When you feel overwhelmed by the amount of debt you owe, you may decide to file for bankruptcy. People in that boat often choose Chapter 13 bankruptcy because it saves them from foreclosure and even removes a second mortgage. The trade-off is that Chapter 13 bankruptcy comes with a repayment plan.
If you’re considering filing for Chapter 13 bankruptcy, keep reading to find out how the repayment plan works.
Information Needed
As part of the bankruptcy process, you need to provide certain information to the courts. This information will help the courts work out your repayment plan. The needed documentation is the following:
- A list of creditors with amounts owed and nature of their claims
- Debtor’s income
- Debtor’s property
- A detailed list of living expenses
Chapter 13 is only available to people who have income. So, the courts need to weigh your income and assets against your debt. They keep in mind your necessities, though, such as food, shelter, transportation, and medicine.
Types of Debt
Your list of creditors will include different types of debt. The courts don’t count all debts the same. The creditors will get their portion of repayment based on the nature of their claims.
Priority debts will get paid off during the plan’s duration. These debts include back taxes and any debt related to criminal charges. They also include back payments of child support and spousal support. You also have to pay the costs for filing for bankruptcy.
Secured debts are those backed by collateral, so a mortgage or car loan. If the debt comes due within the duration of your plan, you must pay it in full. You must also continue to make other payments on secured debt even if it continues past your plan. If you want to keep your property, you must also pay off any arrearage you owe through your plan.
Unsecured debts are those that don’t involve collateral, so credit card and medical costs as well as unsecured personal loans. These debts are the last to be paid off in the repayment plan, so they may not get paid off in full.
Repayment Calculations
Once the courts have all the information they need, they can make calculations for your repayment plan.
They first take into consideration all your income. Typically, income comes from employment, but they look also at pensions, social security and disability payments, and even alimony. They also account for regular pay raises or bonuses if they’re in your history.
Concerning expenses, some are related to what you actually owe, such as your mortgage payment. For others expenses, such as utilities, they use a flat amount dictated by charts the Internal Revenue Service has compiled.
So, the court takes the information of all your income and subtracts your reasonable and necessary expenses. What they have left is your disposable income. That disposable income usually becomes your monthly repayment. How the priority and secured debts work within this plan depends on your jurisdiction.
Implementation of the Plan
Your plan will last from 36 to 60 months. If your income is less than the median in your state, you may propose a three-year plan. So, you might end up paying less of your unsecured debt. If your income is greater than the median in your state, you’re likely to need a five-year plan. You’ll probably pay off more of your unsecured debt.
During the life of your plan, you will make payments to a court-appointed bankruptcy trustee. Usually your payments are monthly or bi-monthly. The trustee disperses your payments to priority and secured debtors first with unsecured debts getting the remaining balance. At the conclusion of your plan, the court will discharge your remaining debt, meaning you don’t have to pay on them.
Chapter 13 bankruptcy is a path to debt repayment while keeping your main assets. If you want to discuss your options more in-depth, call The Madden Law Firm Attorneys at Law.
