How Much Debt is Eliminated Under a Chapter 13 Repayment Plan?
Under a Chapter 13 plan, a person makes monthly payments on their debt to the bankruptcy trustee. The trustee distributes the money to the creditors. It is critical to make every payment in order to complete the 3-5 year repayment plan and have any remaining unsecured debts wiped out.
Priority and Secured Debts to beCompletely Repaid
Some debts must be completely repaid and are not reduced or eliminated. These include:
- “Priority Debts:” back alimony and child support, most tax debts, and wages owed to employees.
- First mortgage payments, but only if you want to keep your home.
- Car payments, if you want to keep your vehicle. If you owe more than the car is worth, the bankruptcy court may reduce your car loan to the car's current value on the open market.
- Secured debts, which are debts where the creditor has the right to repossess the property that has "secured" the debt if the debt is not repaid. However, if you owe more than the item is worth, the bankruptcy court may reduce the debt to the current value of the property.
- Administrative claims: bankruptcy filing fee, bankruptcy trustee commission, and attorney’s fees.
Unsecured Debts
- The amount of unsecured debt that is repaid varies for each individual based on the person’s income, the value of the property they own, and the length of their repayment plan. Common unsecured debts include credit cards and medical bills.
- Under Chapter 13 bankruptcy, the person must make a commitment to use any left-over income to make payments toward their unsecured debts. This left-over income is called “disposable income.”
- The amount of disposable income varies for each person depending on their income, expenses, and household size. A person’s disposable income is the difference between their income and what the law considers to be “allowable expenses.” Not all expenses are "allowable expenses."
- In a Chapter 13 repayment plan, a person is required to pay their disposable income toward their unsecured debts. If a person has a high amount of disposable income each month, they may be required to repay all of their unsecured debt. On the other hand, if a person has a lower amount of disposable income, they will repay a smaller portion of their unsecured debt.
- Once a person successfully completes their repayment plan by making all payments over the 3-5 year repayment period, any remaining unsecured debts eligible for discharge will be wiped out. Under this method, some people’s unsecured debts will be repaid in full while others might repay only a fraction of the amount owed.
How Long a Chapter 13 Repayment Plan Lasts
The length of a person’s repayment plan depends on their income. The court looks at the person’s current monthly income. This amount is calculated by averaging the person’s income for the 6 months prior to filing bankruptcy. The person’s income is then compared to the median monthly income for households of the same size in California.
If the person’s income is more than the median state income, their repayment plan must last for 5 years.
If the person’s income is less than the median state income, they may use a 3 year repayment plan subject to the court’s approval.
Reasons to File Chapter 13 Bankruptcy Rather Than Chapter 7
If you are in one of the following situations, Chapter 13 may be right for you.
- You do not qualify for Chapter 7 bankruptcy because your income is too high:
- In Chapter 7, the person filing bankruptcy must pass a complex “means test.” The court looks at the person’s income, certain allowable expenses, and debts to determine whether the person has the financial means to fund a Chapter 13 repayment plan. If so, the court does not allow the person to file Chapter 7 bankruptcy. In this case, the court will require that you use Chapter 13 if you want to file for bankruptcy.
- You are behind on your first mortgage or your car payments, but want to catch up so you can keep your property:
- In your Chapter 13 repayment plan, you can catch up on back mortgage or car payments. The back payments are paid over the course of your 3-5 year repayment plan in addition to your regular payments. This allows you to catch up over time while keeping your home or car.
- You owe back taxes to the IRS that cannot be discharged:
- The back taxes can be repaid through your Chapter 13 plan. Once your case is filed, wage garnishments stop and all interest and penalties freeze. You will be allowed to repay the taxes over your 3-5 year plan without your wages being garnished or incurring additional interest/penalties.
- You have property that cannot be exempted in Chapter 7 bankruptcy:
- In Chapter 7 bankruptcy, the law allows you to keep property only up to a certain value. If you have a home with equity and valuable possessions (such as paid-off vehicles), all of your property may not be protected under the exemptions. In Chapter 7, non-exempt property may be sold by the trustee to repay your creditors. In Chapter 13, you do not have to give up your property. Instead, you use your future income to repay your creditors through a court-approved repayment plan.
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