Understanding Your Obligations in a Chapter 13 Bankruptcy
People accumulate debt because they do not have the means of repaying what they owe. When these debts grow, one can find themselves in a situation where their collective debt has become insurmountable, even if they have a well-paying job. An ill-timed injury requiring costly medical bills, for example, can put an otherwise well-off family into crippling debt.
Filing for bankruptcy can serve as an effective means of getting on top of debt. Though the practice has become heavily stigmatized, filing has helped countless individuals and families discharge debts, conquer debts, and forge a better financial future.
You may be wondering, then: What is the catch? Filing for either type of consumer bankruptcy will result in your credit scores taking a hit, but it is extremely possible to quickly rebuild credit. Further implications depend on the type of bankruptcy for which you file.
For Chapter 7 bankruptcy, filers will be subject to a liquidation process, in which nonexempt assets are sold to repay creditors. In exchange, Chapter 7 filers do not have to make any additional payments before being permitted to discharge unsecured debts.
For Chapter 13 bankruptcy, filers are expected to pay back at least some of what they owe. The exact amount depends on the filer’s ability to reasonably repay. Below, we cover what goes into determining that amount and how you can begin to tabulate what you might be expected to pay should you choose to file for Chapter 13 bankruptcy.
The Importance of Disposable Income
Most individuals will only qualify for Chapter 7 bankruptcy or Chapter 13 bankruptcy. You may instinctively desire to file for Chapter 7 bankruptcy: It concludes faster, you do not have to make additional payments in service of unsecured debts, and Pennsylvania or federal exemption schedules might prevent you from losing much of your property to liquidation. However, you generally do not get much of a choice in which bankruptcy you can file for.
The Pennsylvania Means Test seeks to determine your eligibility for bankruptcy by evaluating your current level of disposable income. Reading between the lines, the Means Test is trying to figure out if you have the means of paying back at least some of your debt, which would in turn make you eligible for Chapter 13 bankruptcy but not Chapter 7 bankruptcy. If your income is above the average median income for your household size in the state, you will have to perform the full disposable income calculation.
Determining disposable income requires taking your gross income and making allowable deductions, which include:
- Housing (rent or mortgage installments) and utility payments
- Transportation costs (including bus or subway fares or car payments)
- Tax obligations
- Involuntary payroll deductions (including payroll taxes)
- Life insurance payments
- Court-ordered payments (including spousal or child support)
- Medical costs
- Education costs (with some exceptions)
The extent of allowable deductions in each category can vary. For some, you can deduct the full, at-cost amount. For others, you can only deduct up to a certain amount, determined by local, state, or federal standards. This is to prevent someone from deducting the entirety of an exorbitant mortgage payment under the housing deduction, for example.
Once you subtract allowable deductions from your monthly income, you will arrive at your disposable income. If this number is robust enough to at least partially repay creditors, you will be expected to file for Chapter 13 bankruptcy, not for Chapter 7 bankruptcy.
Determining the Size of Your Chapter 13 Bankruptcy Monthly Payment
When you file for Chapter 13 bankruptcy, a trustee will be appointed to help manage your case. The court will issue an automatic stay that will prevent all collection actions from being taken against you, including any pending or in-progress foreclosures, wage garnishments, or repossessions. During this preliminary period, you will not be expected to make any payments to creditors.
In the days and weeks following your filing, you will be expected to present the bankruptcy court with a repayment plan that makes a “best effort” to address your outstanding debts. This plan will combine your nonpriority, unsecured outstanding debts into a single repayment effort.
The monthly amount you are proposing to repay will often be rooted in your disposable income. The court will approve the proposal if it is consistent with all bankruptcy regulations and requirements and if it is satisfied that you are making the best possible effort to settle your debts. The goal of bankruptcy is not to punish, so a court will not scale your monthly obligation with the total size of your debt. The final amount will be based on what you can reasonably repay.
Keep in mind that a proposed repayment plan will be heavily scrutinized by the trustee assigned to your case and the bankruptcy court. Without an approved plan, your Chapter 13 bankruptcy cannot proceed. Qualified legal representation can help you determine what constitutes “best effort” and devise a plan that is likely to pass muster with the court.
Once you and the court do agree on a number, you will be expected to make the approved monthly payment for a period of 3 to 5 years. So long as you continue to make these payments on-time, you will be protected from further creditor actions for the duration of the bankruptcy. Once the payment plan has been completed, you will in most cases be able to discharge any remaining unsecured debt.
We Can Help You Leverage the Benefits of Chapter 13 Bankruptcy
Having to repay a portion of your debt over 3 to 5 years can sound intimidating, but the reality is it likely will help you to regain control of your financial situation. The amount you are expected to repay in a Chapter 13 bankruptcy ultimately comes down to what you are able to offer. Our bankruptcy attorney at Dethlefs Pykoth & Murphy can work with you to propose a payment plan that meets the court’s “best effort” threshold while remaining fair and reasonable to your ongoing needs. Our firm’s goal is to help you get the most out of bankruptcy in order to build a better financial future.
Our team can help determine what you might need to pay in a Chapter 13 bankruptcy. Call (717) 975-9446 or contact us online to schedule an initial consultation.