How Much Debt is Repaid in a Chapter 13 Bankruptcy?

This is a very common question about chapter 13. You might think it has everything to do with how much you owe, but you would be wrong.

The amount of debt that you pay back in a chapter 13 bankruptcy plan has much more to do with how much you earn, not what you owe. Here's an introduction to how it works.

The Repayment Plan
When you file for chapter 13 bankruptcy, you must submit to the trustee (the lawyer appointed by the court to administer your case) and the court, a "Repayment Plan". The name is a little misleading because it implies you must repay your debts, but this is not entirely true. What you must do is repay as much of your debts as possible given your disposable income.

Your Disposable Income
The amount of money you have left each month, after taxes, after your monthly expenses like rent or mortgage, utility bills, etc is your disposable income. This is the money available to be used for your repayment plan.

To better illustrate, imagine you earn $5,000 per month after taxes. Your mortgage is $2,500, utility bills add up to $300, car payment is $500, groceries are $500 and other bills are $200. That leaves you with $1,000 of "disposable income". You do not include credit card or any other unsecured debt payments.

Is That It?
Not quite. You do have to consider the different types of debt you owe, their "priority" level and which must be repaid first and/or in full.

Typically, student loans, family support debts, recent tax debts and some others must be repaid in full. These are "priority" debts. Other debts, like credit cards, medical bills and personal loans will only be repaid as much as is left over after the priority debts.

Back to Our Example
In our example, we have $1,000 a month that we can use for the repayment plan. Let's also assume that there is a student loan and some tax debt that would require $500 per month to repay in full. In the repayment plan, $500 would go towards those. That leaves $500 for everything else, and this is where chapter 13 can become a very helpful tool.

Since the amount of disposable income is fixed, $500 will be all that is paid towards other "non-priority" debts. Even if you owe $50,000 in credit card debt, you would only pay $500 per month for the duration of the plan, usually three to five years.

Upon completion of the plan, any remaining debts are discharged. In our example above, $50,000 of credit card debt would probably cost around $1,200 per month to pay off in five years, but under chapter 13, $500 effectively does the same thing.

Now, this is very simplified explanation of how it works, but the key to take away is that in a chapter 13, you can still get a lot of your debts discharged, and you needn't repay everything. Not to mention you can save a home from foreclosure, protect all of your assets and even include past due mortgage payments in your plan.

Chapter 13 is a very effective debt reduction solution.