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How are chapter 13 repayments calculated?

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.

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