Is Your Chapter 13 Bankruptcy Payment Plan Enough? A Key Benchmark

Law Blog

Chapter 13 bankruptcy can be a life-altering alternative to liquidation bankruptcy for some debtors. But while you have more control over what you get to keep and what you give up in bankruptcy, your repayment plan must be approved by the court. And to do this, debtors have to reach one key benchmark. What is this benchmark? Why does it matter? And how can you ensure you achieve it? Here's what you need to know. 

What Is Your Minimum Payment?

Chapter 13 debts are broken down into three categories before a payment plan is created. The first type is secured debts you will reaffirm, such as your home mortgage or vehicle loans. The next type is priority obligations you must pay regardless of the bankruptcy, including mandatory support or judgments. The last type is unsecured debts like credit cards, medical bills, loans from friends, and some taxes. 

Once you subtract the first two types of debt from your income, how much will go to unsecured debts? The amount to be paid back to them over the lifetime of your plan must be at least as much as the creditors would have received if you had used Chapter 7 liquidation; only then will you receive approval. 

How Is the Minimum Calculated?

The debtor must perform two sets of calculations. First, they calculate the proposed payment plan based on all three types of debt and the number of months in the plan they had chosen. Then, the debtor must add up the value of the assets they would have forfeited in Chapter 7 liquidation, after any exemptions. The former must equal or exceed the latter. 

Why Does This Matter?

Chapter 13 repayment plans provide a way for borrowers to keep their most important assets, like their homes. But this is not a guaranteed right.

In fact, the bankruptcy process is a compromise between the best interests of the borrower and the interests of those who lent them money. In order to keep assets through Chapter 13, your creditors have the right to receive at least the amount that the liquidation of those assets would have benefited them. This assurance helps keep the bankruptcy system working and lenders cooperative with it. 

Where Can You Get Help?

Will your payment plan be approved by the bankruptcy trustee? Should you adjust your plans to reaffirm any debts? Find out by meeting with an experienced attorney in your state that specializes in bankruptcy services today. 


20 July 2023

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