New Jersey Bankruptcy Lawyer - Toll Free: (866) 503-5655 | Local: (856) 797-1500

Certified as a NJ Consumer Law Bankruptcy Attorney by the
American Board of Certification, which is accredited by the American Bar Association

≡ Menu

How Does a Chapter 13 Bankruptcy Work

The following are similarities to a chapter 7. The New Jersey debtor must include on the petition: income, expenses, all debt, creditors, assets, liabilities and financial information. A debtor may not pick and chose which creditors to include. Immediately upon the filing, no creditor may commence or pursue any action against the debtor. Furthermore, upon the filing, no creditor may contact the debtor by any means including by telephone or letter.

The individual filing any New Jersey bankruptcy case is called a “debtor”. A trustee is an individual that is assigned to review, administer and evaluate the case to ensure that the debtor meets the chapter 13 bankruptcy law requirements. There may be various goals of a chapter 13 debtor, some of which may be the following: obtain an order of discharge; stop foreclosure, stop repossession; eliminate debt; and pay off certain debt. The manner in which the court treats each debt, depends on the classification of each debt and the debtor’s entire financial position.

A New Jersey chapter 13 may permit various benefits, even though the debtor may be concerned about one specific matter. Generally, an individual files for chapter 13 protection for 3 reasons. The first is that the debtor does not meet the requirements for a chapter 7. Second, the debtor wishes to stop an auto repossession or a foreclosure on a house. Third, one wishes to payoff a debt that is not dischargeable in a chapter 7. Under all scenarios, a chapter 13 requires an individual to make monthly payments to a trustee, which is referred to as a trustee or plan payment.

Generally, a chapter 13 requires a debtor to make one monthly payment to a trustee for a period of 36 to 60 months. The amount of the monthly trustee payment and the number of months of the payment plan is based on the debtor’s income, expenses, assets, liabilities and mortgage or auto payment arrears. The trustee disburses the monthly payment to certain creditors, in compliance with the bankruptcy plan. In the majority of cases, a bankruptcy plan is 60 months. Please note that a chapter 7 does not require a trustee payment

In general, the number of months of the plan is based on the debtor’s ability to pay the total amount required. The debtor must pay to the trustee, his/her monthly disposable income, after deducting actual, reasonable and necessary expenses. In general, this means that the debtor must complete the plan in the shortest number of months possible, based on one’s monthly disposable income. The debtor may obtain a contribution from a friend or relative. However, again, in most cases, the plan is paid over a 60 month period, which allows for the lowest monthly payment.

The main chapter 13 concerns are as follows: 1. What is the amount of the monthly trustee payment? 2. How many months is an individual required to make payments? 3. Which creditors are required to be paid? 4. Which debt can be eliminated? 5. What property can I keep. This is explained below.

Secured Debt

Secured debt is debt that is connected to personal property (ie. Auto) or real property (house). The best example of secured debt is a mortgage or auto financing. If an individual is keeping property, one must pay the secured creditor. Therefore, if you are keeping your house, you must pay the mortgage. If you are keeping your auto, you must pay the financing. Generally, the court will allow a debtor to keep property if one has the ability to pay the debt.

Save your House from Foreclosure and Sheriff’s Sale.

A mortgage is classified as secured debt.

Bankruptcy law forces the mortgage company to allow a debtor to pay all of the arrears’ balance ( amount behind prior to the filing) over the life of the bankruptcy plan.

If the debtor’s house is in the process of a foreclosure action, a chapter 13 bankruptcy permits an individual to save their house. Immediately upon the filing, the mortgage foreclosure action stops. After the filing, the debtor is required to pay all mortgage arrears, as of the time of the filing, to the trustee, on a monthly basis, over a 36 to 60 month period. The trustee disburses the funds to the mortgage company. The monthly trustee payment representing mortgage arrears is determined by calculating the mortgage arrears (mortgage payment arrears, fees, costs, mortgage company’s attorney’s fees) and dividing by the number of months of the plan

The monthly trustee payment will likely be more than the amount due to the mortgage company because additional funds will be added to this payment. The amount due to the trustee representing the mortgage arrears is not reduced if an individual’s income, together with any contributions, is insufficient to make the payment. Therefore, you must have the ability to make the monthly payment.

