Use this as a guide to get an estimate. Of course, your plan payment may be different, but this will give you a good working idea for most situations. You may find that you can lower your monthly payments and wipe out all your unsecured debt better in a chapter 13 than you can in a chapter 7.
Because you can “cram down” cars and other loans in a chapter 13, but not in chapter 7.
And, if you own a home and have a second mortgage that qualifies, you may be able to wipe that out as well, but only in chapter 13, not in chapter 7.
And, if you have a high interest rate on your car, you can change it to 4.75% in chapter 13, saving hundreds or even thousands of dollars!
How Long Will Your Chapter 13 Repayment Plan Last?
Although some may qualify for for a 36 to 60 month plan, as a practical matter, most plans will be 60 months.
Because to qualify for the 36 to 60 month plan, your average income for the 6 months prior to filing must be below the median income for your family size. This is the means test at work. For more information I have a complete explanation here.
And, of course, if your income is below median, you naturally want the lowest possible payment for your chapter 13, right? The way to get the lowest payment is to stretch the plan out to the maximum length permitted by law. That is 60 months. So, even if you qualify for a shorter plan, you will normally want a longer plan to get a lower payment. But, you are permitted in this kind of situation to pay your plan off early, but not earlier than 36 months.
How is the Minimum Monthly Payment Determined?
There are certain debts you want to pay (stuff you want to keep).
There are certain debts which, by law, you have to pay.
And, there are some principles that require you to pay more that the minimum as calculated above, which we will review below.
Let’s look at some examples of each of these:
Property you want to pay for, and keep.
Like your house and your Cars
Catching up missed mortgage payments, late car payments.
If you are keeping your home and are behind in payments, you can catch up the missed payments in your plan. Most of the time the mortgage company will not give you much time or work with you in a way that you can afford, but you get up to the full five years of your plan to catch up in chapter 13.
But, sometimes it doesn’t make sense to keep the house.
And if you plan to surrender your house, you don’t pay back the missed payments.
Sometimes if you want to keep your home you can actually strip off the second mortgage, so you pay the first one, catch up the missed payments over 5 years, and wipe out the second one with little or no payment.
This is lien stripping, explained here.
Cars, jewelry and other property pledged as security for loans (like Eagle loans)
If you are going to keep your cars, you will pay for them in your plan.
They are paid off in full at the end of the plan.
If you purchased the car within the last 2.5 years, you must pay the balance due on the loan, and the interest rate you pay will be a very low 6.5%.
If you purchased the car more than 2.5 years prior to filing your bankruptcy (Watch for this! It’s an opportunity that you don’t want to miss. Sometimes we wait a few extra days to file and save thousands of dollars!!) – then – you only pay the actual value of the car if it is less than what you owe. And the amount you pay, it’s value, is paid at the 6.5% interest rate as well.
If you are buying jewelry, the same kind of analysis for how much you pay, except the time period is one year, not 2.5 years. So if you bought jewelry more than a year prior to filing your chapter 13, then you only pay the lesser of what you owe, or what its worth.
Collateral loans, like Eagle loans, where you “pledge” property to secure the loan, are paid only what the current “garage sale” value of the property may be. So if the used TV set and golf clubs you pledged to borrow $3,000 are really only worth $500, you pay $500, at 6.5% interest, or about $10 per month in a 5 year plan.
Again, if you are surrendering the property, you normally don’t pay anything.
Debts you have to pay – like taxes and child support
Mostly in this category we are talking about income tax debt. We don’t normally put child support in the plan, because if you owe child support arrears you paying some amount in addition to your normal child support payment to catch up those missed payments.
Taxes can sometimes be discharged at virtually no payment, and sometimes we can save you thousands of dollars on taxes you owe. But more often we have to pay the taxes (but not the penalties) in full in the bankruptcy plan. No interest is paid on tax debt, not even the 4.75%!
Other debts which must be paid in the plan are the Chapter 13 trustee expense and often I will normally put most of my attorney fee in the plan as well.
Interest on secured debts you owe is changed to 6.5%, and this represents a big savings for many of my clients who have high interest rates on cars. House loan interest rates are unchanged in bankruptcy.
Sometimes we are required to pay more than just the minimum.
Recently, Ohio bankruptcy law was changed to greatly increase the protection we have for all of our personal property and our home.
But sometimes the exemptions don’t fully cover the value of our property.
Do you lose property?
You don’t want that to happen! You worked hard for what you have.
Is this what they mean when they call Chapter 7 a “Liquidation Bankruptcy?”
Yes, but . . . Chapter 13 to the rescue!
Your car is really worth $10,000. You’ve taken good care of it, even paid it off early. But, the Ohio equity exemption is only about $4,000. Even if you “stack” your “wildcard” exemption you still have $5000 in unprotected equity. This is an issue for you.
