Your Chapter 13 Bankruptcy Repayment Plan
A critical part of your Chapter 13 filing is your repayment plan. This takes into account your expected income, and all of your secured and unsecured debts, and works out how to deal with them all. Secured and unsecured debts are treated quite differently.
For your secured debts, you must catch up on any overdue payments, as well as continue to make your regular monthly payments on time, through a repayment plan that lasts three to five years. You also must pay your unsecured creditors a portion of what you owe them through that repayment plan. Here is how the repayment plan is calculated:
Length of the repayment plan
Although the Means Test is not used in Chapter 13 for determining eligibility, it is still used in determining how the repayment plan will work. As part of the Means Test, you must compare your own income to the state median. If you earn less than the state median, your Chapter 13 repayment plan will probably last for three years; if you earn more than the median, it will last for five years. If your income is extremely low, so it does not appear that you will be able to afford the repayment plan, you will probably not be approved for Chapter 13.
How much will I have to repay?
You will have to repay all of your secured debts as well as arrears, and all of your priority debts. You will have to repay a portion of your unsecured debts. Here is how your repayments are calculated:
Repaying your secured debts
You must catch up on all arrears and penalties and any other overdue charges related to your secured debts through the course of the repayment plan, as well as continue to make your regular scheduled payments on those loans. If you are not able to or prepared to make up all of the arrears on your secured debts, you will have to give up the collateral on those loans (e.g., your house or your car).
For example, if you want to keep your home: let’s say that your regular mortgage payment is $1,800 per month, and that you are behind by three months, as well as owe $600 in late fees and penalties. Therefore, you are behind by a total of $6,000. A five-year repayment plan would have to allow for you to be able to pay $1,900 per month towards keeping your home: your regular $1,800 mortgage payment, plus an extra $100 to make up the $6,000 arrears over those 60 months (plus, of course, payments towards any other secured debts).
If the court approves your repayment plan, your creditors will be bound by that plan. As long as you are making your scheduled repayments in full and on time, your creditors cannot initiate any collection actions such as foreclosure or repossession.
Repaying your unsecured debts
You must also repay a portion of your unsecured debts. There are two different ways that what that portion should be is calculated.
First, there is a minimum repayment requirement. Your unsecured creditors should receive at least as much as they would have received if you had filed Chapter 7: and that is the value of your non-exempt assets. So, even though you are not required to sell your non-exempt assets through Chapter 13, it is extremely important to list every piece of property that you are allowed to exempt, because the more you can exempt, the less you pay.
For example, let’s say you owe $10,000 in credit card debt, and $5,000 in medical debt. And let’s say that you own a painting valued at $3,000 that you cannot exempt and that you want to keep for sentimental reasons. You have a total of $15,000 in unsecured debt, and you will be required to repay at least $3,000 of it back.
When listing your non-exempt assets, make sure that you state their value as their “liquidation value” - which is not the same as what you paid for them, or how much a new replacement item would cost. Liquidation value is how much that item would sell for today. So if you purchased a brand new carbon-fibre racing bicycle two years ago for $10,000, which you are not able to exempt, its liquidation value would be substantially less than what you purchased for. If that two-year-old used racing bike would sell fairly on the market for $5,000 today, that would be the liquidation value that you use for your calculations.
The second part of the calculation of how much you must pay your unsecured creditors looks at your disposable income. In summary, your disposable income is how much you will have left over each month after paying your required payments to your secured creditors, as well as essential expenses such as rent and food. (In detail, it’s more complicated than this - we’ll go over how to calculate it in the following section).
The idea is that, if you have money left over each month after making your required payments, and you are in the midst of a bankruptcy repayment plan, that leftover “disposable income” should not be going towards luxury items or vacations or even your long-term savings: it should be going towards repaying your creditors. Therefore, calculating your expected disposable income is an important part of coming up with your repayment plan: all of your disposable income over the course of that plan will be expected to go to your unsecured creditors.
Other debts that must be repaid through your plan
Your repayment plan must also cover 100% of your priority debts (such as back alimony, child support, most tax debts, wages or commissions you owe to employees, and any contributions you owe to an employee benefit fund). It also must cover paying 100% of all of the administrative fees related to filing bankruptcy, as well as 100% of your attorney’s fees.
Calculating disposable income
Calculating your disposable income is not as simple as it sounds - and how it is calculated depends upon whether your Current Monthly Income is higher or lower than your state’s median income (refer back to our article on the Means Test to see how to calculate this).
First, you must determine your Current Monthly Income, and compare it to your state’s median. You will have already done this as part of the Means Test, before you filed for bankruptcy.
