Last updated June 30, 2017.
When you think of the term “bankruptcy,” you’re most likely thinking of Chapter 7. In a Chapter 7 bankruptcy, you surrender your nonexempt assets to the court-appointed bankruptcy trustee and the trustee sells them. Your unsecured creditors get the proceeds of the sale and you get a discharge of the remainder of your debt.
That’s not the only type of bankruptcy that’s open to consumers, though. You also have the option to file under Chapter 13.
Below, we’ll discuss how Chapter 13 works, including the payment plan and confirmation of payment plan; how to get a Chapter 13 discharge; and if Chapter 13 is right for you.
How does Chapter 13 bankruptcy work?
Under Chapter 13, you don’t have to surrender any of your assets. Instead, you’ll sit down with your creditors and the bankruptcy trustee to come up with a payment plan for part or all of your debts. You’ll make monthly payments for three to five years and at the end of the plan, the court will discharge your remaining debt.
The Payment Plan
First, you’ll need to know how long your plan is going to last. To determine the length of your plan, the court will first average your income over the last six months. Your income can come from any source, including wages, investment income, rental income, and unemployment benefits. You can exclude Social Security benefits and mandatory retirement plan payments from your income.
If your average monthly income for the six months prior to filing is less than the state median, your plan will last for three years. If it’s more, your plan will last for five years. In California, the median annual income for a single person in 2017 was $52,416. For a family of four, it was $84,059. You can end the plan early, but in order to do so you must repay all of your secured and unsecured creditors in full.
Next, you’ll need to determine your minimum monthly payment. You have to fully repay certain debts through your bankruptcy plan, so your minimum payment will be the amount that allows you to repay all of those priority debts over the course of your plan. Priority debts include back child support and alimony and certain taxes. If you want to keep your home, your mortgage arrears must be fully repaid through the plan. You’ll also have to keep up with your regular mortgage payments. If you’re surrendering your home, you will not have to repay any arrearages through your plan.
If you’re behind on your auto loan and want to keep it, you may be able to repay the loan up to the value of the car over the course of your plan. This is called a cram-down because you don’t have to pay the full value of the loan. You’ll also have to fully pay administrative fees. These include filing fees, attorney fees, and a percentage fee (usually from 3-10%) for the trustee.
Determining Disposable Income
If your average monthly income for the last six months is less than the state median, you’ll generally only have to make your minimum payment and you won’t have to pay anything toward your unsecured debts. If you earn more than the median, you’ll have to pay your disposable income to your unsecured creditors every month. To calculate your disposable income, start with your average monthly income for the last six months. Then you’ll subtract your allowed expenses. The remainder is your disposable income.
The expenses are not what you actually pay; they’re determined by national and state standards. The national standard for food, clothing, and other items is $639 monthly for one person or $1,650 for a family of four as of March 2017. National standards assume $49 out-of-pocket for health care expenses per person under age 65. Housing and utilities standards are local; for Los Angeles County, a single person with a mortgage can deduct $2,162. A family of four with a mortgage can deduct $2,984.
Transportation costs also have local standards. If you have a car and living in L.A. County, you can deduct $300 for operating costs. If not, you can deduct $189 for public transportation costs.
Once you’ve subtracted the minimum monthly payments and these expenses from your average monthly income, you have your disposable income. Your disposable income for bankruptcy purposes is capped at 15% of your monthly income. So, you’ll have to pay the lesser of all of your disposable income or 15% of your monthly income in addition to your minimum payments.
Confirmation of Your Chapter 13 Plan
Once you’ve determined your monthly payments and filed your Chapter 13 plan, you must receive confirmation of the plan from the bankruptcy court. Without confirmation, the plan isn’t worth anything.
After you’ve filed the plan, your creditors and the bankruptcy trustee have an opportunity to object to it. A judge will hear and rule on any objections at the confirmation hearing. Creditors will generally only object that they’re not being paid enough. You’re most likely to face a creditor objection from your mortgage lender over the repayment of arrearages or from your auto lender over the value of the car.
The bankruptcy trustee may object on many different grounds. Her job is to ensure that your bankruptcy plan follows all the rules. First, she’ll make sure that your plan payments are feasible. If your disposable income is less than the proposed monthly payment, for example, you’ll have to convert your case to Chapter 7. She’ll also make sure that creditors are getting enough. She’ll check that you’ve listed all of your income and that the plan is reasonable. She’ll also make sure that your creditors are getting as much or more than they would if you filed under Chapter 7. If they’re not, you’ll have to convert to Chapter 7. 11 U.S.C. § 1325.
How do I get a Chapter 13 discharge?
When you complete all of your plan payments, the court will consider your discharge. You’ll receive a discharge of your remaining unsecured debt as long as you’re up-to-date on any domestic support obligations, you’ve completed a financial management course, and you haven’t received a discharge for another Chapter 13 case less than two years ago or another Chapter 7 case less than four years ago. 11 U.S.C. § 1328. If you meet those three requirements, the court will discharge your remaining unsecured debt. Creditors will no longer be able to pursue payment for those debts.
Certain debts cannot be discharged in bankruptcy. Student loans, child support, alimony, debts that arise from personal injury caused by driving under the influence, and criminal fines cannot be discharged. If you don’t fully pay them under your Chapter 13 plan, you’ll have to pay them afterward. You may receive a discharge for debts arising from fraud and debts for damages in a civil case unless the creditor objects, in which case your debt will not be discharged. 11 U.S.C. §§ 1328, 523(c); Fed. R. Bankr. P. 4007(c).
Is Chapter 13 right for me?
The answer depends on your circumstances. Chapter 13 is a complicated process with detailed rules and regulations and is best handled by an attorney. If you’re struggling with debt and considering filing for bankruptcy, reach out to one of our experienced bankruptcy attorneys to discuss your circumstances and your options. While it may be tempting, you won’t want to file for Chapter 13 bankruptcy on your own — more than 99% of Chapter 13 cases filed without an attorney in the Central District of California fail.
Borowitz & Clark has years of experience helping thousands of consumers successfully resolve their financial issues. Contact us today to schedule a free consultation, which we offer at seven conveniently located offices.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.