United States Bankruptcy Court SignChapter 13 bankruptcy is based on the principle of debt reorganization, rather than asset liquidation—you take all of your debts, put them into a pile, and then make repayments into that pile over a three to five year period. (If you need more information about the basic difference between Chapter 7 and Chapter 13, look here.) The central concept of a Chapter 13 is that your repayments aren’t based on what your creditor’s say that you owe, rather, the payments are based on your disposable income. The chief benefit of this approach is that a Chapter 13 debtor has the opportunity to account for important daily expenses (i.e. gas, food, rent, clothing, cell phone bills, utilities, etc.), before making payments to their creditors.

This basic conceptualization of a Chapter 13 plan payment, however, does not adequately capture the practical impact of different varieties of debt. When it comes to secured debt and unsecured “priority” debt, understanding the components of a Chapter 13 repayment plan can be difficult.

A Threshold Question: Are You Above or Below Median?

The first question that we ask in a Chapter 13 context has to do with your “commitment period” under 11 USC §1325(b)(4). In other words, do you qualify for a three year bankruptcy, or are you required to stay in your Chapter 13 bankruptcy for five years? Learn more about means testing and median income threshold in our previous post, here. If your household income is below-median, you qualify for three-year Chapter 13; if your income is above-median, then you are required to stay in your Chapter 13 for five years.

As importantly, this determination bears heavily on the calculation of your disposable income for the purposes of your Chapter 13 plan. If you are above-median, then your disposable income is determined on the basis of the subsequent means test calculation (see more here). If you are below the median for your household size, then your disposable income is calculated in a less formulaic manner, based on the self-reporting that you do on Schedules I and J. Always keep in mind that all of your disposable income must be included in your plan in order for the court to confirm it. Consequently, determining your disposable income can be an important exercise in anticipating your potential payment in a Chapter 13 bankruptcy.

What about my House and Car Payments?

A common misconception is that Chapter 13 bankruptcy can eliminate (or drastically reduce) car or house payments to make them more manageable. For most debtors, this is untrue, although there are some uncommon scenarios where you can have your car payment reduced (ask your attorney about cram downs) or a second mortgage payment extinguished (ask your attorney about lien stripping).

The general rule is that you should expect to make payments for those houses or cars (or other secured debt) which you plan to keep through the bankruptcy. If you want to keep your house, you better be prepared to make the regular mortgage payment. Same goes for the car, unless you are eligible for a cram down—even in the “cram down” context, you will still have to make payments on the secured debt.

Of course, arrearages come into play here as well. If you are behind on your house or car payment, you can plan on paying back that arrearage over the life of your bankruptcy. Remember that Chapter 13 rearranges secured debt, but rarely does it discharge it altogether. If you want to keep your stuff, and it is pledged as collateral, you are probably going to be paying that debt back in full.

What is Priority Debt?

The most common examples of priority unsecured debt are monies owed to the government (i.e. taxes) and payments/arrearages owed as part of a domestic support obligation. Domestic support obligations commonly include child support and/or alimony payments. There are certainly other kinds of priority debt, a list of which you can find here. If you owe arrearages on unsecured priority debt, you should expect to pay those arrearages back over the life of the bankruptcy.

Tell Me How Much.

Unfortunately, it is rarely so easy. Even in the event that you file a Chapter 13 bankruptcy, the trustee can, and often does, modify the proposed repayment amount. While every Chapter 13 plan is different, you can expect to pay the following in your Chapter 13 plan:

  1. Trustee’s Fees;
  2. Attorney’s Fees;
  3. Regular Payments on Secured Debt (for property you intend on keeping);
  4. Regular Payments on Priority Debt (typically for an ongoing domestic support obligation);
  5. Repayment of Arrearages on Secured Debt;
  6. Repayment of Arrearages on Priority Unsecured Debt;
  7. Payment of any and all disposable income left over.

If it isn’t clear from the above, crafting a plan in a Chapter 13 bankruptcy can be a complex and client-specific exercise. Our office offers a free bankruptcy consultation for clients who are interested in learning more about Chapter 13 plans or any other aspect of bankruptcy. Please give our office a call today to arrange yours (336-996-4166).