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How repayment plans work in Chapter 13 bankruptcy

On Behalf of | Nov 8, 2021 | Chapter 13 Bankruptcy |

Consumers who are stressed by debt and calls from collectors may benefit from filing bankruptcy in Chicago, Illinois. Most filers choose Chapter 7, but the process can require the selling of property. Qualified individuals may prefer Chapter 13, which allows them to keep the property.

Overview of Chapter 13 bankruptcy and repayment plan

Chapter 13 helps consumers pay back debt under a repayment plan that they submit to the court for approval. However, the filer must have an income sufficient to make payments over three to five years and not exceed the debt limit. There are commonly three types of debts included in a repayment plan: priority, secured and unsecured.

Having secured debts means that the lender requires the borrower to put up collateral, which they can seize for nonpayment. An unsecured debt, such as credit card and medical debt, commonly doesn’t require collateral and is paid last in a bankruptcy proceeding. Priority debts include those that cannot be discharged in bankruptcy, such as domestic obligations, and they get paid first.

Calculating repayments

When a consumer files the petition for bankruptcy, the court will conduct a means test to determine if they have enough disposable income. The court determines this amount using form 122C-1, the length of the repayment plan, and the household expenses listed on form 122C-2.

The time limit to repay depends on if the filer’s disposable income exceeds the median for six months for a similar size household. The amount of the repayment is based on the type of debts the filer has, and it includes an administrative fee that the trustee takes monthly. Nonexempt assets also figure into the payment plan, but exemptions may allow the filer to exclude them to lower payments.

For property that the filer cannot exempt, they must commonly repay the creditor an amount equal to the value. The nonexempt amount to include in the repayment plan is figured by dividing the remaining equity by the plan length. To keep vehicles and homes, the consumer must catch up on payments in arrears and not miss current payments.

Consumers usually have 15 days to submit their plan to the court. However, since writing a plan is complex, they may seek assistance.