In order to reorganize your debt under chapter 13 bankruptcy, you make monthly payments to a trustee over a period between 36- to 60-months. How much do you pay, though? Well, it’s not not complicated….
The Chapter 13 plan incorporates payment on four primary classes of debt. They are:
1. Secured debts in arrears (such as delinquent mortgage dues): If you wish to reinstate your mortgage (to save your home from foreclosure), the chapter 13 bankruptcy will repay the mortgage arrears (without interest) over 36- to 60-months;
2. Secured debts that are current (like auto loans): vehicle loans can be paid outside the chapter 13 bankruptcy plan (directly to the lender); however inclusion in the chapter 13 bankruptcy might allow payoff at reduced principal and lengthen the payment term (up to 60 months) to reduce monthly costs;
3. Priority debts: these are debts that aren’t dischargeable, such as recent taxes; at least the principal has to be paid in full (over the course of up to 60 months) in the chapter 13 bankruptcy; and
4. Unsecured debts: the chapter 13 plan designates a percentage paid to unsecured creditors (like credit cards, medical bills, personal and pay day loans). The percentage may be as low as 0%. The unpaid balance of the debt is forgiven (with the exception of certain unsecured debts like student loans).
The percentage the plan pays to unsecured creditors is based upon the highest of the following three measures:
i. Your actual disposable income (meaning your net income less your actual (reasonable and necessary) living expenses;
ii. Your “theoretical” disposable income, which is a function of your income less standardized living expenses (IRS- and Census-derived allowances designed to reflect reasonable living costs); or
iii. The hypothetical sum creditors would be paid if you were to alternatively file Chapter 7 Bankruptcy IF it were the rare chapter 7 bankruptcy in which assets were liquidated to pay creditors. Property could be sold in chapter 7 bankruptcy if its value doesn’t fall within bankruptcy exemption allowances, which seldom happens.
Since the above measures are arguably subjective, you need a diligent bankruptcy attorney to advocate for the lowest payment possible. To confirm your chapter 13 plan (and cement the amount), your bankruptcy attorney must overcome any and all objections of the trustee, creditors and the court. Whereas chapter 13 bankruptcies routinely fail across the industry, my confirmation rate (with optimally low payments) has been nearly perfect. We will work in earnest to confirm a payment plan that’s carefully crafted to be as fair and affordable as possible.