Most Chapter 13 debtors want to know: How much will I have to pay each month? And for how long? Chapter 13 debtors must make monthly payments over three to five years in a Chapter 13 plan or repayment plan. The number and amount of required plan payments depend on three factors:
For more information about the repayment plan, see the articles in The Chapter 13 Repayment Plan.
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 doesn’t include:
The court determines the "commitment period," or length of the repayment plan by comparing the debtor’s monthly earnings to the median family income in the state where he or she lives. You can find your state’s median family income by visiting the U.S. Trustee website.
For debtors who earn less than the state median family income, the commitment period is three years. The plan length for debtors who make more than the state median family income is five years. The court will allow a shortened plan length if all unsecured creditors, such as credit card balances and medical bills, can be paid in full. A filer would need to pay all debt with the exception of long term debt, such as a home mortgage and student loans, in what bankruptcy lawyers informally call a 100% plan.
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 allows the debtor to use actual expenditures for some expenses, and expense amounts permitted under national and local standards issued by the Internal Revenue Service for others. Payments for housing and utilities can exceed the IRS’ local standards if the debtor demonstrates that they are reasonable and necessary.
Charitable contributions and job-related expenditures also can be deducted in calculating the amount of a debtor’s disposable income. You’ll want to be prepared to demonstrate a history of such payments. Expect the court to view new or recently increased expenses with skepticism.
Find out how to complete the disposable income form.
Determining a debtor’s plan payments often requires more than a mechanical calculation of disposable income. In many cases, the filer will have to make adjustments 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 owed to the debtor’s counsel and trustee fees owed to the United States Trustee. Administrative expenses have priority under the Bankruptcy Code. A debtor must ensure payment in full through the repayment plan.
Typically, a Chapter 13 debtor’s primary assets are his or her home and motor vehicle. 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—or caught up—under Chapter 13, and spread out over the duration of the plan.
"Best Interests of Creditors" Test
A Chapter 13 plan cannot be confirmed unless it provides that unsecured creditors—those owed credit card obligations, medical bills, and the like—would get paid at least as much as they would receive in a Chapter 7 case.
In most Chapter 7 cases, unsecured creditors receive 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 sell assets and distribute the proceeds to creditors. The Chapter 13 trustee must pay that same amount Chapter 7 creditors would receive to creditors in Chapter 13.
In Chapter 13, however, the trustee doesn’t sell property. Instead, the debtor must have sufficient income to pay the equivalent amount through the repayment plan. You can determine this cost by adding up the value of property that can’t be protected with a bankruptcy exemption.
Learn more about the best interests of creditors test.
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 other funds available. Some ways to do this include:
Another way to increase plan payments for debtors who qualify for Chapter 7 is to extend the commitment period from three to up to five years.