Chapter 13 Bankruptcy Plan: What It Is And How It Works

At the start of a Chapter 13 bankruptcy filing, you will fill out several forms, which are generally the same ones that would be filled out if you were filing for Chapter 7 bankruptcy. On these forms, you will give information about your property, your income, your debts, and your monthly expenses (see our article about the bankruptcy schedules for more information). These forms must be filed with a bankruptcy court in your jurisdiction, and they must include a practical and feasible plan in which you’re proposing a strategy for repaying your debts during the repayment period following your filing for bankruptcy.

Also, you will need to file a tax return for the prior year, along with proof of the fact that you have done the same for the four years before you file for bankruptcy. You will also need to include a certificate which shows that you have attended credit counseling at an agency which has gotten approval from the United States Trustee; a credit counseling course is required regardless of whether you pursue a Chapter 13 bankruptcy.

Pursuant to this kind of repayment plan, you will usually make payments toward your debts each month, and these payments will be submitted to the bankruptcy trustee who is overseeing your bankruptcy case. Then, the trustee will submit the payments to your creditors, as well as collecting a statutory commission, the amount of which will depend on how much you are paying according to your plan. It is imperative that you submit each payment on time, so that you may successfully complete the bankruptcy plan and have the remainder of your debts discharged.

What You Will Need to Pay

While some of your creditors will end up receiving the total of what you owe them, other creditors might get only a portion of what you owe, or none of it whatsoever. Usually, a Chapter 13 bankruptcy plan will need to include provisions for the following:

Administrative claims that will be paid in full. These claims include:

• A $281 filing fee
• A bankruptcy trustee’s commission, which can range from three to ten percent of every one of your monthly payments, and
• Attorney’s fees, provided that you have enlisted the help of a bankruptcy attorney to assist you with your Chapter 13 bankruptcy.

Priority debts that will be paid in full. These debts include:

• Overdue spousal or child support;
• The majority of tax debts, including both federal and state income tax;
• Salaries, commissions, or wages you might owe to your employees; and
• Any outstanding contributions you might owe to an employee benefit fund.

Also, any amount you may have defaulted on a home mortgage will need to be paid in full if you would like to hold on to your home, rather than having it foreclosed upon. Defaults on other secured debt will also need to be paid in full if you wish to hold on to the property. Car payments are included in this category.

Any debts which are unsecured (debts for which there is no property as collateral) are basically the last to be paid under a plan and those creditors receive anywhere from nothing to being paid in full. The amount you will end up paying will depend on several things:

• the total worth of your property which is not considered “exempt” for bankruptcy purposes (this is the amount of property the is subject to liquidation under Chapter 7, see our article about New Mexico bankruptcy exemptions for more infomation);
• how much disposable income you will have every month to use to satisfy your debts; and
• the duration of your bankruptcy plan.

Your Disposable Income

Your bankruptcy plan will need to include a commitment to putting all of your leftover income- any income which is not budgeted for bills and living expenses- toward your outstanding unsecured debts like credit card bills or medical expenses. Social security income is not considered for disposable income analysis. Additionally, it is important when creating your budget that you make realistic expenditure estimates, as your budget is something that you will have to live within for several years.

The Duration of Your Bankruptcy Payment Plan

Your level of income will determine how long your bankruptcy payment plan will last. If you make more than the median income (averaged out over the previous six months) for households of the same size within your home state, then your repayment plan has to last at least five years. Alternatively, if you make less than the median amount, your repayment plan might last only three years even if that is not enough time to fully repay your unsecured debts.

Also, keep in mind that “current” income per month could be out of date. Since the monthly income discussed above is only an average, it could actually be more when you file for bankruptcy. For example, if you were abruptly laid off two months before you file for Chapter 13 bankruptcy, then your monthly income at the time of filing could be very low, or nothing, when compared to your average income for the previous six months.

You Won’t Have To Surrender Your Property

When you file for Chapter 13 bankruptcy, you will not be made to surrender your property. Rather, you will be made to repay the debts on that property. As a trade-off for allowing you to retain your property, your bankruptcy repayment plan must include provisions stating that you will pay your creditors at least as much as the value of your nonexempt property. In fact Chapter 13 bankruptcy is often used in lieu of Chapter 7 when filing a Chapter 7 would require liquidation of assets. If you are unsure of which bankruptcy chapter is right for you, then be sure to contact our office for a free consultation.