If your income is lower than the state median
Take your Current Monthly Income, and subtract from it any monthly payments you make towards child support, foster care support, or disability payments for the care of a child. Then subtract:
- any reasonable essential living expenses for yourself and your children, such as rent, food, clothing, utility bills, medical or dental expenses
- payments towards secured debts, such as your mortgage or car loan
- payments towards your priority debts
- payments for arrears that will be required through your repayment plan.
Any income that is left after making these payments is your disposable income. You will be required to pay that amount every month to your trustee, to be allocated between your creditors, through the course of your repayment plan.
If your income is higher than the state median
Use the calculation method outlined above, but instead of using your actual living cost payments, you will have to use expense limits set by the IRS. You may also be allowed to subtract additional payments to bring your disposable income down, such as:
- child support and alimony payments
- out-of-pocket health care expenses
- some tax payments, such as income tax, self-employment tax, Social Security tax and Medicare tax
- mandatory payroll deductions
You are best to work with an attorney or an accountant in making this calculation. Any income left after subtracting these deductions is considered to be disposable income, and will be required to be paid towards your secured creditors through the course of your repayment plan.
If you know your disposable income will change
In many cases, a debtor knows that their disposable income may change: your Current Monthly Income as calculated over the past six months is often not the same as what your actual income is or will be. In a historic 2010 U.S. Supreme Court decision, known as Hamilton vs. Lanning, the court ruled that “when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.”
This is important, because if you know that your future income will be lower than the income you received over the last six months, you will not be able to afford a repayment plan calculated according to your Current Monthly Income. For example, in the reference case, Lanning had received a buyout from her employer in the previous six months. On paper, it looked like she was earning a high income, when in fact her future expected income was well below the state median. If you know that your income will drop, it is important that you document that for the court, so that your future income level is used in calculating your repayments rather than your past income.
Having your repayment plan approved
You cannot just come up with any repayment plan: your repayment plan must be approved by the court. The bankruptcy court does not want to see you back in six months because you were unable to keep up on your payments! They will review all of your financial information very carefully, to make sure that your repayment plan is realistic and affordable for you.
As a reminder, here are the principal aspects that will all need to be met in order to get your repayment plan approved:
- you will have caught up on all arrears and other charges on your secured debts by the end of the repayment plan,
- you will also continue to make all scheduled payments on secured debts, such as mortgages or car loans, through the course of the plan
- you will have paid your unsecured creditors a minimum of the total value of your non-exempt assets
- all of your monthly disposable income will go to your unsecured creditors through the course of the plan
- your expected monthly income is sufficient to cover all of the above payments.
Although your income may be low enough to qualify you for a three-year plan rather than a five-year plan, in some cases you still may not be approved for a three-year plan because you cannot afford it. This could happen if you cannot afford to catch up on your arrearages over the three years (36 months), or if you do not have enough disposable income to cover the minimum required payments to your unsecured creditors (the value of your non-exempt assets). In this case, one option to get your plan approved is to convert it to a five-year plan - making your monthly payments smaller.
If you cannot come up with a plan that you can afford, and that adequately covers the minimum repayments for all of your secured and unsecured debts as described above, your plan may not be approved at all. Your only option then may be to file Chapter 7.
If your circumstances change
Five years is a long time... and it is possible that, over the course of your repayment plan, your circumstances change. A plan that was once affordable to you may become unaffordable. This might happen if your income unexpectedly drops, for example, if you are forced to take a lower-paying job or if you lose your job.
If your circumstances change, you should contact your trustee as early as possible to see if you can work out alternatives. Some options to avoid defaulting on your plan are:
- give up assets that you were attempting to keep, such as your home or your car, so you can modify your plan to either lower your monthly payments or lower the term length
- sell assets that you had hoped to keep through the plan, and use those funds to top up payments
- modify your plan by lengthening the term from three years to five years, so you reduce your monthly payments
- request a moratorium, which is a break from having to make payments for up to 90 days, provided that your financial setback is only temporary.
Note that if you have to modify your plan, that modification must be approved by the court. If you foresee problems in meeting your repayment plan obligations, contact your trustee as soon as possible, while you still have options.
Buying or selling property while in Chapter 13
You are not permitted to use credit, or otherwise borrow money or undertake more debt, while under your Chapter 13 plan, and you may not obtain or use credit cards. You may not co-sign a loan for someone or otherwise guarantee any debt. If you are in an emergency situation and need to use credit, you must go to court and seek the judge’s permission to do so.
You may not buy, sell, or refinance any property while under your plan unless you obtain court approval first. If you try to do so without approval, your case may be dismissed. If you receive any profit from a sale or a refinancing, some or all of that profit may be used to repay your creditors.
If you plan to sell property to pay part or all of your plan, you must notify your trustee in writing to request a payoff at least 10 days before the sale closes, or the sale’s closing may be delayed.
Read on for our next article in this series: Bankruptcy strategies