors to receive at least as much under the Chapter 13 plan as they would if the debtor’s non-exempt assets were liquidated in a Chapter 7 bankruptcy. If a debtor has non-exempt property, this test can establish a minimum payment for unsecured creditors, even with low disposable income. This ensures fairness to creditors by preventing debtors from using Chapter 13 to pay less than what would be available through liquidation.
The repayment plan’s duration directly affects the monthly payment. Chapter 13 plans typically last between 36 and 60 months. If a debtor’s current monthly income is below their state’s median income, the plan usually lasts three years. If income exceeds the state median, the plan generally extends for five years. Debtors qualifying for a three-year plan may choose a five-year plan to lower monthly payments.
What the Payment Covers
The single monthly payment in a Chapter 13 plan is distributed to cover various debts and administrative costs. This payment acts as a central fund from which the court-appointed trustee disburses money to creditors. A portion of each payment compensates the Chapter 13 trustee for administering the plan, with fees typically ranging from 0% to 10% by judicial district.
Secured debt payments, such as for mortgages or car loans, are often channeled through the trustee as part of the monthly payment. This covers both regular payments and past-due amounts. For instance, if a debtor is behind on their mortgage, the Chapter 13 plan can include a schedule to catch up on these arrears while maintaining current payments, which helps prevent foreclosure. Some secured debts, like regular mortgage payments, may be paid directly by the debtor outside the plan.
Priority debts are paid in full through the Chapter 13 plan before general unsecured creditors receive distributions. These include recent tax liabilities, past-due child support, and alimony. The plan ensures these claims are fully satisfied over its duration.
After trustee fees, secured debt payments, and priority debt payments, any remaining disposable income is distributed to general unsecured creditors. This category includes credit card balances, medical bills, and personal loans not secured by collateral. The amount these creditors receive varies; they may receive only a fraction of what is owed, with any remaining balance discharged upon successful plan completion.
Attorney fees for the bankruptcy filing can also be incorporated into the Chapter 13 repayment plan. This allows debtors to pay legal costs over time through the monthly plan payment, making legal assistance more accessible.
Creating and Approving the Payment Plan
Establishing a Chapter 13 payment plan begins with the debtor, usually with their attorney, drafting a detailed proposal. This document specifies the monthly payment amount, identifies creditors to be paid, and outlines the repayment period.
The proposed plan, along with the bankruptcy petition and other financial schedules, is filed with the bankruptcy court. Debtors are typically required to begin making proposed plan payments to the Chapter 13 trustee within 30 days of filing, even before formal court approval. This demonstrates commitment to repayment.
After filing, a “meeting of creditors,” also known as a 341 meeting, is scheduled, usually 21 to 50 days later. During this meeting, the debtor appears under oath to answer questions from the Chapter 13 trustee and attending creditors regarding their financial affairs and the proposed plan. This meeting allows for initial review and clarification.
The Chapter 13 trustee reviews the proposed plan for feasibility and compliance with bankruptcy law requirements, including the disposable income test and the best interest of creditors test. Based on this review, the trustee typically recommends plan confirmation to the court.
Creditors can object to the proposed plan if they believe it does not meet legal requirements or is unfair. Objections can lead to negotiations or modifications to address concerns. The court considers these objections during the confirmation hearing.
The final step is the confirmation hearing, typically held within 45 days after the 341 meeting. During this formal court proceeding, the bankruptcy judge reviews the proposed plan, considers objections, and decides whether to “confirm” or approve it. If confirmed, the plan becomes legally binding on both the debtor and creditors. The debtor is then obligated to make monthly payments as outlined for the entire duration.