Chapter 13 bankruptcy is also known as a "wage earners" plan because debtors who file for bankruptcy relief under Chapter 13 must have a steady income in order to fund a Chapter 13 plan. Each debtor that files a Chapter 13 must propose a Chapter 13 repayment plan describing how the debtor intends to reorganize their debts. This typically includes paying a percentage of your unsecured debts as well as catching up with past due payments to secured creditors, or surrendering property that is secured by a debt.
Your bankruptcy attorney will prepare the Chapter 13 plan and review the terms with you so that you understand what your obligations are under the plan. Your Chapter 13 plan is extremely important because you can only receive your bankruptcy discharge after completing all payments required under your repayment plan. The bankruptcy discharge is the ultimate goal of filing bankruptcy because it releases your legal liability for the repayment of any debts that are discharged through your bankruptcy case.
While you'll want to discuss the advantages and disadvantages of filing a Chapter 13 with an experienced bankruptcy attorney before you file a bankruptcy case, below are 10 things that you should know about a Chapter 13 debt repayment plan.
1. The plan must comply with the rules set forth in the Bankruptcy Code.
A Chapter 13 plan must have all of the terms, conditions and information that are required by the Bankruptcy Code. Most bankruptcy courts have local rules that set forth the format that all plans must follow in order to be approved by the court.
2. The term of the bankruptcy plan.
Most bankruptcy plans provide for 60 monthly payments, but based on your income and debts, you may qualify for a 36-month plan. However, most debtors choose to voluntarily file a 60-month plan so that they can have lower monthly payments even though they may qualify for a 36-month plan.
3. Not all debts will be paid through your bankruptcy plan.
Some debts, such as your mortgage payment, will be paid outside of your plan. This means that in addition to the plan payment, you must continue to pay these debts directly to the creditor. However, most debts are included in your bankruptcy plan.
4. The court may require that your plan payment is withheld from your paycheck.
In some jurisdictions, the court may require that your monthly payment is withheld from your paycheck and paid to the trustee by your employer. While some debtors may not want their employer to know they filed bankruptcy, statistics show that debtors who have their plan payment deducted from their pay and forwarded directly to the trustee have a higher chance of completing their bankruptcy plan.
5. How to modify your Chapter 13 plan.
A Chapter 13 plan may be modified for good cause during your bankruptcy case. For example, if your spouse becomes disabled, you may be able to lower your plan payment because your income has changed substantially for the foreseeable future. However, if your change is short-term, the court may not approve a modification.
6. Payments must be made on or before the due date.
If you fail to make your plan payments on time each month, the Chapter 13 trustee will file a petition for dismissal. If your case is dismissed, you will not receive a refund for any money that you have paid, as that money has been paid to your creditors each month. However, your creditors can now pursue legal action to collect the remaining balances you owe.
7. You will not receive a discharge until you make all of your payments.
In order to be eligible for a bankruptcy discharge, you must pay all payments under the Chapter 13 plan. Your discharge will not be granted until the Chapter 13 trustee completes a final accounting and notifies the court that you have paid all payments under the plan.
8. You cannot modify the terms of your mortgage through your Chapter 13 plan.
You may use your Chapter 13 plan to catch up with past due mortgage payments to avoid foreclosure, but you cannot modify the terms of your mortgage in your plan. In other words, you cannot lower your mortgage payment, change the interest rate, or change the length of your mortgage in your plan. In some cases, you may be able to value a second mortgage at zero in your plan if the balance of your first mortgage exceeds the appraised value of your home.
9. Creditors can object to your proposed plan.
Your creditors will receive a copy of your Chapter 13 plan when it is filed with the bankruptcy court. Each creditor has the right to file a timely objection to the plan. In most cases, your bankruptcy attorney will be able to reach a satisfactory settlement of the objection; however, if you cannot settle the objection, the parties will appear before a bankruptcy judge to argue their position.
10. You cannot include current alimony or child support in your plan.
If you are behind in your domestic support payments, you may include the past due portion in your Chapter 13 plan. The terms of your Chapter 13 plan require that you begin making your domestic support payments outside of the plan and that all future support payments are paid on or before the due date for the payment.
Filing a Chapter 13 repayment plan can be a complex process, depending on the debtor’s individual financial situation. Calculating the correct monthly payment based on the debtor's income, expenses, assets and debts requires the services of an experienced bankruptcy attorney. If you are contemplating filing a Chapter 13 bankruptcy case, you need to consult a bankruptcy attorney who has experience in handling Chapter 13 cases.