Chapter 13 bankruptcy is commonly known as the “reorganization” bankruptcy. Under this chapter of the U.S. Bankruptcy Code, the bankruptcy trustee will reorganize your debts based on priority, and then will require a debtor to make monthly payments, which the trustee will then distribute to creditors. Your repayment plan can last for three to five years, depending on your financial situation. Some debts must be fully repaid during the repayment plan, and the court may discharge any qualified debts that remain upon completion of the plan.
The prospect of a repayment plan can be stressful for debtors who already cannot afford to pay their debts. However, the right Chapter 13 bankruptcy attorney can ensure that your payment requirements are reasonable based on your income and expenses. The following is some additional information about what happens when you file bankruptcy including the Chapter 13 process and repayment plans.
Repayment Plans in Chapter 13 Bankruptcy
Chapter 13 bankruptcy is often used by consumers who have too much monthly to qualify for Chapter 7 bankruptcy. Because you have a regular income, the law requires you to contribute a certain amount to your debt repayment before the court will discharge further debt obligations.
While you retain your property and assets, the court will set a specific payment amount that you must submit each month for the duration of your plan. Making one consolidated payment is preferable to making several - often increasing - payments to multiple creditors each month. Instead of juggling many different payments, you will simply need to make a single payment to the court for three to five years.
How is Your Repayment Plan Calculated?
The calculation of your repayment plan begins with you. As the debtor, you propose a repayment plan that typically offers to repay less than 100 percent of what you owe to your creditors. Past due amounts on secured debts – such as mortgages and car loans -- must be repaid in full. Unsecured debts will usually receive less than 100 percent of the amount owed and sometimes will receive nothing. The bankruptcy court will either approve the proposal or, if a creditor or the chapter 13 trustee objects to your plan, devise a different plan that will repay creditors the maximum amount possible given your income and debt obligations. Depending upon your income, your plan will be for three or five years, with lower income debtors qualifying for a three-year plan, and thus repaying a smaller percentage of their unsecured debts. Your repayment plan will fit within certain parameters:
- The amount of debt you repay can be anywhere from 1 percent to 100 percent of unsecured claims
- Only your disposable income (the amount of your income that does not go toward reasonable and necessary expenses) will be used to repay creditors, and
- Your creditors must receive at least the amount they would receive if you liquidated your assets in a Chapter 7 case.
In determining the amount you will have to repay, the court considers several factors:
- How much disposable income you have
- The amount of debt you have that must be paid in full, such as secured debts
- How much your unsecured creditors would receive in a liquidation of assets under Chapter 7
Disposable income is how much you have after paying reasonable and necessary living expenses out of your monthly net income. Food, for instance, is a necessary living expense, but paying several times the national average on food for the number of people being fed would not be considered reasonable. Expenses such as car payments, mortgage or rent, clothing, transportation, food, secured debts (usually house and car payments) and other such necessities will also be considered in your repayment plan.
The amount left after paying for necessary items is what is considered disposable. Tax debts, arrears on secured debts (such as mortgages), child or spousal support payments, and other secured debts must be repaid in full. If you do not have enough disposable income to repay these in full, you might have to file for Chapter 7 bankruptcy and face the potential liquidation of assets. However, if you can pay all of your secured and priority debts, including bankruptcy trustee fees, what remains of your disposable income must go to unsecured debts.
Your Chapter 13 repayment plan should always be manageable given your circumstances. Your bankruptcy attorney can help you obtain a repayment plan that is right for your situation and that allows you to successfully complete your plan and obtain the discharge of your leftover debts.
Wondering what happens when you file bankruptcy in minnesota?
Chapter 13 requires a repayment plan, but the formulation of that plan can be a flexible process to deal with your particular circumstances. For a free case evaluation to determine how bankruptcy can help you, contact the bankruptcy attorneys of Kain & Scott at 800-551-3292 or through our online contact form. We are available for convenient video meetings if you cannot meet in person and will explain to you exactly what happens when you file bankruptcy.