A Chapter 13 bankruptcy is also called a wage earner’s plan because it requires a repayment plan. Those with higher personal incomes and assets that they can’t exempt from a risk of liquidation often choose Chapter 13 bankruptcy and need to negotiate a repayment plan if they hope to discharge their unsecured debts. Before the courts grant someone a discharge, the person who files will make multiple years of payments. Those payments will help reduce the outstanding balance on their debts. It is only after completing the plan that someone will complete the bankruptcy process and obtain a discharge.
Frequently, a filer will need to commit a significant portion of their income toward their monthly payments. Who establishes how much the monthly payment amount is and how that amount gets distributed to the filer’s different creditors?
The Debtor makes initial payment proposal
Two main factors come into play in determining how much the payments will be. The Debtor’s disposable income and the nonexempt equity in the Debtor’s property. Debtor is allowed to pay reasonable and necessary living expenses. If after paying for those expenses, the debtor has money left over, that disposable income is devoted to creditors.
In addition, a Debtor can protect a certain amount of equity in assets such as home, furniture, car, etc. If the Debtor cannot exempt all of the equity, the Debtor payment plan must also be sufficient to pay creditors at least what they would have received in a liquidation.
If the trustee or creditors object to the proposed plan, they file an objection. If an agreement cannot be reached, the judge decides.
The filer will then send a payment to the trustee each month, and the trustee will make sure that those funds go out to the individual creditors each month.
Seeking legal guidance to learn more about what to expect during a Chapter 13 bankruptcy can help those who are hoping to regain control of their financial circumstances by reworking their budget and making structured payments before discharging some of what they owe.