In Chapter 13, the debtor makes consistent monthly repayments to the trustee pursuant to an agreed upon plan that is ultimately confirmed by the Court. But how is this plan calculated?

There are nuances within a Chapter 13 plan that will vary by district (for example, how much of a tax refund the debtor is entitled to keep), but the calculation based on creditor classification is similar throughout the country.

Administrative and priority creditors are entitled to be paid in full. The primary administrative fee is payment to your attorney for legal services. Priority debts will consist primarily of certain income tax debt and domestic support obligations.

Secured creditors also get paid in full. In the case of a car, the secured creditor will be paid at interest, even though that rate can be reduced greatly from the contract rate. Your mortgage company will need to be paid any penny of arrears you brought into the case.

The unsecured creditors will theoretically get the remaining crumbs based on the debtor’s income and ability to pay under the means test. They could therefore get anywhere from 0-100%. However, the debtor must pay the greater of her ability to pay based on income vs. what assets of hers would be subject to liquidation had she hypothetically filed Chapter 7.

In other words, a debtor who is cash poor but asset rich, will possibly have to pay more to her creditors than she can afford. In that scenario, the debtor will not be able to make a Chapter 13 work because inability to pay it not a defense to being in Chapter 13.

On top of all this, the debtor must outside the plan be able to afford all of her monthly living expenses (rent/mortgage, utilities, food, auto insurance, etc..).

In sum, the debtor has certain creditors she must pay at 100% in a Chapter 13, and others she may pay at 100% depending on a variety of factors. Should the debtor be unable to make the “must” payments, the debtor cannot afford the Chapter 13.

By Peter Bricks