How Is a Chapter 13 Bankruptcy Plan Calculated?

Introduction
The most common questions we get at Ashley F. Morgan Law, PC about Chapter 13 are: “How is my Chapter 13 payment plan calculated?” and “What will my Chapter 13 payment be?” The answer is complicated because your plan depends on multiple factors, including your income, expenses, assets, and specific debts. For many people in Virginia, equity in their home plays a significant role.

Virginia’s relatively low homestead exemption (even with recent increases) means that homeowners with significant equity in their homes often cannot file for Chapter 7 bankruptcy without risking their property. As a result, Chapter 13 becomes the best option, and the payment plan is heavily based on their equity.

In this post, we’ll explain the key factors that influence a Chapter 13 plan, why two people with similar incomes can have very different plans, and the unique challenges for Virginia homeowners.

Key Factors That Influence Your What Your Chapter 13 Payment Will Be

Understanding what your Chapter 13 payment will be is an important part of the process. While it can sometimes be easy to determine what needs to be paid to creditors, sometimes calculating payments can be difficult. Any Chapter 13 payment is based on numerous factors including: non-exempt assets, disposable income, and priority debts.  Your payment may also

1. Equity in Your Home

For many Virginia residents, home equity is the biggest factor in calculating their Chapter 13 plan. The state’s homestead protection protects $50,000 per owner (which results in $100,000 for married couples owning a property together), but with rising property values, many homeowners exceed this amount. With this relatively low homestead exemption, there are many individuals who may qualify for a Chapter 7 with income but must pay back creditors since their equity exceeds the exemption.

If your non-exempt equity in your home is significant, you must pay that amount to your unsecured creditors through your plan. Many people will use Chapter 13 as a way to protect their home and ensure that they can keep it after filing bankruptcy. 

Example:

• Your home is worth $440,000, and you owe $300,000 on your mortgage. You have about $100,000 in equity (after reducing for 10% in cost of sale/case administration).
• If you jointly own the home, the homestead exemption protects $100,000, and your plan won’t be affected by equity.
• If you own the house by yourself, $50,000 of equity is unprotected, and you must pay at least $50,000 to unsecured creditors through your plan.

2. Disposable Income and the Means Test

Disposable income is the amount left over after deducting allowed expenses from your income. It’s calculated using the means test, which takes into account IRS-standardized expenses like rent, transportation, and food, as well as some actual expenses like childcare, mortgage, taxes and more.

Typically, if your disposable income is low, your monthly payment to unsecured creditors will also be low—unless your plan is driven by non-exempt assets like home equity.

3. Priority Debts and Mortgage Arrearages

Certain debts, like recent taxes and mortgage arrearages, must be paid in full during your Chapter 13 plan. These can significantly increase your monthly payment. Additionally, you must remember that in Chapter 13, you restart paying your mortgage after filing and you are paying an additional payment toward your debts to the trustee. As a result, if you have not paid your mortgage in many months, there can be a big shock to your budget.

Example:

• If you owe $15,000 in priority taxes, this adds $250/month to your plan over 5 years.
• If you’re behind on your mortgage by $30,000, your plan must include payments to cure that arrearage, often stretching affordability.

4. Liquidation Test (Best Interest of Creditors Test)

The liquidation test ensures that creditors receive at least as much in Chapter 13 as they would if you filed Chapter 7. If you have significant non-exempt assets, your plan must pay unsecured creditors an amount equal to the value of those assets.

Examples:

• You own a car worth $30,000 with no loan and Virginia allows you to protect/exempt $10,000. Your plan must pay at least $20,000 to unsecured creditors.
• You own a car with $45,000 with a loan of $40,000.00 and Virginia allows you to protect/exempt $10,000. Your plan must pay at least $20,000 to unsecured creditors.

5. Plan Length and Affordability

Chapter 13 plans cannot exceed 5 years. If your plan requires high payments to cover priority debts, arrearages, or non-exempt equity, it may become unaffordable. Your payments might be able to be adjusted if you have fairly certain changes in your expenses that will happen during the plan. Additionally, some people can qualify for a 3 year Chapter 13 plan in certain circumstances; basically, if your income is below the median income, you may be able to file a three year plan. But, if you cannot afford to make the necessary payments during the three year plan, you can elect to file a five year plan to make payments more affordable.

Example:

• If your plan must pay $60,000 in mortgage arrearages over 5 years, that’s $1,000/month before considering other expenses, including the regular mortgage payment.
• If your disposable income after necessary expenses is only $200 per month, you may not be able to afford the payment.
• If your disposable income is $900 per month, you may be able to afford the payment, especially if you can cut back on expenses. Alternatively, you may start will a lower payment and increase the payment later, if you have payments that will be ending during the plan, like car loan or retirement loan. Chapter 13 does allow flexibility in allowing payment changes, like step payments, when realistic.

Chapter 13 Plan FAQs

1. What happens if my Chapter 13 plan is asset-driven and not income-driven?
   If your plan is based on non-exempt assets (like home equity) rather than your disposable income, it can be difficult to afford. In some cases, a Chapter 13 plan may not be feasible if the required payment exceeds your ability to pay.
2. Can Chapter 13 help with tax debt?
   Yes, Chapter 13 can help manage tax debt in several ways:

• • Priority taxes must be paid in full during your plan, but this often prevents interest and penalties from accruing further.
  • Older income taxes may be treated as unsecured debts and only paid, if there is funding available. Then the balance may be discharged at the end of your plan.

3. What if I can’t afford my plan?
   If your plan is unaffordable, we’ll explore options such as:

• • Adjusting the plan to account for allowable expenses.
  • Reviewing whether you can find additional income, like renting a room, second job, etc.
  • Consider non-bankruptcy options, including mortgage modification, tax resolution, etc.
  • Converting to Chapter 7, if possible.

4. How does the liquidation test impact my plan?
   If your plan doesn’t meet the liquidation test, it won’t be approved. This is why careful planning is critical, especially for homeowners with equity.
5. Can I pay off my plan early?
   In most cases, no. Early payoff is only allowed if all creditors are paid in full, including unsecured debts.

Virginia’s Unique Challenges for Chapter 13 Filers

1. Low Homestead Exemption: Although Virginia’s homestead exemption has increased to $50,000, it’s still relatively low compared to rising property values. This creates challenges for homeowners with significant equity, especially those in northern Virginia.
2. High Priority Debts: Many of our clients in northern Virginia have high tax debts or mortgage arrearages, which can push plans beyond affordability.  For our clients with high tax debt, if Chapter 13 won’t work, we can consider a Chapter 7 or tax resolution options directly with the taxing authority.

How We Help You Create a Feasible Chapter 13 Plan

At Ashley F. Morgan Law, PC, we understand the complexities of Chapter 13 in Virginia. We take the following steps to ensure your plan works:

1. Comprehensive Financial Review: We analyze every detail of your income, assets, and debts to create an accurate plan.
2. Strategic Planning: We’ll recommend the best time to file and ensure exemptions are maximized.
3. Honest Assessments: If Chapter 13 isn’t feasible, we’ll discuss other options, such as Chapter 7, mortgage modification, or debt settlement.

After reviewing after your fill situation, we will then be able to tell you what your Chapter 13 payment will be.

Schedule an Appointment with an Experienced Attorney 

Calculating a Chapter 13 payment plan is complicated, but you don’t have to navigate it alone. At Ashley F. Morgan Law, PC, we specialize in helping Virginia residents develop affordable, realistic plans that protect their homes and financial futures.

Contact us today to schedule your free consultation. We’re here to help you every step of the way.