When a chapter 13 case is filed, a “plan” must be proposed that tells the court and creditors how each debt is going to be treated i.e. paid or not, how much and when.
How each type of debt is treated, depends on the bankruptcy code and case law. Generally, a chapter 13 filer must have enough income to pay the following in full:
1. Living Expenses
The law assumes that you need a certain amount of money to pay for your “reasonable” living expenses. What is considered to be reasonable is litigated around the country each week. In Arizona, your reasonable living expenses typically includes: mortgage, food, utilities, insurances, out of pocket medical care costs, upkeep on home, HOA dues, property tax, child care, spousal maintenance, daycare, costs related to maintaining your small business, or related to your employment, gas and upkeep on car, laundry, mandatory withholdings at work, car lease and a few other items. These items are paid outside the plan of course.
2. Car Loan
Car payments are paid through the chapter 13 plan as part of the plan payment. The plan will often change the treatment of the car loan creditor. The law often allows for the debtor to pay less in principal and or interest and the length of the loan payout is either shortened or lengthened.
3. “Priority” Debt
Certain taxes, child support, spousal maintenance are the most common debts that must be paid in full through the plan.
4. Tax Lien
If a taxing entity has properly recorded a tax lien and the debtor has assets with value, the tax lien will have to be paid through the plan with interest.
5. Mortgage Arrears
If behind on a home loan, the amount that is owed will be paid as part of the plan payment and any foreclosure will be stopped while the payments are made.
6. Value of Non-Exempt Assets
If the debtor has an asset that is not considered “protected” under state law, in order to create a viable chapter 13 plan, unsecured creditors must be paid its value during the plan. If the debtor has an antique jukebox worth 10000.00, these creditors will need to be paid 10000.00 during the plan or give the jukebox up to the chapter 13 trustee for sale and distribution as in a chapter 7 bankruptcy.
7. Disposable Monthly Income
The debtor must also pay unsecured creditors their “extra” income as determined by various and required budget and income calculations IF the resulting number is greater then the proposed amount to the unsecured creditors to protect the non-exempt asset. Many debtors pay very little to the pool of unsecured creditors.
Attorney and Trustee fees paid through the plan.
A well developed and successful chapter 13 plan often results in:
1. full payoff of priority debt 2. full payoff of car loans and home arrears 3. a large reduction of debt paid to unsecured creditors 4. protection of assets that would have been lost in chapter 7.