If you go through Chapter 13 bankruptcy, you'll spend three or five years devoting all your disposable income to paying off your creditors, after which your debts can be discharged. Bankruptcy law states that your disposable income is what's left after you pay your living expenses and pay any debts you can't discharge. The living expenses are based on IRS standards for calculating delinquent tax debts.
Once you begin the Chapter 13 payment plan, you'll be on a tight budget for several years. The goal is to make sure every penny you can spare goes to paying back your creditors, but that doesn't mean you have to eat bread and water, wear sackcloth and walk everywhere. The IRS list of acceptable expenses the U.S. Department of Justice uses for bankruptcy cases includes food, clothing, out-of-pocket medical expenses, housing, utilities and transportation. When drawing up your payment plan, the court will subtract these from your family's total income to figure out your disposable income.
Just because your family favours tailored suits and designer dresses doesn't mean the court will accept your clothing budget as a legitimate expense. The IRS guidelines spell out what constitutes an acceptable level of expense for a family of your size, based on federal statistics and consumer surveys. Your allowable expenses for food, clothing and health care will be based on national figures; the figures for housing, utility and transportation expenses come from your local area. You're also entitled to spend up to 15 per cent of your gross income on charitable donations.
Chapter 13 breaks down your debts into three classes. Priority debts such as alimony, child support and recent back taxes can't be discharged and must be paid off. Debts secured by property such as a car loan or a mortgage must be paid if you want to keep the property; if you're already delinquent, the payment plan will give you a chance to make up your back debt. These debts will be subtracted from your income along with your living expenses. Your remaining income will go to the third class, "unsecured creditors" such as credit-card companies.
If your income is below the state median, you'll spend three years paying off your creditors; if you're above the median, it will take five. Rather than pay them directly, you'll send a single check each month to the court-appointed trustee for your case, and she will send the unsecured creditors an equal share of the money. If you have debts you'd prefer to pay off first--personal loans, for example--you're out of luck. In bankruptcy, everyone gets paid equally. At the end of the payment plan, the remaining unsecured debts will be wiped out.
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