Generally, if a person has a mortgage and wishes to keep the house, in addition to the trustee payment, the individual is required to make the monthly mortgage payment directly to the mortgage company. In general, the required amount of the monthly mortgage payment is the typical amount that is required under your mortgage and note agreement. In other words, the monthly amount is the same that is required if the individual is not under bankruptcy protection.

Any additional funds that may be required to be paid to the trustee are explained below.

Surrender the House

If you surrender (give up) your house, the total mortgage may be considered general unsecured debt, which is the same as credit card debt. You may be required to pay a portion of this debt. Look to the explanation below regarding unsecured debt.

Save your Auto from Repossession / Options How to Treat Auto Finance Payments

Any amount paid to the trustee for the auto is added to the other funds paid to the trustee for other creditors, including the mortgage arrears. Auto financing may be treated in three separate and distinct ways, as follows.

Firstly, the court treats auto finance arrears like mortgage arrears. A debtor may pay the arrears (amount behind prior to the filing) through the monthly trustee plan over 36 to 60 months. The Trustee will disburse the funds to the finance company, accordingly. Under this scenario, in addition to the monthly trustee payment, the debtor is required to pay their monthly auto payment directly to the finance company.

Secondly, one may pay the total amount due (payoff) to the finance company, through the bankruptcy plan. Generally, you would divide the number of months of the bankruptcy plan by the total amount due to the finance company, plus the appropriate interest. Under this scenario, you are not required to pay any monthly finance payments directly to the finance company.

Thirdly, you may do what is referred to as a “cram down”. You may only pursue this option if your auto was purchased a certain number of days prior to the bankruptcy filing. A “cram down” permits a debtor to keep the auto by paying to the finance company only the auto’s “replacement value”, plus a fair interest rate, through the bankruptcy plan. Under this scenario, you are not required to pay the entire payoff to the finance company. Also, under this scenario, you are not required to make direct monthly payments to the finance company.

Again, the amount paid is not reduced if your income is insufficient.

Possible Additional Debt which Must be Paid Through the Bankruptcy Plan

In addition to any auto or mortgage payment that is made to the trustee, in compliance with the information provided above, the debtor is required to add and pay the following debt, through the bankruptcy plan and to the trustee, which is divided over the months of your bankruptcy plan. The debt that is added to the trustee payment, is as follows:

Priority Debt: certain taxes; child support, administrative costs, including certain fees, trustee’s commissions, and possibly other costs and debt.

There are certain taxes that may be eliminated. The particular tax that may not be eliminated must be added and paid to the trustee over the life of the 36 to 60 month bankruptcy plan. All child support arrears must paid and added to the amount paid to the trustee, over the life of the bankruptcy plan. All future taxes and support payments must be paid on a timely basis.

Possible Additional Debt Which May be Required to be Paid Through the Bankruptcy Plan (unsecured debt)

Unsecured debt (ie. credit card, health care, deficiency on a repossession or mortgage foreclosure, personal loan, etc.).

In addition to the funds that are required to be paid to the trustee on a monthly basis for your mortgage arrears and/or auto finance arrears and/or for the priority items listed above, a debtor may be required to pay all, some or none of the amount due to unsecured creditors.

In general, the court determines the amount required to be paid to the unsecured creditors based on the following factors: value of assets, in excess of liens; means test result; and, the present and future disposable monthly income. In a nut shell, the court adds all of the unsecured debt and looks to three factors to determine, how much, if any of this debt, a debtor is required to pay, through the monthly trustee payment. Any amount required to be paid, is divided by the number of months of the plan and added to the other funds that must be paid.

