How Is a Chapter 13 Bankruptcy Payment Plan Calculated?

Bankruptcy can be an intimidating time for individuals and families. Many myths and cautionary tales abound about what to expect during bankruptcy proceedings. While Chapter 13 bankruptcy is undoubtedly a big undertaking, it is a way for you to gather your financial footing if you find yourself overburdened with debt. 

During a Chapter 13 bankruptcy, you will prepare and submit a bankruptcy plan with your initial petition or within 14 days afterward. But how is a Chapter 13 bankruptcy payment plan calculated? 

While there is no one-size-fits-all approach, the Southern Maryland Law team will attempt to provide you with some basic and helpful information in this post. The amount you have to pay back depends on many factors including your household income and expenses and the amount of your assets.

We understand the trials and tribulations experienced by individuals and families facing bankruptcy. It can be a scary time with more questions than answers—especially if you do not have the right legal team. We act as advocates and a beacon of hope for our clients facing bankruptcy. 

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy allows eligible individuals to discharge or pay off their debt if they fall behind on payments and cannot pay their debt. To be eligible to file for Chapter 13 Bankruptcy, you must receive regular income and owe less than $2.75 Million. The obligations in question can be secured or unsecured. 

Broadly speaking, secured debt is “secured” by collateral. This means the creditor can retake possession of the property if you cannot make payments and default on the loan that helped you purchase the property. For example, a mortgage is a secured debt because the house you use the mortgage to buy serves as collateral for the loan. As most people know, if you default on your mortgage, the bank will foreclose on your home. This enables them to recoup their money by reselling the property. Other requirements make a loan a secured debt. 

Generally, unsecured debt is a financial obligation that is not secured by collateral. For example, credit cards are usually unsecured loans because there is no collateral backing the loan. That said, there are cases where your assets could be sold during bankruptcy to pay for the debt, even if it is unsecured. 

What Is a Chapter 13 Bankruptcy Plan?

A Chapter 13 bankruptcy plan is a court-arranged strategy for how to pay the remaining debt under a three-to-five-year structured plan. The repayment plan includes the money that the debtor makes, which will be paid out to a trustee. The trustee oversees and manages the plan by receiving funds and paying the outstanding debt according to the structured plan on behalf of the debtor. 

The parties also classify the debt in the plan and outline what debt must be repaid. Contrary to what you might believe, in many cases not all your debt needs to be paid off fully under a repayment plan. In most cases, only debt with priority under the law must be repaid in full. Exceptions might apply, however, where a priority creditor agrees to waive the obligation or allows you to pay less than what you owe. 

How Long Is a Chapter 13 Bankruptcy Plan?

Chapter 13 bankruptcy plans are anywhere from three to five years, meaning you enter into a specific installment agreement to pay off the particular debt in the agreed-upon time frame. Part of the agreement requires you to complete the plan duration to pay off the debt. In most cases, you cannot pay off some debt earlier than others unless it is part of the installment plan. 

To determine the length of the plan, the bankruptcy court typically looks at your income compared to the average in your state. If your and your spouse’s income is higher than the median income in your state, the plan will typically last three years. The plan’s duration is five years for individuals or couples who make less than the state median.  

How Is a Chapter 13 Bankruptcy Payment Plan Calculated?

The main factors that go into the calculation of a Chapter 13 plan payment are:

• 122C Calculation of disposable income;
• Schedule I&J Disposable income; and
• A Liquidation analysis.

The 122C is the bankruptcy code formula that determines what you should be able to afford to pay each month.  Schedule I & J are the income and expense schedules that list your household income and expenses. The Liquidation Analysis is a test to make sure that your unsecured creditors receive at least as much in your plan as they would get if you filed a Chapter 7 bankruptcy.   Under this test you have to make sure your plan pays enough to protect any assets that aren’t covered by the bankruptcy exemptions. (see our post Maryland Bankruptcy Exemptions for more information)

The Trustee wants the plan to match the highest payment calculated by these three tests.  When your plan is filed with the Court a plan is filed that proposes a payment.  The Debtor starts making payments to the Trustee in this amount.  We then have to negotiate with the Trustee if they will agree to approve the proposed plan or request the payment to change to match either the 122C or the Schedule I&J disposable income.  If an agreement can’t be reached, the matter can go to a hearing before the Judge.

To calculate the bankruptcy plan, the parties, trustee, and bankruptcy court must first take inventory of your assets and outstanding debt. You or your bankruptcy attorney prepare and file the plan with the court when you file for bankruptcy or within 14 days afterward. Sometimes, the court grants debtors an extension of this deadline, but it is better to submit this on time if you can. 

The amount of your payment plan depends on many factors, including the amount of income you receive each month and the types of debts you owe. As previously mentioned, sometimes not all debt must be paid in full when you file for bankruptcy. For example, you might only have to pay a portion of the credit card debt that you owe. Defaulted mortgages and car loans likely will need to be paid in full under the plan unless the creditor takes possession of the house or car to cover the debt. 

You and your attorney work together with the creditors, trustee, and bankruptcy court to coordinate a plan that meets the legal requirements and fits the situation. 

Should I Use an Online Chapter 13 Bankruptcy Plan Payment Calculator?

The internet is incredibly useful. With the click of a button, you can find a host of information that would otherwise be outside your grasp or very difficult to find. But using online Chapter 13 bankruptcy plan payment calculators may not yield the accurate results you might receive if you talk to a qualified bankruptcy attorney or accountant. 

Southern Maryland Law: Dependable and Compassionate Bankruptcy Attorneys

Going through bankruptcy can be a difficult and stressful time for individuals and families who are unfamiliar with the process. But with an experienced legal team, you help set yourself up for success during this challenging time in your life. Dave Gormley has been practicing bankruptcy law for over 30 years and has helped a multitude of clients fight to keep their homes and cars and regain their financial footing by filing for bankruptcy. 

If you are facing Chapter 13 bankruptcy, don’t go it alone. Contact our team online to schedule a consultation.