How Does Chapter 13 Bankruptcy Work?
Repayment Plan Proposal
A Chapter 13 bankruptcy filing includes a proposal by the debtor to repay some or all outstanding debt to creditors. You must have a “regular source of income” and generally some disposable income to apply towards your Chapter 13 payment plan. The duration of the repayment plan is based on the debtor’s gross income. If their gross income is below the median income in California, a plan of at least 36-months is proposed to the court. If the debtor’s income is above the median income for California, then a 60-month payment plan must be proposed to the court.
Once your case is filed with the court, the clock starts clicking. Your first payment is due within 30 days. You must send your plan payments to the court appointed trustee by the due dates. Missing a payment can result in your case being dismissed for failing to comply with the requirements of your repayment plan.
The amount of the monthly payment is based on various factors including the disposable income of the debtor as determined by the California Means Test. The total amount paid to creditors over the term of the repayment plan must also be at least as much as creditors would have received under a Chapter 7 bankruptcy filing. Also, certain debts, such as unpaid child support, or the loan on a car that will be kept, must be paid before a plan can complete. If you can stick to the terms of your repayment agreement, all your remaining dischargeable debt will be released at the end of the repayment plan period.
How will Your Monthly Payment be Calculated?
The monthly payment amount for your Chapter 13 bankruptcy plan is determined by comparing the amounts calculated from the following three formulas.
- 1. Disposable Income– Generally the monthly payment for a Chapter 13 bankruptcy is calculated based on your income minus national standards deductions designed to cover transportation, housing, food, utilities, etc. and secured debt payments for your home mortgage and car payments.
- 2. Priority Debts – Your repayment plan must provide for the payment in full of priority debts. Unsecured priority debts include recent income tax debts, past due child support, past due spousal support, and other past due domestic support obligations.
- 3. Best Interest of Creditors: Unsecured creditors must receive at least the amount equal to what they would have received from a Chapter 7 bankruptcy filing. The total value of non-exempt assets is used to calculate this amount.
The monthly payment for your plan will be set to the highest results determined by these three formulas.