How Much Money Do You Have to Repay in Chapter 13 Bankruptcy?
The overwhelming majority of consumer bankruptcy cases fall into one of two categories: Chapter 7, and Chapter 13. One of the major differences which sets these two “chapters” apart is that in Chapter 13, debtors are required to create a long-term “reorganization” or repayment plan, which dictates how creditors will be repaid over the next three to five years. But just how much of your debt are you required to repay in Chapter 13? Do you need to pay for all of it, or just a certain portion? In this blog post, our Bucks County bankruptcy attorneys will explain your financial obligations as a Chapter 13 filer.
Types of Debts that Require Payment in Full in Chapter 13 Bankruptcy
The extent to which your debts must be repaid depends on the type of debt involved. Bankruptcy treats various debts differently, breaking them down into categories such as:
- Secured Debts — These are debts which are “secured” by collateral. Some common examples of secured debts include mortgage loans, where your house is collateral and may be foreclosed on, and auto loans, where your car is collateral and may be repossessed.
- Unsecured Debts — These are debts which are not secured by any form of collateral. Examples of unsecured debts include medical bills and credit card bills. If you default on an unsecured debt, the creditor must obtain a judgment prior to taking anything you own.
- Priority Debts — Put simply, you can think of priority debts as your most urgent debts. As the name implies, these are debts which receive priority over others. Debts take priority status when the debtor owes money to the government, or when repayment of the debt benefits the general public. Priority debts include child support, alimony payments, some income taxes, criminal restitution, and any overpayments of government benefits, such as disability payments.
- Non-Priority Debts — These are the debts which take a back seat to your priority debts in terms of urgency. Non-priority debts include your medical bills, your student loans, and your credit card debt.
The portion of each debt which must be repaid depends on which of these categories the debt falls into. You are responsible for repaying in full 100% of the following:
- Priority debts. For this reason, bankruptcy may not be your best option if the bulk of your debts stem from alimony or child support.
- Secured debts, provided you intend to keep the property which is secured. While the automatic stay places a temporary freeze on collection actions, including foreclosure, you will need to repay 100% of your mortgage defaults if you want to avoid foreclosure in the future.
In addition to repaying your priority and secured debts, you will also be required to fully repay all administrative fees associated with your case. Administrative fees include the trustee’s commission, which generally ranges from 3% to 10% of your total monthly payments, and the filing fee associated with filing your petition. Effective June 1, 2014, the Chapter 13 filing fee is $310 (which, counter-intuitively, is actually slightly lower than the Chapter 7 filing fee of $335). This is a federal fee, and is therefore the same for residents of New Jersey and Pennsylvania.
Unsecured Debts and the Best Interest of Creditors Test
While you must repay 100% of your secured and priority debts, you are not necessarily required to repay 100% of your unsecured debts, which again, include:
- Utility Bills
- Medical Bills
- Credit Card Debts
- Personal Loans
- Back Rent
You may be required to repay the full amount, a partial amount, or none at all. The exact financial obligation will vary from one Chapter 13 filer to the next, because the repayment amount is influenced by factors such as:
- How much disposable income is left over after you cover your basic living expenses like rent, electricity, and groceries. Chapter 13 typically requires that all of your disposable income be put toward making your repayments.
- How long your repayment plan is, as plans may range anywhere from 36 to 60 months.
- How much your nonexempt property is worth. In Chapter 7, nonexempt property (or property which is “not exempt” from the bankruptcy estate) can be sold off by the trustee, but in Chapter 13, you get to keep even property which is nonexempt in exchange for satisfying the repayment plan.
The minimum amount each debtor must pay is calculated by applying the “best interest of creditors” test. In plain terms, the trustee will determine what your unsecured creditors would have been paid had you hypothetically filed under Chapter 7, and will require that your actual Chapter 13 creditors receive at least this amount. If you cannot realistically pay this amount — perhaps, for example, because you do not have enough disposable income — then you will be required to file for Chapter 7.
Conversely, you will not be permitted to file for Chapter 7 if the court determines that doing so would constitute “abuse” of Chapter 7. If the court determines you can afford to accommodate Chapter 13, then you may be required to file for Chapter 13 unless you can prove otherwise and pass the Means Test, such as demonstrating very large expenses stemming from elder care or the care of a disabled child.
Pennsylvania Bankruptcy Lawyers Offering Free Consultations
If you’re thinking about filing for bankruptcy in New Jersey or Pennsylvania, the attorneys of Young, Marr & Associates may be able to help. To arrange for a completely free and confidential legal consultation, call our law offices right away at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania.
☑ Been paying credit card balances that seem to never go down?
☑ Lost your job and are now having trouble keeping up?
☑ Attempted to work out a payment arrangement to no avail?
☑ Been notified of a mortgage foreclosure action?
☑ Been denied for a mortgage or other line of credit?
If the answer to any of these questions is “yes” then bankruptcy may be an option that you should consider.