Chapter 13 Bankruptcy
If your income is too high to qualify for a Chapter 7, or if your assets are higher than you would be allowed to keep in a Chapter 7, a Chapter 13 Bankruptcy might be an option for you. Under a Chapter 13, you pay as much as you can afford to pay for a period of 3 to 5 years, after which time your remaining debt is discharged (eliminated).
To qualify for a Chapter 13, your secured debt (liens on real estate, car loans, or any other debts that are secured by some type of property) must be less than $1,081,400, and your unsecured debts less than $360,475.
Other benefits to a Chapter 13 include:
You may be able to save your home from foreclosure.
If you have sizeable non-dischargeable tax debts you can stop seizure of property and bank levies, and get a no-interest payment plan.
Under a Chapter 13, if the value of your home is less than what is owed on the first mortgage, you can «strip» the second lien on your home, meaning to turn it into an unsecured debt which will be paid off at probably pennies on the dollar.
How much will your monthly payment be? The exact amount won’t be known until it has been approved by the court, but you can estimate the range that the payment will be in.
Your MAXIMUM payment, if you are paying 100% to your unsecured creditors, will be: the amount of total debt, plus the trustee’s fees of 11% of the total payments, divided by the number of months of the plan. For example, if your total debts are $40,000, the Trustee’s fees will be $4,400, which is the total to be paid through the plan. Divide that by 60 months, and you come up with $667 per month.
Your MINIMUM payment, if you are filing a Chapter 13 to keep your home, will be: the amount of the arrears (i.e., past due mortgage payments) plus the trustee’s fees of 11% of the total payments, divided by the number of months of the plan. For example, if you have missed 10 payments on your home of $1,000 each, your arrears are $10,000. The Trustee’s 11% fee for collecting and distributing that would be $1,100, making your total payment to the plan $11,100. Divide this by 60 and you get monthly payment of $185.
If you can’t afford the MINIMUM payment as described above, then Chapter 13 is not an option for you.
If you can afford the MINIMUM payment, but not the MAXIMUM, then you will do what is called a «BEST EFFORTS PLAN,» under which you pay as much as you can afford to pay for a period of 36 to 60 months. At the end of that period, the remaining amount you owe your creditors is discharged.
The following are some more examples of estimating the monthly payment.
For the MAXIMUM (or 100%) payment, let’s say that you owe $50,000 in unsecured debt, and you are $10,000 in arrears in your mortgage payments, and that you want to save your home. This comes to $60,000. To get the trustee’s fee, multiply this times 11% and you get $6,600. Add these together and your total plan payments come to $66,600. Divide this by the number of months in the plan. If it is a 60 month plan, your monthly payments will be $1,110.
The MINIMUM payment, using the above figures, if your income and expenses are such that you cannot afford to pay anything toward your unsecured debts, will be $185 per month, calculated as follows: $10,000 arrears on the mortgage, plus trustee’s fee of $1,100, divided by 60.
For the BEST EFFORTS PLAN, your payments will be the amount you can AFFORD to pay each month, so long as that figure is somewhere between the MINIMUM and MAXIMUM payments above. Let’s assume that you can afford $500 per month. This is between the above minimum and maximum, so that’s what you’d pay. $500 times 60 months is $30,000. The way this $30,000 will be distributed is: $10,000 to pay your mortgage arrears, $3,300 to the trustee’s fees. The remaining $16,700 will go toward the $50,000 in unsecured debt, meaning that each of your unsecured creditors will get approximately 33 cents on the dollar.
Estimating what the court will deem you can afford to pay each month gets complicated, but a simplified formula is: determine your take home (after tax) pay; subtract from that your reasonable and necessary living expenses, and the amount left over is what is paid to the plan.