Most people go into a bankruptcy seeking to discharge their debts through Chapter 7, but Chapter 13 may be the best option for you depending on your circumstances.
If you make too much money to file Chapter 7 or want to keep all your property, it’s the way to go. Filing a Chapter 13 repayment plan to pay your creditors off in 3-5 years helps you keep your assets.
The big question you’re probably asking yourself is, “How does the court determine my monthly payment?” In this article, we’ll discuss the factors that go into the calculations. If you are considering bankruptcy, speak to a Westfield MA bankruptcy attorney at the Law Office of Eric Kornblum today.
How Long Will Your Chapter 13 Repayment Plan Last?
Repayment plans last either 36 or 60 months. Which period the court chooses depends on your level of debt and average income for six months prior. If you qualify for a three-year repayment but ask for five years (which you can do), your monthly payment will be less. However, you’ll be stuck in bankruptcy for an unnecessarily long time.
Calculating Your Monthly Payment
When calculating your minimum monthly payment, the court will take into account specific debts, while discharging those that can be legally discharged. This may include extra mortgages and liens on your home, through something called “lien stripping.” Debts that you must pay back include:
Nondischargeable Debts. By Congressional mandate, you can’t discharge priority debt: some back taxes, spousal support (alimony), and child support, for example.
Late Mortgage Payments. If your mortgage is in arrears, the court will include the arrearage in your repayment plan. You may be able to include your future mortgage payments in your repayment plan as well, but that would make each monthly payment very high. You don’t have to pay the arrears if you plan on giving up your house. That debt will be discharged.
Car Loans and Similar Unsecured Debts. If you want to keep your car, your payment plan requires you not only to pay off any arrears but also the entire auto loan. The same goes for most other secured debts. If you qualify for a “cramdown” for any secured debt, your payment need only consist of the property’s replacement value.
Paying for What You Want to Keep. If you want to hold onto any property with secured debt, you’ll either need to keep making your monthly payments or have the court add the payments to your repayment plan. Some courts may require the latter.
Administrative Fees and Interest Charges. Your Chapter 13 trustee will charge you a percentage of the amount they pay to your creditors each month. This fee may be as high as 10%. You’ll also have to pay interest equivalent to the prime lending rate plus 1-3% on all secured claims you’re paying off through the repayment plan.
Nonexempt Property and Disposable Income Can Increase Your Payment
The repayment plans outlined above are for the bare minimum monthly payback. If you have any nonexempt assets or disposable income, you still have to pay back as much of your nonpriority unsecured debts as possible. This will increase your monthly payment, so let’s take a closer look.
Calculating Disposable Income
You determine this factor after filling out the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, a.k.a. Form 22C. This is a means test used to determine how long your plan will last and how much your unsecured creditors will receive.
If you make less than the state’s average median income for your household size in the six months before you file, you won’t have to include unsecured nonpriority creditors in your repayment plan. However, if your income is higher, you then have to determine if you’ll have any disposable income you can use to pay those debts. If so, the trustee then adds that amount to your minimum plan payment so you can pay off as much of your unsecured debt as possible.
One of the requirements of Chapter 13 bankruptcy is that you pay unsecured, non-priority creditors at least as much as the value of your nonexempt property. Your trustee will also add its value your Chapter 13 repayment plan.
Is a Chapter 13 Repayment Plan Best for You? Ask a Massachusetts Bankruptcy Attorney
At the Law Office of Eric Kornblum, we specialize in helping people become debt-free. If you live in Massachusetts, contact us for a consultation. Depending on your income and how much property you own, a Chapter 13 repayment plan may very well be your best bankruptcy option.