Most chapter 13 debtors do not have to pay all of their debts in full through their bankruptcy. But each person’s situation is different. To determine how much you would have to pay depends on several factors, like the types of debts you have and how much money you make.
The Minimum Amount Chapter 13 Payment
It’s useful to start from the bottom and define the “base” amount you’ll have to pay in a chapter 13 plan:
“Priority” unsecured debts must be paid in full through the bankruptcy. The most common types of “priority” debts are certain income taxes (generally, those incurred in the last 3 years) and past-due domestic support (such as child support or alimony). See 11 U.S.C. § 507 for a full list of priority debts.
Certain secured debts, like car loans or some financed personal/household items, must be paid in full—unless you choose to surrender the collateral. Mortgage arrears must also be paid through the bankruptcy.
Note: Depending on the type of property and when you incurred the debt, you are sometimes able to cramdown the amount you have to pay to the fair market value of the collateral.
For example, if you purchased your car more than 2.5 years ago (910 days, to be exact), you can reduce the amount you have to pay on your car to what it’s actually worth. This can be very useful if you’re underwater on your car (like if you rolled a previous car loan into your current one).
If you have assets that are not exempt under applicable exemption law, you must pay unsecured creditors as much as the value of the non-exempt property. This is known as the “best interest of creditors” test.
- For example, you own a car outright that is worth $15,000. Under Nebraska law, you can exempt $5,000 of the car, which leaves $10,000 non-exempt. That means the “best interest” test requires you to pay at least $10,000 to your unsecured creditors through your bankruptcy.
- Remember: “priority” debts (No. 1, above) are also unsecured. Priority unsecured debts are paid before any other general unsecured debts. So, if the best interest test says you must pay $10,000 to unsecured creditors but you also have $6,000 in priority tax debt, the taxes would be paid off first and the remaining $4,000 would be split proportionally among your other unsecured creditors.
In most chapter 13 bankruptcies, the majority of your attorney fees are paid through the plan. This reduces upfront costs, oftentimes to just the cost of the court’s filing fee and credit reports.
The trustee is the person who administers your case and distributes funds according to the chapter 13 plan. Your chapter 13 payment is made to the trustee, who then pays your creditors and fees. The trustee is also entitled to an administrative fee based on a percentage of the funds distributed through the plan, which varies based on district.
Understanding When Your Chapter 13 Plan Payment May Be Higher
In some cases, you have to pay more than the “minimum” amount to your creditors through a chapter 13 bankruptcy. How much more is based on your “disposable income.”
If you have any additional income—after accounting for taxes, insurance, retirement contributions, reasonable living expenses, and the minimum chapter 13 plan amount (e.g., for priority debts, cars, etc. paid through the plan)—then that income must be paid to your other general unsecured creditors.
Keep in mind that this calculation of your income and expenses is not set in stone from the day you file. If your disposable income changes—like if you start making more/less money or your expenses change—you may need to amend your plan to increase or decrease your payment.
Experience and Knowledge Matter
Chapter 13 is complex and calculating a payment amount involves examining several factors. Additionally, each district tends to have unwritten “norms,” complicating it further.
Wherever you live, you should consult with an attorney who practices chapter 13 bankruptcy (not all consumer bankruptcy attorneys do). And when you meet with an attorney, keep an open mind as there may be a different solution from the one you expect.
A good attorney will listen to your goals and concerns, and then examine bankruptcy and non-bankruptcy options with you. It also helps to get multiple perspectives. Many consumer bankruptcy attorneys offer free consultations—you should take advantage of that to get a feel of the attorney’s knowledge, experience, and care.
Let Us Help
Our experienced bankruptcy lawyers can help you determine whether Chapter 13 is a good plan for you. We are not just here to sign off on the paperwork. Instead, we’ll give you honest, experienced advice on this important decision.