Chapter 13 payments explained

I’m a fan of Chapter 13 and each time I pitch 13 to a client, I need to explain that though it is called a “repayment plan”, you’re likely repay only a fraction of your debt.

Here’s how your lawyer determines just how much you have to pay to the trustee for the life of your plan. It is the largest of these three numbers:

1. The amount your creditors would get if your case were filed under Chapter 7. To get this number, you list your assets, apply the exemptions available, and subtract from the value of the non exempt assets a Chapter 7 trustee’s expenses of administering the case. This is the Best Interests of Creditors test.
2. The amount of your monthly disposable income after payment of your living expenses multiplied by the length of your plan. This test looks at your ability to pay, calculated either by Form 22C or Schedules I and J, depending which side of the means test fence your judges come down on. This is the Best Efforts test.
3. The amount necessary to pay in full priority claims, car loans, and mortgage arrears. The Bankruptcy Code requires that priority claims, such as recent taxes and family support be paid in full. The debtor wants the car paid off and the mortgage default cured.

Figure out which of these tests produces the largest number, and that’s what the creditors must get. Probably your Chapter 13 plan pays some or all of your attorneys fees and the commission of Chapter 13 trustee.

For many of my clients, payments to Chapter 13 plans are token payments and we selected 13 just to finance the attorneys fees required by the amendments of 2005 to the Bankruptcy Code.