What Is a Chapter 13 Repayment Plan and How Is It Calculated?
Filing for bankruptcy can feel overwhelming, especially when you’re trying to understand how the process works and what it means for your financial future. If you’re considering Chapter 13 bankruptcy, one of the most important aspects to understand is the Chapter 13 repayment plan — a structured agreement that allows you to reorganize your debts and pay them off over time while keeping your assets.
At the Law Office of Michael Schwartz, we help Pennsylvania residents navigate the complexities of bankruptcy law. This guide will walk you through what a Chapter 13 repayment plan is, how it’s calculated, and what factors determine your monthly payment.
What Is a Chapter 13 Repayment Plan?
A Chapter 13 repayment plan, sometimes referred to as a “wage earner’s plan,” is a court-approved agreement that allows individuals with regular income to repay all or part of their debts over a period of three to five years. Unlike Chapter 7 bankruptcy, which involves liquidating assets to pay creditors, Chapter 13 allows you to keep your property while making manageable monthly payments.
The primary purpose of a Chapter 13 repayment plan is to reorganize your debts, stop foreclosure or repossession, and provide a clear path to financial recovery. Once you complete the plan, most remaining unsecured debts — such as credit card balances and medical bills — are typically discharged.
How the Plan Works
Under Chapter 13, you make a single monthly payment to a court-appointed trustee, who then distributes the funds to your creditors according to the terms of your repayment plan. This centralized payment system simplifies the process and ensures that your creditors are paid in the proper order of priority.
Understanding the Chapter 13 Repayment Calculation
The Chapter 13 repayment calculation is not arbitrary. Your monthly payment is determined by analyzing several key factors, including your income, expenses, equity in assets and the types of debts you owe. The calculation is designed to ensure that you pay as much as you can reasonably afford while satisfying legal requirements.
Three primary factors determine your payment amount:
1. Disposable Income
Disposable income is the money you have left after paying for reasonable and necessary living expenses. This includes housing costs, food, utilities, transportation, and other essentials. All remaining income must be directed toward your Chapter 13 repayment plan.
If your income is above your state’s median, the court uses IRS standards to determine allowable expenses. If your income is below the median, you have more flexibility in defining what constitutes reasonable expenses.
2. Priority and Secured Debts
Certain debts must be paid in full through your repayment plan. Priority debts, such as tax obligations, cannot be discharged in bankruptcy and must be satisfied during the plan period.
Secured debts, like car loans and mortgage arrears, must also be addressed if you want to keep the collateral. For example, if you’re behind on your mortgage, the repayment plan allows you to catch up on those arrears over the course of three to five years while continuing to make your regular mortgage payments.
3. Nonexempt Assets and the “Best Interest” Test
Under Chapter 13, unsecured creditors must receive at least as much as they would have if you filed for Chapter 7 bankruptcy liquidation. This is known as the “best interest” test.
If you have nonexempt assets — property that isn’t protected by bankruptcy exemptions — the value of those assets sets a floor for how much unsecured creditors must receive. For instance, if you own a vacation property worth $10,000 that isn’t exempt, your plan must pay unsecured creditors at least that amount over the life of the plan.
Steps to Calculate Your Chapter 13 Payment
Calculating your Chapter 13 repayment plan involves several steps:
- Step 1: Determine Your Income: The court reviews your income from the past six months to calculate your current monthly income. This figure is then compared to the median income for a household of your size in Pennsylvania.
- Step 2: Identify and Categorize Your Debts: You’ll need to list all of your debts and categorize them as secured, priority, or unsecured. Secured debts are tied to collateral (like a house or car), priority debts have special legal status, and unsecured debts have no collateral backing them.
- Step 3: Calculate Disposable Income: Subtract your allowable monthly expenses from your monthly income. If you’re above the state median income, the IRS standards will apply. If you’re below, you can use actual expenses, as long as they’re reasonable.
- Step 4: Formulate the Payment Plan: Your monthly payment must cover the monthly portion of priority and secured debts, plus any disposable income available for unsecured creditors. The trustee will then distribute these funds according to the plan’s terms.
How Long Does a Chapter 13 Plan Last?
The duration of your Chapter 13 repayment plan depends on your income relative to the state median:
- Below Median Income: If your income is below Pennsylvania’s median, your plan typically lasts three years.
- Above Median Income: If your income exceeds the median, you’ll generally be required to commit to a five-year plan.
However, the court may allow for adjustments based on your specific circumstances.
The Role of the Trustee
Once your Chapter 13 plan is approved, a trustee is assigned to oversee the process. The trustee collects your monthly payment and distributes it to your creditors in the order specified by bankruptcy law. Priority debts are paid first, followed by secured debts, and finally unsecured debts.
The trustee also monitors your compliance with the plan. If your financial situation changes — such as a job loss or unexpected medical expenses — you may be able to modify the plan with court approval.
Comparing Chapter 13 to Chapter 7
Many people wonder whether Chapter 13 or Chapter 7 bankruptcy is the better option. The key difference lies in asset retention and repayment structure.
In Chapter 7, nonexempt assets may be sold to pay creditors, and the process is typically completed within a few months. Chapter 13, on the other hand, allows you to keep your assets while repaying debts over time.
The “best interest” test in Chapter 13 ensures that unsecured creditors receive at least what they would have under Chapter 7. This makes Chapter 13 an attractive option for individuals who have significant equity in their home or other valuable assets they wish to protect.
Benefits of a Chapter 13 Repayment Plan
A Chapter 13 repayment plan offers several advantages:
- Stop Foreclosure: Filing for Chapter 13 triggers an automatic stay, halting foreclosure proceedings and giving you time to catch up on mortgage arrears.
- Keep Your Assets: Unlike Chapter 7, you can retain your home, car, and other property.
- Discharge Remaining Debts: After completing your plan, most unsecured debts are discharged, giving you a fresh financial start.
- Manageable Payments: The plan consolidates your debts into a single, affordable monthly payment.
Take the Next Step Toward Financial Recovery
Understanding the Chapter 13 repayment plan and how the calculation works is the first step toward regaining control of your finances. If you’re struggling with debt and considering bankruptcy in Pennsylvania, the Law Office of Michael Schwartz is here to help.
Our experienced team will guide you through every step of the process, from determining your eligibility to formulating a repayment plan that works for your unique situation. Don’t let financial stress control your life — contact us today to schedule a consultation and explore your options.