Chapter 13 bankruptcy is a legal remedy that allows people to escape from heavy debt burdens by completing a court-approved repayment plan. During the life of the plan, which is three to five years, the debtor is protected from creditors’ collection actions as long as he or she makes the required monthly payments. This depends upon setting a payment amount that the debtor can manage.

A Chapter 13 plan does not have to repay all outstanding debts. Although secured and priority debts must be paid in full, unsecured creditors generally need only receive as much under the plan as they would get if the debtor's non-exempt assets were liquidated in a Chapter 7 bankruptcy. The bankruptcy court will generally approve a monthly payment that meets these requirements and that is calculated based on the debtor’s financial ability. This factors in the debtor’s income and expenses, any nonexempt property owned and the types of unsecured debts involved.

If you’ve filed for Chapter 13, the calculation of your monthly payment begins with assessing your income for the six months prior to the petition filing. Then, allowable expenses are deducted to determine your projected disposable income. These include all necessary and reasonable living expenses, such as housing, food, transportation, utilities, clothing, healthcare and child care.

The next step is to determine the amounts of the following types of existing debt:

1. Priority debts — These include certain income taxes and past-due domestic support obligations.
2. Secured debts — These include real estate mortgages, car loans and other debts that are secured by collateral. You can choose to pay the debt in full or to surrender the collateral. You may also be able to "cram down" the outstanding debt to the fair market value of the collateral.
3. Unsecured debts — Debts that have no collateral need only be partially discharged, depending on the disposable income remaining after priority and secured debts are accounted for. If you hold assets that are not exempt under federal or state law, you must pay unsecured creditors at least as much as the value of those assets.

A Chapter 13 also involves administrative expenses payable to the bankruptcy trustee, which are calculated as a percentage of the funds distributed through the plan. These expenses are made a part of the monthly payment. Your attorney’s fees are also paid through the plan.

The monthly payment is calculated based on projected economic circumstances, and these can change over the three-to-five-year life of the plan. With the aid of your Chapter 13 attorney, you may request a modification of the payment amount if you undergo a significant loss in income, a sizable increase in expenses or other unexpected financial changes.

The Law Offices of James C. Zimmermann represents clients throughout New Jersey’s Sussex and Passaic counties in Chapter 13 bankruptcies. Call us at 973-764-1633 or contact us online to arrange a free consultation and learn how we can help.