There are two basic types of Bankruptcy filings. A filing under Chapter 7 of the Bankruptcy Code is called liquidation. It is the most common type of bankruptcy proceeding, because it merely wipes out your unsecured debts (with the exception of taxes, child support, and student loans, etc.), and does not wipe out your secured debts. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors.

Bankruptcy proceedings under Chapter 13 of the Bankruptcy Code involve the rehabilitation of the debtor to allow him or her to use future earnings to pay back creditors. Under Chapter 13 of the Bankruptcy Code, a trustee is appointed to supervise the assets of the debtor. A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors. After a bankruptcy proceeding is filed, creditors, for the most part, may not seek to collect their debts outside of the direction and distribution of the money by the trustee. The debtor is not allowed to sell or gift their property that has been declared part of the bankruptcy estate.

A Chapter 13 Bankruptcy is basically a repayment plan. It provides an individual to pay back some or all of what they owe to creditors over 3 or 5 year repayment plan. The individual filing for a Chapter 13 Bankruptcy pays their monthly payments to the Chapter 13 trustee, who in turn takes the payment and disburses out payments to the individual creditors in order of importance. Priority claims (child support, and back taxes) get paid out first, then arrearages (back payments on homes) get paid next, and then finally if there is money left over non-priority unsecured creditors (i.e. Credit Cards) get paid out last.

A trustee uses three separate equations (Means Test, Difference between I and J, and liquidation value of assets), to calculate the amount in which some will pay towards the Chapter 13 plan payment. The first equation is the “Means Test.” The means test has also been used to calculate whether someone qualifies to file a chapter 7 bankruptcy ever since the Bankruptcy laws changed in 2005. The means test first looks to see whether you make more than the median income for the state of California. If a Single individual with no dependants makes less than $4098.00 gross monthly income, then they are not forced to pay any money back to unsecured non-priority creditors (i.e. Credit Cards). Thus, their plan payment is whatever money they have left over after paying their rent/mortgage and all other expenses (i.e., Food, Clothing, etc.), without paying any creditor bills. For example, if a person made less than the gross monthly income, and they took home $3800.00 net income a month, yet they only spent $3300 on rent, clothes, utilities, food, car payments, etc. a month, then their plan payment may be $500.00/month. If they made more than the Gross Monthly income, then their plan payment would be either that persons excess income, or whatever excess disposable monthly income they possessed after one subtracted the IRS standard living allowances.

This is a broad overview of the process of filing a Chapter 13 Bankruptcy, and the process by which a trustee determines a Debtor’s monthly payment to the plan. In order to determine what your Chapter 13 payment will be, you need to set up a consultation with an experienced lawyer who can run you numbers through a computer. Call the Bankruptcy Law Center today at 1-800-551-7922 to set up a Free Consultation with one of lawyers today to see if you qualify.