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How Does Chapter 13 Bankruptcy Work?

Chapter 13 bankruptcy is a repayment plan which proposes to the court to pay back some or all of your outstanding debt to creditors. In most cases you will only pay back a portion of the outstanding debt to creditors. In a Chapter 13 bankruptcy a 36 to 60 month payment plan is proposed to the court to repay your debt. A 36 month plan is proposed to the court if your gross income is below the median income for your state. If your gross income is above the median income for your state then a 60 month payment plan will be proposed to the court.

How Your Payment Plan Works?

Your Chapter 13 Bankruptcy plan will propose an amount that you will pay back to creditors and will state the amount of time in which you will pay back the amount. The amount that you will propose to pay back to creditors can range from 0% to 100%. Once your bankruptcy case is filed the first plan payment is due 30 days after the case is filed. The trustee appointed to your bankruptcy case will distribute payment to your creditors.

How is Your Monthly Payment Calculated?

The monthly payment amount that will be required for your Chapter 13 bankruptcy plan is based on the largest amount calculated from the 3 formulas below:

1) Disposable Income- Generally the monthly payment for a Chapter 13 bankruptcy is calculated based on your income minus national standards deductions for items such as transportation, housing, food, utilities, etc. and secured debt payments for your home mortgage and car payments

2) Priority Debts - Your Chapter 13 bankruptcy plan must provide for the repayment in full of priority debts. Priority debts include generally federal and state income taxes and domestic support obligations such as spousal and child support.

3) Best Interest of Creditors – The plan must at least give unsecured creditors an amount equal to what they would have received from a Chapter 7 bankruptcy liquidation. This amount is calculated by determining what is the total value of any unexempt assets. Below is an example of how this test works:

  • Example: A debtor who files for bankruptcy in California has a number of assets that the applicable bankruptcy exemptions can protect. The debtor also has a painting worth $10,000 that the bankruptcy exemptions are not able to protect. If this person were to file for Chapter 13 bankruptcy his unsecured creditors would be entitled to receive at least $10,000 (minus administrative expenses from the trustee) over the life of the plan.

Once each of these items is examined, the monthly payment is determined by finding which of these formulas yields the highest payment amount.

What Happens at the End of the Plan?

Once you complete your repayment plan term then the remaining dischargeable debt that was not paid back during the term of your plan will be discharged. This means that you will no longer be personally liable for the payment on these debts.

  • Example: A person owes $40,000 in credit card debt and medical bills. A payment amount of $300 monthly is proposed based on their disposable income. The debtors income is above the state's median income therefore his payment plan is for 60 months. If the debtor completes his plan he would have paid $18,000 over the term of the plan. After 60 months the debtor has paid back less than half of his outstanding debt. The remaining debt would be discharged at the end of his Chapter 13 payment plan.

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