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Debt that is included in a California Chapter 13 Bankruptcy
Before looking at what your monthly bankruptcy payment could be, it is essential to understand how debt is included and categorized in a Chapter 13 bankruptcy.
A secured debt is a financial obligation that you owe that is backed with collateral. This means that if you default on the contractual terms of your debt, your creditor could recover by taking possession of the collateral. The collateral is secured through a lien that could be voluntary or involuntary. One of the most common types of voluntary liens people are familiar with is a mortgage. An example of an involuntary lien would be a lien on your property for unpaid taxes. Additionally, some municipal utility claims are also secure. When you list your secured debt, you must also include the attached property and the fair market value.
Unsecured debt includes almost everything else, including credit card debt, medical bills, and personal loans. When you file for bankruptcy, our Sacramento Chapter 13 bankruptcy attorney will help ensure that you include a complete list of all your unsecured debt. In your schedules, you will have to list the creditor, the balance due, and the date the debt was incurred.
Certain debt is considered priority debt. Simply put, priority debt is considered “special” and will survive your bankruptcy if not paid. Additionally, in Chapter 13, priority creditors will be paid before any unsecured creditors.
Most all tax obligations are categorized as priority debt. In addition, various other debts are considered priority under the Bankruptcy Code. These debts include administrative costs associated with the bankruptcy, such as attorney or accounting fees, spousal and child support, and injury or death claims related to a drunk driving accident.
Calculating Your California Chapter 13 Bankruptcy Plan Payment
What you are required to pay through your Chapter 13 bankruptcy plan will depend on the type of debt you have, your last six months of household income, your non-exempt assets, and your monthly income versus expenses. For the sake of explanation, imagine a couple with a home in foreclosure, $85,000 of various credit card and medical bills, and $12,000 in tax debt. For this example, the couple also has $21,000 of non-exempt equity in their personal property.
The Means Test
The first thing our Sacramento, CA bankruptcy attorney will do is calculate the household’s disposable monthly income through the Means Test. This test looks at all the income received over the six months before filing for bankruptcy and deducts various actual and federally mandated expenses. If your household income is above the median amount for your geographical area, you will be required to pay a portion of your unsecured debts. An above-median bankruptcy must also last five years. If it is below, your unsecured debts could be discharged and your case only has to last three years.
For this example, assume the couple is above-median and has $300 in disposable monthly income. Because there is disposable monthly income, the bankruptcy plan will have to provide $300 a month, or $18,000, towards unsecured creditors.
The couple in this example is filing for bankruptcy primarily to stop a foreclosure on their home. Assume that the amount they are behind is $15,000. If they want to keep their home, this amount must be paid through their bankruptcy plan. Therefore, because the bankruptcy is sixty months long, the monthly payment for the mortgage arrears is $250.
As stated above, priority creditors must be paid through your bankruptcy plan. In this example, the couple owes $12,000 in unpaid taxes. This amount will also be spread over sixty months, adding $200 to their monthly payment.
Non-exempt Equity in Property
When our Folsom bankruptcy attorney listed all the couple’s personal property in the bankruptcy schedules, there was $21,000 in non-exempt equity. To understand how non-exempt equity impacts a Chapter 13 plan payment, you need to know how Chapter 7 works.
In Chapter 7, a court-appointed trustee will take possession of any non-exempt property and sell it. The proceeds will then be paid to the unsecured creditors. When you file for Chapter 13, your creditors must be paid what they would have been if you filed for Chapter 7. This requirement means that the value of any non-exempt property must be paid to unsecured creditors.
The couple in this example has $21,000 in non-exempt property. There are also paying $18,000 to unsecured creditors because of the Means Test. Therefore, they need to pay an additional $3,000 to unsecured creditors, or $50 a month.
Therefore, the monthly Chapter 13 bankruptcy payment will include $300 per the Means Test, $250 for the mortgage arrears, $200 for priority debt, and an additional $50 because of the non-exempt equity, for a total monthly payment of $800.
The couple must show that they can afford this payment by listing their monthly income and subtracting their reasonable monthly expenses. If the amount is too low, then the couple would not qualify for bankruptcy. If the left-over amount is higher than $800, the excess amount must be added to the monthly payment. Our Sacramento Chapter 13 bankruptcy attorney will draft a plan based on your circumstances.
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