Often times a consumer realizes that they will need to file a Chapter 13 bankruptcy in order to catch up on some missed payment to their mortgage, car loan, or simply need to file due to the fact that their household income exceeds the median income in their state. The biggest question that needs to be asked at this point is, how much do I have to pay into the reorganization plan each month? The answer to this question is not always a simple calculation. There are a few things that need to be taken into account in order to determine how much one must pay to propose a confirmable Chapter 13 plan.
The first issue to analyze is whether the Debtor has any arrears which must be paid back. What this means is that if there are any missed payments to a mortgage, car loan or some other type of secured debt, the Debtor must propose to pay back 100% of those missed payments if they want to retain the property. Additionally, if there are any taxes or other priority debt in arrears, those must also be paid back in full, interest and penalty free over the course of the plan.
The second issue to consider is whether the Debtor owns any property that is not exempt in a Chapter 7 case. For example, if the Debtor has an investment property that has $30,000 of equity, which cannot be protected with any applicable exemptions under either state law or Section 522 of the Bankruptcy Code, then the Debtor must propose to pay his or her creditors through the plan at least as much as the non-exempt equity is valued. This test is called the liquidation analysis.
The final step that must be taken is to determine how much actual disposable income a Debtor has available to fund his or her Chapter 13 Plan payment. What this means is that any income left over after payroll deductions, and reasonable living expenses are taken into account, how much money is left to pay into the plan each month. A Debtor is required to propose 100% of that disposable income in order to meet the best interest of the Creditors test. This final step is where many people run into problems, in that your disposable income must demonstrate you can fund a plan to at least meet the requirements under the first to issues of secured debt and non-exempt assets.
It is clear from this blog post that in order to calculate a Chapter 13 bankruptcy plan, one must understand not only how much debt they owe, but also what kind of debt and how much their assets are valued in order to move their case forward. For this reason, it is important when filing a Chapter 13 case to consult with an experienced bankruptcy attorney before filing anything.