In chapter 7, you would have to pay the trustee $5,000 in order to keep the car. The trustee will pay the $5000 to your creditors (less his fees, of course). Or the trustee will sell your car, give you $5,000 and then distribute the other $5,000 to himself and the creditors. You lose the car.
But – you don’t want to lose the car! What to do?
Here’s what I would do.
First, let’s reduce the value of the car to $8,500 (don’t ask me how, just know that I can do it).
Now let’s stack your exemptions and maximize the protection for you.
That’s about $5,000,
Now all that remains is $3,500.
Add the trustee fee of 7%, and divide by 60, and you can keep the car, and satisfy the bankruptcy law by paying $62.42 per month to the chapter 13 trustee.
Much easier than coming up with $5,000 all at once!
And, you keep the car.
Sometimes you make enough money to actually pay a portion of your debt.
Nobody I have ever met has any objection to paying what they can on their bills. It’s just that the creditors won’t ever work with you in a way that lets you pay what you can and get out of debt in a reasonable time, which is exactly what chapter 13 is designed to do.
So, if your net income, after taxes and deductions, and after deducting the amount you have to pay for your housing, and your other “must pay” bills, and after an adequate allowance for your living expenses is deducted as well, leaves something “left over” for the unsecured creditors – the law does require you to pay the “left over” to them.
Sounds fair. And it is.
So, if you are blessed with enough income to pay something, even if not much, then that “something” satisfies the law, the creditors get something, according to your ability to pay, and the balance that is unpaid is discharged, forever wiped out, at the end of your plan.
So, just how do we calculate our “net income” anyway?
If you want more detail on the means test, I have a very practical explanation for you here.
But, a quick, “short-hand” way to estimate the net, or disposable income, is to look at your “take-home” pay. Your net income is, essentially, the starting point. Just make sure that you don’t count any debt payments that you may be making as direct deposits from your pay. Sometimes loans or other debts are payroll deducted.
Child support deductions are allowed – so you would not “add back” those payments.
Retirement plan loans are allowed in chapter 13 (but, curiously, not in chapter 7) but remember that if your retirement plan repayment will end during your plan, this will change your net income and result in a “step up” in your chapter 13 plan payment.
A Real-Life Example:
Joe is having a hard time with his bills, he needs help and he knows it.
Currently his home is upside-down. But he wants to keep it. He’s been hounded by his credit card bill collectors so he has skipped the last 4 months on both his first and his second mortgages. He is now facing foreclosure. He needs to trade his car in but hasn’t because he has been struggling with $25,000 in credit card, medical bills and some personal loans he took out to get him through some periods when he wasn’t working.
His current expenses look like this:
-Regular mortgage payment $900 an he is 4 months behind, $3,600
-Home equity line of credit $350, 4 months behind $1,400
-Total missed house payments, $5,000
-Car was purchased 3 years ago, its worth $5,000 but he owes $9,500. Car payment is $300 and he is 2 months behind,
-He is paying $900 per month on his credit cards, medical bills and personal loans.
-His current out of pocket is $2,450 per month.
-He only brings home $3,000 per month, so he can’t afford to live.
This is bad. Joe needs a new plan. He sees me. And I revise his budget as follows:
First – we know we want to keep the house and reorganize the finances.
This is a perfect case for chapter 13.
His new budget looks like this:
-House payment still $900 but we are catching up the missed payments over the next 5 years, so the $3,600 / 60 is now only $60.
-We are totally stripping off the second mortgage, and the arrears. So there is no payment at all now. At the end of Joe’s plan, the second mortgage is forever discharged, gone, no payment.
-The car is eligible for a “cramdown” so we are going to keep it and pay $100 per month on it.
-We discussed that he could get a different one, and let the old one go, and only pay 6.5% on the replacement car. This means he could have purchased a late model used car worth $15,000 and still have only a $300 car payment, but Joe decided to keep his existing car since he knows the history and its been a good car for him. He thinks it will last another 5 years.
I put my fee in the plan and the trustee’s fees too… so here is the new payment:
900 + 60 + 100 +60 = 1120 x 1.07 = $1,199.00
A savings of $1,251 per month!
He keeps everything, loses nothing, strips off his second mortgage and saves $5,000 on his car, plus he saves all the interest he would pay on the car and the second mortgage.
This is HUGE!
What to do next?
If you use the calculator and see that your finances will be significantly improved, or even if your cash flow is not improved at all, the idea of getting out of debt more quickly using chapter 13 appeals to you, then contact me. If you are in my practice area (Dayton / Cincinnati Ohio area) I’ll be happy to give you a more detailed analysis, and thoroughly review your circumstances so you will know for sure what options you can use to get out of debt, keep your property and actually improve your credit.