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How are chapter 13 repayments calculated?

Chapter 13 payments are calculated to allow for normal family and household costs.

The repayment plan that debtors are required to complete as part of a Chapter 13 bankruptcy isn't just a mathematical calculation. It's a reasonable assumption of what the individual is able to pay back to their creditors and still maintain their normal family and household expenses.

The plan, submitted with their petition to the U.S. Bankruptcy Court, is determined by debtors and their attorneys. It is based on their monthly income, and for higher earning debtors, in terms of a means test that measures the debtor's income against the average income for the state in which they live.

"We also have to look at your assets. Once we know what you own, we can figure out which assets may be exempted and which ones are non-exempt," according to the Nashville law firm of Clark & Washington. "The bankruptcy law requires that your unsecured creditors are to receive at least as much as they would get if your non-exempt assets were sold at auction, so we have to keep these figures in mind when drafting your plan."

As a starting point, the monthly net earnings - income after taxes and deductions for health insurance or pensions - are weighed against the individual's living expenses, including rent or mortgage, car payments, utilities, insurance, food and clothing, as well as other reasonable costs of a middle-class household.

Payments on credit cards and other unsecured debts are left out of the calculation because they will be paid at least partially once the plan is in place. The court will also not consider payments on non-essential or luxury items. But interest and late fees that have accrued on delinquent accounts are often waived under Chapter 13 plans.

For three to five years, an individual who has been granted a Chapter 13 bankruptcy will make payments from money that is available after their living expenses have been met. While payments are made, home foreclosures and car repossessions are halted as loan obligations are met through the plan. Car loans are often paid off at a reduced rate and mortgages are back on schedule when the plan is completed.

"At the end of the case, all the remaining unsecured debt balances are discharged, even if the debts have only been partially repaid," writes Minnesota attorney Craig Andresen on BankruptcyLawNetwork.com "This means that just like in a Chapter 7 bankruptcy, a Chapter 13 will almost certainly resolve the debtor's problems with unsecured debts."

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