Chapter 13 debtors are required to make monthly payments under a court-approved plan over a period of three to five years. This is called the Chapter 13 plan or repayment plan. (For more information about the repayment plan, see the articles in The Chapter 13 Repayment Plan.)
Most debtors want to know: How much will I have to pay each month? And for how long?
The number and amount of required plan payments depend on three factors:
Only debtors with regular income are eligible to file under Chapter 13 bankruptcy. Regular income includes wages and commissions earned by a debtor in the ordinary course of employment. Regular income does not include overtime pay or bonuses that a debtor earns only on an occasional basis or under exceptional circumstances. Regular income also does not include child support payments.
The "commitment period," or plan duration, is determined by comparing the debtor’s monthly earnings to the median family income in the state where he or she lives. For debtors who earn less than the state median family income, the commitment period is three years. Debtors who earn more than the state median family income must commit to make monthly plan payments for five years. The commitment period can be shortened only if all unsecured creditors are paid in full.
During the applicable commitment period, the debtor must make monthly plan payments equal to the amount of his or her "disposable income." A debtor’s disposable income is the difference between his or her monthly earnings and the amount "reasonably expended" for his or her family's maintenance and support. Reasonable expenses include:
Bankruptcy courts apply a means test to determine the reasonableness of expenses if the debtor earns more than the median family income in the state where he or she lives. The means test compares the debtor’s actual expenditures to expense amounts permitted under national and local standards issued by the Internal Revenue Service. Expenditures for housing and utilities can exceed the IRS’ local standards if the debtor demonstrates that they are reasonable and necessary.
Charitable contributions (up to 15% of earnings) and job-related expenditures also may be deducted in calculating the amount of a debtor’s disposable income.
Determining a debtor’s plan payments often requires more than a perfunctory calculation of his or her "disposable income." In many cases, adjustments have to be made so that the debtor’s plan payments are sufficient to cover administrative expense claims and meet the Bankruptcy Code’s "best interests of creditors" test.
Administrative expenses are costs incurred in connection with administering a bankruptcy case. Generally, the primary administrative expenses in a Chapter 13 case are legal fees due to the debtor’s counsel and trustee fees owed to the United States Trustee. Administrative expenses have first priority under the Bankruptcy Code and must be fully covered by the debtor’s plan payments.
Typically, a Chapter 13 debtor’s primary assets are his or her home and motor vehicles. Many Chapter 13 debtors file bankruptcy after defaulting on home mortgages or motor vehicle loans. Defaults on home mortgage and motor vehicle loans can be cured under Chapter 13, but the arrearages must be paid over the duration of the plan.
A Chapter 13 plan cannot be confirmed unless it provides for unsecured creditors to paid at least as much as they would receive in a Chapter 7 case. In most Chapter 7 cases, unsecured creditors are paid little or nothing. In some cases, however, unsecured creditors are entitled to at least a percentage return, because a trustee appointed in a Chapter 7 case would be able to realize value even after taking into account homesteads and other exemptions, mortgages and liens, and liquidation costs.
If the amount of your disposable income isn't enough each month to cover administrative expenses, cure obligations, and meet the best interests of creditors test, there are several options.
First you can try to make adjustments to increase your "disposable income" or make available other funds. Some ways to do this include:
Another way to increase plan payments, for debtors who earn less than the median family income in their home state, is to extend the commitment period from three to up to five years.
See our Chapter 13 Payment Calculator to find out what a your minimum payment would be in a Chapter 13 case.