How Much Money Do You Have to Repay in Chapter 13 Bankruptcy?
Anyone contemplating bankruptcy will want to know how their monthly payments will be calculated, who they are going to pay, and what their exact payment amount will be. At Young, Marr & Associates, our Pennsylvania and New Jersey bankruptcy attorneys understand this concern. However, every Chapter 13 bankruptcy is unique, and the answers to all of those questions will vary depending on the facts of each case. While giving an exact amount is impossible without thoroughly examining your circumstances, the following should provide some clarification of the process behind crafting a Chapter 13 plan.
Calculating a Chapter 13 Bankruptcy Plan Payment
As stated above, each Chapter 13 bankruptcy case is unique. The amount a debtor will pay through their bankruptcy plan depends on their household income, the type of debt, their assets, and their financial goals. The best way to understand how a Chapter 13 payment is calculated is through an example:
John and Jane Smith are a married couple residing in Philadelphia who wish to save their home, which is currently in foreclosure. They also owe the Internal Revenue Service (IRS) some back taxes and have a substantial amount of credit card debt. In addition, they are two payments behind on their car payment.
These kinds of debts are quite common. Bankruptcy cases often involve credit card debt, and many people use bankruptcy to save a house from foreclosure.
Both the husband and wife work and have a combined monthly gross income of $6,000. They have no children.
They have come to Young, Marr & Associates to file for Chapter 13 to save their home and address their other debt. They are concerned about what their monthly bankruptcy payments will be.
Now that we have an example of a common financial situation, we will work to calculate what the bankruptcy payments might look like for that family.
Paying Mortgage Arrears and Other Secured Debt Through Chapter 13 Bankruptcy
The primary reason the Smiths need to file for bankruptcy is to save their home. When debtors file for bankruptcy to cure a mortgage delinquency, they will have to pay that default back over three to five years. Once the bankruptcy case is filed, the mortgage lender will submit a “proof of claim” with the court. This document details the exact amount due at the time of filing and provides documentation of what they owe and that the Smiths were the ones who signed the mortgage.
The Smiths’ home has a fair market value of $450,000, and the proof of claim filed by the mortgage company indicates a mortgage balance of $380,000 with an arrearage of $15,000.
They are also behind in their car payments. At the time of filing, they had missed two $250 payments.
The bankruptcy plan will directly address the mortgage arrearage. For this example, the length of the plan will be 60 months. Therefore, paying back $15,000 over 60 months will require a payment of $250 a month. This portion of the monthly trustee payment only addresses the mortgage arrears.
Similarly, their car loan is a secured debt. If the Smiths wish to keep their vehicle, they must pay that default as well. They are behind $500, so dividing that over the length of the plan (again, 60 months) will add $8.33 to the plan payment.
It is important to note that the bankruptcy plan only addresses the defaults. The Smiths will have to keep making their regular monthly mortgage and car loan payments directly to their lenders throughout their bankruptcy on top of the bankruptcy plan payment.
At this point, the Smiths monthly trustee payment is $258.33.
Taxes and Other Priority Debts in a Chapter 13 Bankruptcy
Taxes and other debts are often called “priority debts.” These debts can also be paid through a bankruptcy plan in Chapter 13 bankruptcy.
The Smiths owe the IRS back taxes. The IRS filed a “proof of claim” in their case stating that they currently owe a total of $10,000 in unpaid taxes and penalties. That was further broken down into three separate categories:
- $4,500 priority debt
- $1,500 secured debt
- $4,000 non-priority unsecured debt
Taxes are generally considered priority debt in bankruptcy. The priority portion of the debt must be paid off during the case. Therefore, the Smiths trustee payment will have an additional $75 added to the monthly total – the $4,500 priority debt paid over the 60-month plan.
The secured portion of the debt is treated in the same manner as the mortgage and car loan debt, so it is also paid through the bankruptcy plan. In this case, that will increase the monthly payment by $25. The remaining unsecured balance of $4,000 will be addressed along with all other unsecured debt.
