How Does a Chapter 13 Bankruptcy Work

Posted by Wesley Scott on July 23, 2020 at 9:42 AM
Wesley Scott

Chapter 13 Bankruptcy BasicsThis is an excellent question. There are misconceptions out there about what a Chapter 13 Bankruptcy is and how it works. Many people mistakenly think that when you file a Chapter 13 Bankruptcy, and make payments back to your creditors, you are paying all your debt in full. In the vast majority of cases this is not true.


In a traditional Chapter 13 Bankruptcy case, where one is filing a Chapter 13 Bankruptcy because you have surplus income, after you pay your reasonable and necessary expenses, and assuming there are no non-exempt assets or other issues, a Chapter 13 Bankruptcy is really quite straight forward in how it works.


Your payment back to your creditors is based on the difference between your net income and what your reasonable and necessary expenses are. This is fairly self-explanatory in most cases. The expense is either reasonable and necessary or it is not. For example, budgeting 2k a month for a bi-yearly Hawaii trip is not reasonable and necessary. Health insurance coverage that costs you $600.00 per month is a reasonable and necessary expense. 


Let’s assume you have $400.00 left over after you pay all your reasonable and necessary expenses. If you are in a 3 year plan, you will pay a total of $14,400.00 to a trustee. The first thing that comes off the tops of your payments is a trustee’s fee (typically around 10%). Assuming the trustee fee is 10%, $1,440.00 goes to the trustee to administer your estate. The balance of $12,960.00 goes to your creditors and any unpaid balance gets discharged (wiped out), tax free, forever. Assuming you had 50k in credit card debt, $37,040.00 would get discharged, tax free. Awesome sauce right? We think so!


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