Chapter 13 Payments: How much will I have to pay?

A chapter 13 bankruptcy is a finantial reorganization.  You pay a fixed amount each month for 3 to 5 years (or less).  In return, you may be eligable to modify liens, keep property you'd lose in a chapter 7, or qualify for bankrutpcy with a high income.

By far the most common question is "how much will I have to pay?"  There are two answers to that question.

Chapter 13 is, by definition, affordable.  You pay your disposable income each month; that is, your income minus your reasonable and necessary expenses.  Take all your income from employment, self-employment, support, assistance, etc.  Subtract withholdings, and all your other monthly obligations (except your debt): food, clothing, maintenance, taxes, transportation, child care costs. . . you get the idea.  Whatever is left over, that's what you pay.  It might be $50, or $500, or $5000.

Who decides what you spend on these things?  YOU!  Of course, the expenses must be both necessary and reasonable.  But every person's situation is different, which is why the courts leave this to common sense and reason.  Age, household size, income, and location are all factors.

Also, keep in mind that your disposable income is used to pay all of your debt - including secured debt on property you keep, like your house and cars.  The number may seem high for that reason.  Unsecured creditors, like credit cards, medical debt, and personal loans, only get whatever is left over.  They do not necessarily get 100%; in many cases they get less than 10%.  The rest is discharged!  You do not have to pay everything 100%.

There is one other consideration.  You must pay your unsecured creditors at least as much as they would have received in a chapter 7. In most cases, this number is 0, because the exemptions protect all of the property in a chapter 7, leaving nothing for the creditors.  However, if the number is higher, then you must pay at least that amount within 5 years or less to your unsecured creditors.

In sum, your chapter 13 payments are your disposable income (income minus reasonable and necessary expenses) with your unsecured creditors getting no less than what they would have received in a chapter 7 (usually, nothing).

Your Creditors Don't Want Your Stuff

Clients get nervous when I ask them how much their personal things are worth.  We list the value of clothing, dishes, furniture, toys... even the value of the family pet.  Some clients believe this means they'll have to sell these things if they file for bankruptcy, or that there is some chance they'll lose this property.

In fact, the creditors (represented by the Trustee in a bankruptcy) don't want your personal property. They want money, and most peronal property has very little liquidation value.  How much would you get for your things if they were sold at a garage sale?  Or if you had to buy a similar piece of property in like condition? Probably not very much.  I find most families have between $1,500.00 and $5,000.00 of personal property, with very few, if any, items worth over $550.

Combine this with the fact that you get to keep the following under the federal exemptions:

The debtor’s interest, not to exceed $550 in value in any particular item or $11,525 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

In other words, you can keep up to $11,525.00 in the above items.  And for couples this amount is doubled.

Creditors focus more on things with actual resale value: home equity, equity in boats/motors, savings, and business interests. 

Collection Lawsuits in Michigan (Part I)

The creditors have been calling, but no matter how much you pay it's not enough to stop them. You start ignoring the calls and the threatening letters.  What happens next?

The creditor will sue you to get a money judgment.  Why?  Because a judgment is good for ten years and Michigan law gives the holder of a money judgment a set of tools to force you to pay.  These include bank account and paycheck garnishments, levies, creditor exams, and liens.  Sometimes a creditor will sue you before they even entertain a settlement offer.

But don't panic if a creditor sues you.  The creditor cannot use these tools until a judgment is obtained. To get a judgment, the creditor must file and serve you with the complaint.  If you're served by mailed, you then have 28 days to answer. After that, the creditor must apply for a default judgment, and then wait another 21 days for it to become effective. If you answer the complaint, you can buy more time as the court will set the matter for a pretrial.  

That said, don't wait for the creditor to get a judgment.  A timely bankruptcy filing will halt or prevent litigation.  It can discharge your debt before the garnishments start or the liens get placed on property.  It can even get back some of your recent garnishments and strip off liens, but this can result in a more complicated and expensive bankruptcy filing.

In my next post, I'll address some of the tools creditors use once they obtain their judgments