Many bankruptcy filers in California choose Chapter 13 to deal with their debts. They also must file Chapter 13 if they are above the income threshold for Chapter 7. Chapter 13 allows consumers to repay debts over time with a payment plan.
How Chapter 13 payment plans work
A Chapter 13 payment plan restructures the consumer’s debt into manageable payments across several years. The consumer devises the plan detailing how they intend to pay creditors, and the court must approve it. They commonly have 14 days after submitting the petition to formulate the plan, and it requires attending a confirmation hearing to get approval.
The amount of the payment is based on a two-part means test, which determines disposable income. The first part compares the consumer’s income to the median of the state for a household of a similar size.
If the filer’s income on form 122C-1 is below this figure, they commonly can spread payments over three years. For incomes that exceed the median, they may spread payments over five years or as determined by the court. The filer uses Form 122C-2 to figure disposable income, and they are allowed to lower this amount by deducting acceptable expenses.
Debts in Chapter 13
Priority debts must be paid in full, which include state and federal back taxes as well as past-due alimony or child support. If the debt is secured, which means it has collateral attached, the filer must pay the arrears or surrender the property. While consumers don’t lose assets in Chapter 13 bankruptcy, they must at least pay the value of the asset.
Non-priority unsecured debts, such as medical bills, are commonly paid last. However, they don’t have to be paid in full, which means some unsecured creditors may not get paid anything.
The consumer must meet all of the requirements to avoid case dismissal. Chapter 13 plans have fairly strict requirements, but they help consumers keep more of their assets than they would in Chapter 7.