A Chapter 13 is a repayment plan where certain creditors are paid back in full and others receive a payment of less than what is owed to them. The repayment plan is typically between three and five years depending on the household income of the person filing. The amount of the payment varies drastically from one situation to the next. Some people pay back only 1% of their debt and others pay back 100%. The payment can also be changed through the course of the plan if a person’s situation changes.
Ideally, a payment in a Chapter 13 should be the difference between a person’s net income and necessary living expenses. Necessary living expenses include rent, transportation, daycare, food, healthcare, and clothing among other things. The court also allows expenses for school activities and entertainment. The idea is that a person filing a bankruptcy is agreeing to pay his/her disposable income into the Chapter 13 for a set period of time or a commitment period. After this time, the debtor gets a discharge which wipes out any leftover unsecured debt that was not paid back during the repayment plan. Certain debts like student loans survive the Chapter 13 discharge. If at any point a person manages to pay off all the claims filed in the case, then the case ends.
The payment in a Chapter 13 can be determined by a few other things as well. Certain types of debt set a floor in the case. Basically, enough money must be paid into the bankruptcy to pay these debts in full for the plan to be approved. These debts include priority taxes (typically comprised of the last three years of taxes) and arrears on domestic support orders. There are other debts that a person filing bankruptcy may chose to include in their case. These set a floor of their own. If a person is filing a bankruptcy to stop a foreclosure, then a person can use a Chapter 13 to catch up on their mortgage arrears through the repayment plan. All the arrears must be paid to do this. A person may also choose to pay for a vehicle though the plan to avoid a repossession or in some cases to pay a lower amount for the vehicle than the contracted amount. That debt must be paid in the plan and creates another floor in the case.
There are many ways to design a Chapter 13 that allow a person to meet these floors. For example, a repayment plan could start off at a lower amount and then the payment could be scheduled to change later on when, for example, a 401(K) loan is finished. This can allow someone who is currently struggling the breathing room necessary to pay enough into a Chapter 13 to cover mortgage arrears and prevent the loss of a home.
It is extremely important to have good legal counseling when entering a Chapter 13 as the rules and requirements are complicated.