It may be possible that no payment is required. Or, it may be possible that all or only a portion of the debt must be paid. The court reviews each of the following three factors. Each factor may or may not reflect that a debtor is required to pay a certain sum to the unsecured creditors. Generally, the total amount to be paid to the unsecured creditors, is the one factor that requires the largest payment to these creditors. Again, if any payment is required to the unsecured creditors, the total amount will be added to the other funds and paid to the trustee on a monthly basis, over the life of the bankruptcy plan. The three factors are as follows.

Assets: (first factor)

You are required to provide to the trustee and the court a list of all personal and real estate property and the value of each item. The property includes, but is not limited to the following: all houses, bank accounts, furniture, autos, jewelry, investments, stocks, bonds, claims or law suits against others, etc. In general, retirement accounts are excluded and not considered.

The bankruptcy law applies specific exemptions for each type of property. Exemptions are specific amounts that the bankruptcy law allows the debtor to deduct from the value of each asset. If the exemption amount for that particular property is more than the value of the asset minus the lien(s), you may keep the asset, and not be required to pay any funds to any unsecured creditor. However, if there is any excess amount, after these deductions, the debtor is required to pay no less than that particular amount to the general unsecured creditors, pro rata, over the life of the bankruptcy plan.

The analysis regarding your house is as follows. One must first obtain the fair market value of the house. The court deducts from this value: the mortgage(s) payoff; the amount of all other liens, if any; and an amount equal to10% of the estimated fair market value, representing the estimated cost of the sale of the property. Thereafter, the specific bankruptcy exemption amount for your residence is deducted from these total deductions. The amount of the balance, if any, is paid to the general unsecured creditors, pro rata, through the monthly trustee payment, over the life of your bankruptcy plan. This amount will be added to any other funds that are required to be paid over the life of the bankruptcy plan.

A few of the exemptions are as follows:

  • Furnishings and household goods, collectables and clothing
  • Furs and Jewelry
  • Auto
  • Residence
  • Any property
  • Any property (unused exemption from your residence)
  • $10,775.00
  • $1,350.00
  • $3,225
  • $20,200.00
  • $1,075.00
  • $10,125.00

With regard to an auto, the court applies the exemption amount after deducting the financing pay off from the auto replacement value. An auto exemption analysis is as follows:

  • Ex: Auto
  • Replacement value
  • Financing payoff
  • Value minus payoff
  • Minus exemption
  • Required amount
  • $8,000.00
  • $2,000.00
  • $6,000.00
  • $3,225.00
  • $2,775.00

Under this scenario, a debtor is required to pay no less than $2,775.00 towards the general unsecured creditors, pro rata, over the life of the plan. Please note that this example assumes that no other exemptions may be applied to the auto. However, it is likely that additional exemptions may be applied to reduce the amount to “0”.

This process must be completed for each property.

In my experience, most of the individual’s filing, own property that is fully exempt, thereby not requiring the debtor to pay any funds to the unsecured creditors. If a certain piece of property is not fully exempt, the debtor may wish to surrender the property and avoid paying the amount to the unsecured creditors. Prior to filing, the debtor should be advised of which property is not fully exempt.

Means Test (second factor)

The Means Test is the most significant new requirement under the recent bankruptcy reform.

The debtor(s) gross household income for the six months prior to the bankruptcy filing is compared to the average gross income of a household of the same size in the same state where the debtor resides. If the debtor(s) household’s gross income is lower than this average, the debtor meets this requirement and is not required to pay any funds to the general unsecured creditors under this factor, only.

The six month period starts on the first pay of the sixth month prior to the month filed and ends with the last pay of the month prior to the filing. Therefore, if the petition is filed in February of 2008, the six month period would start on August 1, 2007 and end with the last pay for January of 2008. Also, please note that certain types of income may not be included.

In the event that the debtor(s) gross household income for the six months prior to the bankruptcy filing is in excess of the state average, the court requires further analysis to determine whether the debtor is required to pay a sum to the unsecured creditors. The balance of the analysis requires the debtor to deduct from the household’s gross income, certain allowable monthly expenses, that include: 1. household members’ income taxes; 2. household members’ allowable pay stub deductions; 3. allowable living expenses, based on the Internal Revenue Service’s laws, such as: allowable household expenses; allowable food and living expenses, allowable transportation expenses, allowable clothing expenses, allowable auto operating expenses; 4. insurance payments; 5.mortgage payments, 6. auto finance payments or lease payments; etc. Please note that this list of expenses is not complete and may vary. Also, these expenses may not be your actual expenses, but the expenses that are allowable under the I.R.S. guidelines.

