05 Mar How Are Chapter 13 Bankruptcy Plan Payments Calculated?
I’m a fan of Chapter 13 bankruptcy because it provides for a great deal of flexibility in reorganizing your finances.
That said, I’m aware that Chapter 13 isn’t always easy to explain.
The Chapter 13 Bankruptcy Plan is tough to understand.
A payment plan, after all, often sounds as if it entails repaying your debts in full.
Not necessarily so.
In Chapter 13, You Seldom Pay In Full
Each time I pitch a Chapter 13 Bankruptcy plan 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 Chapter 13 bankruptcy Plan.
It is the largest of these three numbers:
- 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.
- 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.
- 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.
Your Chapter 13 Bankruptcy 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. Often, we choose a Chapter 13 bankruptcy over the Chapter 7 option to finance the legal fees so they can get their case filed more quickly than would otherwise be the case.
For other clients, Chapter 13 bankruptcy makes the most sense because it enables them to keep their property and preserve their ability for file for bankruptcy again later if the need arises.
Regardless, the key point is the your Chapter 13 bankruptcy Plan payments are calculated to make life easier for you – not more difficult. Sitting down with an experienced bankruptcy attorney will give you the opportunity to map out a course of action that will accomplish your goals.
Image credit:Aaron Kyle
Cathy Moran, Esq.
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