How Does Chapter 13 Work?
The concept in Chapter 13 is that the debtor makes payments each month to the Chapter 13 trustee. The trustee then distributes these payments to creditors in accordance with a Plan that the debtor has proposed and that the court has approved. When all the payments under the plan have been made the debtor gets a discharge from any unpaid debt.
How is My Monthly Payment Determined?
The amount of your payment depends on what your disposable income is. “Disposable income” is a term of art under the Bankruptcy Code and means the difference between your monthly take-home pay or other monthly income and your monthly living expenses, such as mortgage or rent; food; clothing; utilities; transportation expenses; any car payments not included in your plan and the like. Expenses do not include payments on debt such as credit cards, doctor bills, etc.
Suppose, for example, that your monthly take-home pay is $4,000 and your monthly living expenses are $3,500. Your disposable income is $500 ($4,000 – $3,500) and that would be your plan payment.
How Much Do I Have to Repay?
The amount of repayment to creditors through the plan depends on a few things. Most importantly is what would creditors get if you filed Chapter 7 and the trustee liquidated (sold) all of your non-exempt assets. In a Chapter 7, the trustee looks at everything you own and what it is worth. She then subtracts any secured debt such as mortgages, auto loans, furniture loans, etc. and further subtracts the value of any exemptions you are entitled to. For example, Utah law gives you a $30,000 homestead exemption in your home; a $3,000 exemption in a vehicle and exempts most household furnishings, such as furniture, stoves, refrigerators, freezers, beds, clothing and the like. What is left is the non-exempt assets that the trustee could sell. Whatever the trustee could get from a sale like that is how much you have to repay to your unsecured creditors such as credit cards, doctor bills, etc.
For example, suppose your assets are as follow:
House $250,000
First mortgage $160,000
Second mortgage 70,000
Homestead exemption 30,000
Net equity ($10,000)
Car $15,000
Bank loan 8,000
Vehicle exemption 3,000 $4,000
Net equity
Household furnishings $10,000
Exemptions 10,000
Net equity $ 0
Note that you can’t offset the negative equity in your home against the equity in your car. Each asset is considered separately because each asset could be sold separately. The trustee could sell your car to get the $4,000 but he doesn’t have to sell the house and wouldn’t.
Based on this, if you filed Chapter 7 there would be $4,000 available to pay to unsecured creditors. Therefore, in Chapter 13 you must pay AT LEAST enough to return $4,000 to unsecured creditors.
The second factor in how much you have to pay under your Chapter 13 plan is how much you need to pay to cure any delinquencies. Many people file Chapter 13 because they are behind in mortgage or car payments and are facing foreclosure or repossession. Chapter 13 lets you catch up those delinquencies over the life of the plan, which can’t be more than five years (60 months) and must be at least three years (36 months), unless you can pay all your unsecured creditors in full in a shorter time.
Suppose your mortgage payments are $800 per month and you are ten months behind. You will need to catch up those ten payments ($800 x 10 = $8,000) through your plan. Plus, if the mortgage company has added any fees (late fees, inspection fees, attorneys’ fees) you will need to pay those. Suppose there is $2,000 in fees. Your total mortgage delinquency is $10,000 ($8,000 payments plus $2,000 fees). You must cure this delinquency over the life of your plan.
If there are other delinquencies, such as unpaid property taxes, car loan delinquencies, income taxes, etc., they will also have to be paid. Unsecured creditors such as credit cards DO NOT have to be caught up. Domestic support obligations such as alimony and child support MUST be current before your plan can be confirmed.
In the above example, there is a total of $14,000 that must be repaid through the plan. First there is the $4,000 that must be paid to unsecured creditors because they would get that much if you filed Chapter 7 and everything was sold. Secondly there is the $10,000 to catch up your mortgage payments. Remember that you have to keep the payments current from the time you file forward so this delinquency doesn’t get any larger. If you don’t care about losing your house, you don’t have to pay the $10,000. You can surrender the house and let the bank foreclose on it.
In addition to the $14,000 to creditors, the Chapter 13 trustee is entitled to a fee for administering the plan and making monthly payments to creditors. This is about 10% of the total payments. Your attorney is entitled to a fee of approximately $3,500, less any retainer you gave him to start your case.
Once you know what has to be repaid under your plan, you compare that to the amount of disposable income you have available to see if the plan is feasible. In our example your total payments must be approximately $19,000 ($14,000 + $3,500 for attorneys’ fees + 10% for trustee). That $19,000 can be spread over up to 60 months. If your plan goes for a full 60 months, your monthly payments must be $316.67.
Comparing this amount, $316.67, against your disposable income of $500 per month, your plan is feasible. At $500/month your plan will pay out in 38 months ($19,000/$500 = 38). On the other hand, if your disposable income was only $250/month, your plan would not be feasible because $250 x 60 = $15,000, which is not enough to pay what you need to pay under your plan. In that case your plan cannot be confirmed. Unless you can make up the difference somehow, your case will be dismissed.
PLEASE NOTE: This is a simplified example. Your case may have other issues. This is given as an example only of the kind of analysis that your attorney and the Chapter 13 trustee make regarding your plan.
