Chapter 13 Bankruptcy Payment Plan Example
Chapter 13 bankruptcy can be a prudent option for people who are struggling financially but have a steady source of income that can be used to repay some of their debts. Unlike Chapter 7 bankruptcy, Chapter 13 lets the individual reallocate and consolidate their debts and then pay them back in a more efficient manner. In today’s uncertain economic climate, it is easy to fall into financial difficulty. If you are considering filing for Chapter 13, review the below information to get a better understanding of what a repayment plan might look like.
Can I File for Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is often referred to as a “consolidation plan” or “debt reorganization plan”. Seeking financial relief under Chapter 13 enables an individual to catch up on late mortgage payments, late car payments and other nondischargeable financial obligations. Qualifying criteria for Chapter 13 are based largely on income and level of debt. In general, a Chapter 13 bankruptcy may be desirable for those who want to protect property and other valuable assets and who have some additional income that can be used to pay creditors.
Which Debts Will I Actually Have To Pay Off?
During the bankruptcy process, not all debts are considered equal or treated in the same manner. In fact, there are some debts that may not need to be paid back in full. During the bankruptcy process, your attorney and the court will evaluate and divide your debts into different categories. The debts will then either be prioritized for repayment or forgiven according to the following classifications:
- Priority Debts. These are items that are absolutely required to be paid off and will be included first in the repayment schedule. Examples of debts with this level of prioritization are: spousal support and child support payments, back taxes, bankruptcy filing fees and court fees.
- Secured Debts. These are debts that are backed by collateral, such as an auto loan, a home mortgage or a vacation home mortgage. Under Chapter 13, an individual may be required to pay back the value of the collateral or pay off the debt in full.
- Unsecured Debts. Considered the lowest rung on the debt ladder in a Chapter 13 bankruptcy, unsecured debts are items like medical bills, credit card bills and unsecured personal loans. Since these debts will receive the smallest allocation of payments in a repayment plan, it is possible that they may be discharged or reduced before the bankruptcy case is wrapped up.
What is a Chapter 13 Repayment Plan Example?
An individual who files for Chapter 13 bankruptcy must be prepared to begin making payments within 30 days of filing. Payment plans are generally on a monthly or bi-monthly basis, and missed payments can result in a case being dismissed.
Once a bankruptcy petition is filed and approved by the court, the debtor and their bankruptcy attorney will work together to create a sensible repayment plan. This plan must be filed with the courts within 14 days of the original bankruptcy filing. A Chapter 13 repayment plan consists of all outstanding debts in the priority order described above and is spread over 36-60 months. Here is an example of a 60-month Chapter 13 repayment plan*:
|Current Monthly Budget||Chapter 13 Monthly Budget|
|Payment to get mortgage up to date||N/A||$200|
|Auto loan – 1st vehicle||$310||$310|
|Auto loan – 2nd vehicle||$450||$390|
|Home & auto insurance||$350||$350|
|Gas & vehicle maintenance||$500||$500|
|Household goods & supplies||$150||$150|
|Medical & dental expenses||$50||$50|
|Clothing & other living expenses||$300||$300|
|Payments toward credit cards & medical bills||$1,500||$0|
|Total Monthly Expenditures||$6,685||$5,325|
|Total Monthly Income||$5,900||$5,900|
|Difference||-$785 in growing debt each month||$575 that could be saved or repurposed|
*This example repayment plan is strictly for illustrative purposes.
Once the proposed plan is accepted by the court, a trustee is assigned to oversee the actual repayment. The debtor remits a payment directly to the trustee each month. In turn, the trustee sends payments to the creditors, paying off the debts according to the prioritization schedule that was approved in the plan.
Successfully completing a Chapter 13 repayment plan offers several potential benefits:
- Improved credit due to a 36-60 month track record of timely payments.
- Reduced debt-to-income ratio.
- Reduced overall debt.
- Elimination of some percentage of unsecured debt, depending on the specifics of the individual’s plan.
- Elimination of collections calls and letters.
How Do I Choose a Chapter 13 Bankruptcy Attorney?
Chapter 13 bankruptcies are complex and the filing process can be tedious. Be sure to work with an experienced attorney who can help create a chapter 13 repayment plan customized for your unique financial profile. Our Maryland Chapter 13 attorneys will review all of your options and will provide recommendations for you to consider. Contact Sirody & Associates for a free consultation.