If after the deductions, the balance is “0”, no payment to the unsecured creditors is required, under this factor. If there is a balance, the total amount required to be paid to the unsecured creditors is the balance after the analysis multiplied by 60. This amount must be paid to the unsecured creditors, over the life of the bankruptcy plan. This sum is added to any other funds that are required to be paid to the trustee, divided by the number of months of the bankruptcy plan. This sum is disbursed to the unsecured creditors, pro rata.

The Means Test and its application has not yet been clarified and clearly defined by the courts and trustees. Therefore, the application may vary based on the trustee and judge who is assigned to your case.

The major issue that has not been settled is which individuals living in the house, represent the household. There may be people living in the house that must be included and others whom are not included in the test. In general ,if an individual contributes income to the household on a monthly basis, this contribution must be included in the test. Please note that in every case, both spouses’ income are included in the test, if the spouses’ reside together.

The IRS average income is based on the U.S. Census Bureas for each state. The IRS National Standards govern such items as food, clothing, personal items, housekeeping supplies, and entertainment. The IRS. Local standards govern housing, utility and transportation costs. The IRS standards may be found at www.irs.gov.

Present Income and Expenses (third factor)

As I explained above, the debtor may be required to pay certain funds to the trustee, for the following debt: mortgage arrears; auto finance arrears or payments; priority debt; such as taxes, support arrears; and; possibly all or a portion of your unsecured debt. The court requires that the debtor has the ability to pay any required amounts to the trustee over the life of the bankruptcy plan. The debtor must be capable of making this required monthly trustee payment, after deducting one’s actual necessary and reasonable living expenses. If the debtor’s personal income is insufficient, he/she may receive financial assistance from another individual. However, if one is unable to make these payments, the plan will be unfeasible and the debtor will be unable to proceed with the case. Please note that the debtor must provide proof to the trustee that the bankruptcy plan is feasible.

The debtor must provide to the trustee, his/her monthly gross (before taxes) income and net (after taxes) income. If the debtor is married, the court adds both spouse’s monthly gross and net income, whether or not it is a joint filing. In some situations, the court adds the income of another household member(s). The court deducts from the gross income, income taxes, other allowable payroll deductions and reasonable and necessary monthly expenses that are necessary to live. If married, the court deducts both spouse’s expenses. The expenses cannot include any payments for unsecured (i.e. credit card) debt. The monthly expenses may include the following: mortgage, real estate taxes, house insurance, utilities, telephone, water, sewer, home maintenance, laundry, medical, dental, transportation, recreation, charitable contributions, life insurance, auto insurance, health insurance, auto finance or lease payments, alimony, support, and child care, etc.

The amount that is available after the court subtracts said expenses is called (disposable income). The amount of an individual’s monthly disposable income must be paid to the trustee for at least 36 months. If the amount of the disposable income is in excess of the amount required to pay the trustee for all creditors other than unsecured creditors, (i.e. mortgage arrears, auto arrears, taxes support arrears, etc.), than this excess amount , will be paid to the unsecured creditors, pro rata. If there is no excess, the unsecured creditors will not be paid any sum, under this factor.

Again, if the other factors require that a certain sum be paid to the unsecured creditors, this sum must be paid and the funds must be made available for the payment.

There are two basic differences between this and the means test requirement. The first difference is that the means test includes the expenses that are allowable under the IRS laws, based on the number of household members, and under this requirement, the expenses represent the actual, but reasonable expenses for the household.

The second difference is that under the means test, household income represents the household income for the six months prior to the filing and under this requirement, income is based on the amount earned immediately prior to and as of the time of the filing. The trustee may also consider the debtor’s foreseeable future income. This requirement may not include household members’ income that is included under the means test.