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Bankruptcy

Chapter 13 – The Repayment Plan

INTRODUCTION

Chapter 13 is a court-supervised reorganization of debts commonly used by debtors who would like to save their home or car from foreclosure or repossession. Chapter 13 is also imposed on anyone who has initially filed for Chapter 7 bankruptcy but has steady income that exceeds his or her monthly expenses by at least $100. Occasionally, Chapter 13 is entered into voluntarily debtors who want to pay back some or all of their debts out of a sense of obligation. While Chapter 13 is not as appealing as Chapter 7 to some debtors because of the repayment obligation, it is important to note that Chapter 13 allows for the discharge of more types of debt than does Chapter 7. See Chapter 7 vs. Chapter 13 Discharge for more.

After filing, the debtor’s attorney will submit a repayment plan to the bankruptcy trustee for approval. The repayment plan will be based on the debtor’s monthly, disposable income and will call for a repayment period of 3 – 5 years. Under the plan, the debtor will be required to repay all priority claims in full, but may avoid paying some or all of any non-priority claims.

ELIGIBILITY

You may file for Chapter 13 Bankruptcy if you are one of the following:

  • Individual; OR
  • Married Couple; OR
  • Sole Proprietor (NOT corporations or partnerships) AND
  • You have steady income that exceeds your monthly living expenses by $100 or more AND
  • You have unsecured debts less than or equal to $336,900 and secured debts less than or equal to $1,010,650.

Unlike Chapter 7, Chapter 13 does not contain a means test that must be passed. However, the means test is still relevant in the Chapter 13 process as it will help the debtor’s attorney determine the amount of the monthly payment that will be required under the plan as well as the plan’s duration.

THE CHAPTER 13 BANKRUPTCY PROCESS

The Chapter 13 process begins in the same way as a Chapter 7 case. The debtor must complete an initial debtor’s education course, the first of two credit counseling requirements imposed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Once the course is complete, the debtor’s attorney will file the Petition, Statement of Financial Affairs, and various schedules detailing the debtor’s assets, liabilities, income, expenses and creditors. It is very important that the debtor notify the bankruptcy court and the trustee of each and every creditor or certain debts will not be considered part of the Chapter 13 plan.

Just as in the case of a Chapter 7 bankruptcy, the filing of the Petition imposes an “automatic stay” on creditors requiring them to cease all contact and collection action. The filing of a bankruptcy Petition is a very common tool for debtors facing foreclosure to stop a pending sheriff’s sale and avoid loss or repossession of, or eviction from, their home.

In a Chapter 13 bankruptcy, the debtor’s attorney will also submit a “proposed repayment plan” based on the debtor’s current and expected future finances. The plan will consider the debtor’s monthly disposable income as well as reasonable living expenses. Recall that the minimum payment that will be required in a Chapter 13 bankruptcy is $100 per month over a 5 year period. Keep reading below for more on the amount and duration of the proposed plan payments.

AMOUNT & DURATION OF PROPOSED PLAN PAYMENTS TO UNSECURED CREDITORS

The amount of the payments and the duration of the plan depend upon two factors: (1) the debtor’s income as it compares to the median income for the debtor’s state, and (2) the debtor’s disposable monthly income. The absolute minimum that must be paid to unsecured creditors over the duration of the plan is the amount that the creditors would have received under a Chapter 7 liquidation. Priority claims must be paid in full under both Chapter 7 and Chapter 13 and are taken into account in determining the debtor’s disposable monthly income.

If the debtor’s income is ABOVE the median, the plan must provide for 60 (or 5 years) payments to unsecured creditors equal to the debtor’s monthly disposable income. If the debtor’s income is BELOW the median, the plan must provide for 36 (or 3 years) payments to unsecured creditors equal to the debtor’s monthly disposable income.

Once the monthly payment is calculated, it will be included in the proposed plan to the bankruptcy court and trustee. The trustee has the responsibility of reviewing the plan and determining whether it has been submitted in good faith and therefore whether it is worthy of confirmation by the court. If the trustee does not object to the plan, it will be confirmed by the court. Assuming the trustee does object the bankruptcy judge presiding over the case will make the final determination as to confirmation of the plan. The debtor’s creditors are also entitled to object to the plan’s repayment terms, but assuming the court confirms the plan, the creditors are ultimately bound to accept it.

Once the plan is confirmed, the plan payments will be made by the debtor directly to the trustee, and the trustee will be responsible for remitting that money to the creditors according to the plan’s terms.

NOTE: The exemptions used to determine what property a Chapter 7 debtor can keep are not as important in Chapter 13. However, exemptions in Chapter 13 are necessary for determining the amount unsecured creditors would get in a Chapter 7 case for purpose of establishing the minimum payment to creditors over the course of a Chapter 13 plan.

RESTRICTIONS DURING THE CHAPTER 13 REPAYMENT PERIOD

Once a Chapter 13 plan has been confirmed and a debtor has started to make payments under it, he or she must be careful not do certain things that will violate the terms of the bankruptcy. Of course the obvious requirement is that the debtor must make all plan payments to the trustee on time. In addition though, there are certain restrictions on the type of finance-related actions the debtor may take. A debtor should not make any purchases that cause the debtor to incur substantial new debt without first getting court approval. For example, the debtor should request court approval prior to buying a new car or a home. If the debtor is unsure whether any action is prohibited, it is always best to consult with his or her attorney prior to doing anything that might jeopardize status in the bankruptcy case.

DISCHARGEABLE & NON-DISCHARGEABLE DEBTS UNDER CHAPTER 13

Chapter 13 discharges the debtor from more debts than Chapter 7, so it is easier to list the debts from which a Chapter 13 debtor CANNOT be discharged. They are as follows:

  • Student loans;
  • Child support & alimony;
  • Prior taxes for which no return was filed;
  • Judgments incurred as a result of accidents while the debtor was under the influence of alcohol or drugs;
  • Debts for restitution; and
  • Certain fines.

All other debts are dischargeable in Chapter 13 with the possible exception of debts incurred by fraud or intentional wrongdoing. Creditors may challenge the discharge of these debts, and if successful, the debt must be repaid.

NOTE that while certain taxes won’t be discharged in bankruptcy, repayment under a Chapter 13 plan may avoid significant penalties that would otherwise be imposed by the IRS, and will stop the accrual of interest that the IRS normally requires.

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