In Chapter 13 bankruptcy, you will have to make payments to the bankruptcy Trustee for three to five years. The Trustee will distribute your payments pursuant to the terms of your Chapter 13 plan. The amount you must pay into the Chapter 13 plan is based on your income, assets and debts. At a minimum, your Chapter 13 plan must cover certain types of debts including certain taxes and arrears on secured debts and domestic support obligations. Income tax liability for returns that have come due in the past three years must be paid through your Chapter 13 plan, but you likely don’t have to pay liability from returns due more than 3 years ago. If you are personally liable for sales taxes or payroll taxes, these must also be paid through your Chapter 13 plan.
Additionally, if you are behind on secured debt such as a car loan or a mortgage and you wish to keep the collateral (ex., vehicle, home), you must pay the arrears (i.e., the amount you are behind on the loan as of the day you file bankruptcy) on this secured loan through your Chapter 13 plan. If you are curing arrears on a secured loan in your Chapter 13 plan, you must also maintain payments on the secured debt as they come due. These payments can typically be made directly to the creditor and do not have to paid through your Chapter 13 plan.
If you are behind on child support, alimony or maintenance when you file bankruptcy, you will likely have to pay these arrears through your Chapter 13 plan. Additionally, bankruptcy law requires you to maintain all domestic support payments that come due during your bankruptcy. Payments for domestic support obligations that come due after you file bankruptcy will typically be made directly to recipient of the obligation and not be paid through your Chapter 13 plan.
Other debts, including your unsecured debt (ex., credit cards, medical bills, personal loans), do not necessarily get paid in Chapter 13 bankruptcy. However, your assets and income may serve as a basis for you to have to pay some of this debt in Chapter 13 bankruptcy. The law states that your creditors cannot do worse in Chapter 13 bankruptcy than they would if you filed Chapter 7. This means Chapter 13 incorporates the asset analysis of Chapter 7, in which the law specifies certain property that you can keep (“exempt”) in bankruptcy (for more information see What property can I keep in Chapter 7 bankruptcy? under Bankruptcy: Chapter 7). If you have property that is “non-exempt”, you must pay your creditors the value of this property in Chapter 13 bankruptcy.
And you may have to pay even more to your creditors if your income is too high. In particular, if your household income for the six months prior to filing (your Current Monthly Income) is above the median income for your household size in Colorado, the amount you have to pay in Chapter 13 bankruptcy will likely be based on the complex formula of the long-form means test (also used to determine eligibility for Chapter 7 bankruptcy). The formula starts with your average monthly household income and then allows you to take deductions from that income for numerous expenses, including:
- Living expenses such as food, clothing, utilities, education;
- Childcare expenses for children under 18;
- Ongoing medical expenses;
- Many payroll deductions, such as taxes, health insurance, term life insurance, and retirement contributions;
- Secured debt payments for your home and vehicle;
- Other reasonable and necessary expenses for the support of you and your dependents (ex., business expenses); and
- Those expenses mentioned above that must be paid in Chapter 13 bankruptcy.
Certain expense deductions are based on IRS standards for your household size while others are based on the amount you actually spend. In general, if your income minus these allowed expenses yields a positive number, then you have “disposable income” and you will pay this amount to your unsecured creditors in your chapter 13 bankruptcy plan for 5 years.
Finally, you typically must make regular payments on any debts secured by collateral you intend to keep, such as your mortgage and car loan. While these payments can be made directly to the creditor outside of your Chapter 13 plan, they are typically specified in the plan and required as a condition to getting a bankruptcy discharge at the end of your plan. Alternatively, you can pay a secured debt at relatively low interest through the Chapter 13 plan.