Individuals who cannot qualify for Chapter 7 bankruptcy, have the option of filing for bankruptcy under Chapter 13, where a repayment plan is made to pay off your creditors. According to Los Angeles based bankruptcy law firm Recovery Law Group, confirmation of the repayment plan takes place after you show your “best efforts” to pay back your creditors. This is also known as the disposable income test, wherein your disposable income will be used to clear your dues.
Filing of a repayment plan in case of Chapter 13 bankruptcy is followed with its review by the bankruptcy trustee to ensure that it complies with bankruptcy laws. The repayment plan needs to be approved by the court before it is finalized. For that to take place, you need to prove that you will use your best efforts to repay your unsecured creditors using your disposable income. Any amount which remains after deduction of allowed living expenses and mandatory payments (secured and priority debts) is termed as disposable income.
Debts are classified into three types:
- Secured debts – collateral exists against such debts; e.g. car payment or mortgage.
- Priority debts – these debts need to be paid, no matter what; e.g. tax debts and domestic support obligations.
- Unsecured debts – these are generally considered non priority debts; e.g. credit card and medical bills, personal loans.
How non priority unsecured creditors are paid using disposable income in Chapter 13 repayment plan?
While filing forms for Chapter 13 bankruptcy, you are required to provide your average monthly income for a 6-month period prior to a bankruptcy filing. This is compared to the average income against the state median income for a household of the same size. The amount you end up paying your non priority unsecured creditors depends on whether your income is above the state median or below it and on how much significant property you own.
- If income is below the state median
In this case, you do not need to calculate your monthly disposable income. The payment plan is based on your budget and is usually approved by the bankruptcy court, even if you pay little or nothing to nonpriority unsecured creditors. In this case, the plan exists for 3 years only.
Example. If a single person makes $40,000 a year and the median state income for a single household in that state is $45,000, then the individual does not need to calculate the disposable income. In fact, they may not pay anything to nonpriority unsecured creditors. Such a case is known as “zero percent plan.”
- If income is above the state median
Your disposable income will be calculated by deducting these expenses from your income – living expenses (as per local and national standards), secured debts, and priority debts. The amount which remains is the minimum payment which needs to be made to unsecured creditors every month for a period of 5 years.
Example. A married couple with a combined annual income of $ 95,000 and a state median income of $60,000 for a household of two must come up with a repayment plan by calculating their disposable income. If the monthly disposable income comes to $600, they need to pay an amount of $36,000 ($600 multiplied by 60 months) to their nonpriority unsecured creditors as part of their Chapter 13 repayment plan.
- If bankruptcy filer has significant property
Prior to confirmation of the repayment plan, the judge also considers whether your creditors are getting paid as much in Chapter 13 as they would in case of Chapter 7. In the case of Chapter 7, all non-exempt assets are sold off to pay creditors (priority and then nonpriority). However, Chapter 13 allows you to keep non-exempt property, but it should not be at the loss of creditors. To give justice to the creditors, you must pay the greater of- either the total amount of priority debts plus your disposable income or the value of the non-exempt property.
Example: An individual does not make much money but has significant property. Though the disposable income is $300 only, the ancestral property has non-exempt equity worth $165,000 and there exists a tax debt of $6,000 too. In this case, the debtor must pay either $24,000 ($6,000 priority debt plus monthly disposable income of $300 times 60), or $165,000 (value of non-exempt property which comes to $2,750 per month for 60 months). Since the income is relatively low, the debtor will not be able to support this Chapter 13 repayment plan.
Bankruptcy can be quite confusing. It is important to consult with lawyers if you are thinking of filing for bankruptcy. Call 888-297-6023 to know more about your case.
