How are Chapter 13 Payment Plans Calculated?

How are Chapter 13 Payment Plans Calculated? A laptop sits on a table. The screen reads "Payment Plan."

When debt becomes unmanageable and you find yourself falling behind on payments, Chapter 13 bankruptcy becomes a very real option to help get your finances back on track. However, many people don’t truly understand how bankruptcy works and are leery of taking that first step. You may be asking yourself several questions. Is bankruptcy right for me? How are Chapter 13 payment plans calculated? What happens if my circumstances change over the 3-5 year repayment period?

We will address these questions and more throughout the course of this article.

Is Bankruptcy Right For Me?

Though it tends to carry a negative stigma, bankruptcy is not the end of the world. In fact, it can actually be good for you. Chapter 13 bankruptcy is a powerful tool that can help families and individuals throughout the State of Maryland get their debt under control. Chapter 13 allows the restructuring of debt, including secured debts such as mortgages and car loans through lien stripping and cramdowns. So, if you find yourself in a situation where you are no longer able to keep up with your debt, bankruptcy might be your best option. Use the evaluator below to help you determine your eligibility.

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How are Chapter 13 Payment Plans Calculated?

Chapter 13 bankruptcy can be used for individuals to pay back mortgage arrears, tax debt, and certain other kinds of secured and priority debt over a 3-5 year payment plan. When a person files for bankruptcy, the automatic stay takes effect and prohibits all collection activities against the individual. This gives the bankruptcy filer, or “debtor,” some breathing room to devise their payment plan. But how is this plan actually calculated?

First, let’s look at the length of the plan. Whether you can propose a 3-year (36 months) or a 5-year (60 months) plan depends on several factors, including your average income for the six-month period preceding your bankruptcy. If your income is below median in Maryland, your plan can be anywhere from 3 to 5 years (60 months) long. If your income is above median in Maryland, you will typically end up with a 5-year plan. If you have no disposable income, you can ask for a shorter plan.

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Next, we must determine which debts must be paid back in full. You see, Chapter 13 bankruptcy is a very useful tool to resolve many different kinds of debt. In many cases, the debtor can pay their unsecured debts (credit cards and personal loans) pennies on the dollar. Other debts (secured debts), as we just mentioned, must be paid back in full over the 3-5 year payment plan. 

  • Priority Debts: Certain types of debt are considered priority debt and cannot be discharged in a bankruptcy and must be paid in a Chapter 13 plan Examples of these types of debt include certain taxes, child support, and alimony.
  • Mortgage Arrears: If you want to keep your house, you must pay off all of the arrears existing at the time of filing in your Chapter 13 plan If you plan to surrender your house, you don’t have to pay back the arrears throughout the course of your Chapter 13 payment plan.
  • Car Loans: Unless you intend to surrender your vehicle, you will be required to pay off arrears while also making your regularly scheduled payments.

These debts, among other secured debts, are used to calculate your minimum Chapter 13 payment plan.

When it comes to unsecured debts, the minimum amount you must pay unsecured creditors is equal to the amount these creditors would have received had you filed for Chapter 7 bankruptcy. However, disposable income and exempt vs. non-exempt assets also play a role. Depending on how much disposable income or non-exempt assets you possess, your monthly payments can be much higher. To calculate your disposable income, you will be required to fill out Form 22C – Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income. If your income is below median in Maryland for the six months preceding your bankruptcy, you will not be required to fill out the entire form and will likely pay little or nothing to nonpriority unsecured creditors. However, if your income is above median in Maryland for the six months preceding your bankruptcy, you must complete the form to determine whether or not you have enough disposable income to pay back some of your nonpriority unsecured debts.

Consult a Maryland Bankruptcy Attorney to Determine Your Monthly Payment

Chapter 13 bankruptcy is a complicated process. If you are still struggling with the question, “How are Chapter 13 payment plans calculated?” or want a more exact estimate than you can reasonably calculate yourself, it is a good idea to consult a bankruptcy attorney, like Steiner Law Group. We can help you understand the bankruptcy process and evaluate your options. Steiner Law Group is a boutique law firm in Maryland that assists individuals and businesses with bankruptcy and financial restructuring services. We have helped hundreds of individuals, families and businesses discharge millions in debt.

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What Happens if My Circumstances Change During the 3-5 Years?

Throughout the course of 3 to 5 years, circumstances can often change. For example, if a person in a Chapter 13 plan loses their job, becomes ill, or is seriously injured, they may no longer have access to a steady income and, as a result, can no longer afford their monthly payment plan. In situations like these, there are several options.

  • Modify the Payment Plan: When circumstances change, it is possible to modify the Chapter 13 bankruptcy payment plan with the Court’s approval. Following a motion to modify the plan, the court and Chapter 13 trustee will typically request proof of your new circumstances and, if satisfied, they can order a new plan payment for the duration of the case.
  • Hardship Discharge: When a debtor can’t complete their Chapter 13 payment plan because of an unexpected event, such as a long-term loss of income, they may be able to request a hardship discharge to release debts early. However, this is typically a rare occurrence and, if the court does grant the debtor’s motion for a hardship discharge, only unsecured non-priority debts are discharged. 
  • Convert to a Chapter 7 Bankruptcy: The debtor can consider converting to a Chapter 7 bankruptcy. However, under a Chapter 7, the trustee may wish to sell certain assets and distribute the proceeds to creditors. However, this is not always the case, as many times property either has no value to the Bankruptcy Estate, or the property can be exempted.

If you can no longer afford your monthly payment plan and are not able to utilize one of the above options, the Chapter 13 trustee can ask the Court for Chapter 13 involuntary dismissal.

Still Have Questions?

If you have more questions about Chapter 13 bankruptcy, please schedule a risk free consultation or contact Steiner Law Group, LLC a Baltimore, Maryland law firm at (410) 670-7060 to learn more about bankruptcy options.

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About Eric Steiner, Esquire

Mr. Steiner graduated from the University of Michigan Law School in 2006. Since then, he has focused his practice on bankruptcy, real estate, commercial and consumer collections, including representing the third largest lender in the greater Baltimore area.