After calculating the priority and secured portion of the IRS’s claim, the Smiths’ monthly trustee payment now totals $358.33.
Unsecured Debt in a Chapter 13 Bankruptcy
Credit card bills, medical bills, personal loans, and many other types of debt are categorized as unsecured debt. Whether or not the Smiths will be required to pay their unsecured creditors is determined by three factors:
- The calculation of their disposable monthly income
- Their financial interest in nonexempt property
- The amount of money available after subtracting their monthly expense from their income
In addition to their secured and priority debt, the Smiths also have $96,000 in outstanding credit card bills. They are hoping to have the entire amount discharged through their Chapter 13 bankruptcy.
Disposable Monthly Income
The first factor to consider in determining payments to unsecured creditors is the calculation of their “disposable monthly income.” The Smith’s combined gross monthly income is $6,000. This equals an annual income of $72,000. The median income for a family of 2 in Philadelphia is currently $67,540. Therefore, the Smiths are an above-median case. Means testing for bankruptcy would keep them from filing for Chapter 7 bankruptcy. This also requires the length of their Philadelphia bankruptcy case to be 60 months and means that the Smiths must pay part or all of their unsecured debt.
By calculating their monthly income and deducting their taxes, expenses, and payments to secured creditors, the Smiths disposable monthly income comes to $750. The $750 is applied to each monthly trustee payment and will pay unsecured creditors a total of $45,000 during the 60-month bankruptcy.
The next consideration is the nonexempt equity the Smiths have in their property. For this example, the Smith’s home is the only property with any equity. The fair market value of the home is $450,000, and the total mortgage balance is $380,000. Accordingly, the Smiths have $70,000 in equity in their home.
The Bankruptcy Code provides exemptions to protect the equity in personal and real property. At the time of this writing, the exemption for a martial home is $25,150 per debtor. Therefore the Smiths can protect $50,300 between the two of them, leaving $19,700 in nonexempt equity.
Typically, the amount in nonexempt equity must be paid to unsecured creditors. Luckily, the Bankruptcy Code allows for deducting the cost of the sale of the property. This means that the Smiths can deduct 10% of the value of the property, or $45,000, to offset the costs involved in selling it. Therefore the property has no nonexempt equity for bankruptcy purposes.
The final factor in determining the amount paid to unsecured creditors is the difference between the Smith’s monthly income and their reasonable monthly expenses. For this example, the amount remaining each month after reasonable expenses are paid is $1,250.
Fortunately for the Smiths, this does not affect their monthly payment, as it leaves the Smiths just enough money to pay their trustee payment.
After addressing the Smiths’ unsecured creditors, their current monthly trustee payment is $1,108.33. They will be paying $45,000 towards the $100,000 they owe to unsecured creditors.
Other Required Payments Through a Chapter 13 Bankruptcy Plan
There usually are two other payments included in the Chapter 13 bankruptcy plan. The first is the trustee’s fee, which is 10% of the total amount paid into the case. In the Smiths case, the base amount of their plan is $66,499.80. Therefore they will have to pay an additional $6,649.98 to the trustee. This will add $110.84 to their monthly plan payment.
Sometimes our fees are included in the bankruptcy plan as well. For the purposes of this example, we’ll say the Smiths have a balance of $1,500 for attorneys’ fees, increasing their monthly payment by $25.
Therefore, the Smiths’ total monthly trustee payment will be $1,244.17. From the example above, the Smiths have $1,250 remaining once they have paid their reasonable monthly expenses, leaving them sufficient income to fund their bankruptcy plan.
Call Our Experienced Pennsylvania and New Jersey Chapter 13 Bankruptcy Attorney to Schedule a Free Consultation
As you can see, the amount a debtor is required to pay in Chapter 13 depends on many factors. It is crucial to speak with our bankruptcy attorneys at Young, Marr & Associates, to help you determine how your specific circumstances will affect your monthly trustee payment. We have helped people in dire financial situations for over two decades. Call our law offices at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania today to schedule a free consultation on your bankruptcy case.