Chapter 13 Bankruptcy

The key component of the Chapter 13 bankruptcy case is the repayment plan we’ll propose to the trustee and creditors. The plan must consider all of your debt, and the type of each debt.

Both creditors and the bankruptcy trustee have an opportunity to object to your plan, beginning at the plan filing, during the 341 hearing (or meeting of creditors), and continuing until the plan is confirmed. Expect to get some pushback on all but the simplest plan filings. Most objections are fairly straightforward and, as your attorney, we’ll guide you through resolving any objections. Keep in mind that an objection does not mean your case is being dismissed or that it is failing, only that there are certain issues for your attorney to resolve.

The bankruptcy statues require that debtors pay full installments into their plan within 30 days of filing and every 30 days after. If you are employed, funds will be withheld from your pay and paid into the plan; self-employed individuals are allowed to make payments directly to the trustee. In any case, you are responsible to ensure those payments are complete and full by the deadlines.

In a Chapter 13 reorganization, the bankruptcy trustee does not sell the debtor’s property but manages the intake of payments from the debtors and distributes funds to creditors in a prescribed priority order. Many Chapter 13 plans allow debtors to repay less than the amount owed on most unsecured debt.

Before the plan becomes official, the bankruptcy court must “confirm” or approve it. Creditors will have an opportunity to object before the hearing to any part of the plan that affects payment to them.

Once all objections are resolved, the bankruptcy judge will confirm the plan only if it meets the following criteria:

• the debtor must have enough income to pay the creditors as provided in the plan (and document that ability to repay)
• the debtor isn’t trying to take advantage or manipulate the bankruptcy process; the plan is proposed in good faith
• the plan complies with all applicable bankruptcy law

After the Chapter 13 plan is confirmed, the debtor must follow through and complete the three- to five-year repayment plan before any debt gets eliminated.

Given the complexity of filing and dealing with objections, representing yourself in a Chapter 13 case may not be a good idea. Most courts encourage filers to retain counsel.

Following are some of the types of debt that you’ll repay in a Chapter 13 bankruptcy plan.

• Secured Debt: If you’re behind in payments on any debt that was made with collateral, such as a home or car loan, those amounts must be repaid through the plan, as well as any current monthly obligations to the creditor. If you’re current on payments on secured debt, you may have the option of including it in the plan or paying it yourself outside the plan directly to the creditor.
• Priority Debt: Priority claims include domestic support obligations and arrearages, and most tax obligations. These must be paid in full.
• Unsecured Debt: Your repayment plan must take your disposable income (money left over after paying secured and priority debt, as well as ordinary living expenses) and apply it toward unsecured debt. In most cases, you only will have to repay a percentage of this debt, and rarely in full.

Repayment plan length varies depending upon your income; many filers may require a five-year plan. A three-year plan is available to debtors who qualify for a Chapter 7 case but choose to file a Chapter 13, perhaps to prevent losing a home to foreclosure, a car to repossession, or get caught up on taxes or domestic support arrearages.

Financial situations can change, often dramatically, during the course of a Chapter 13 plan. Because you suddenly can’t make payments, doesn’t mean your plan will be automatically cancelled.

If your income drops, for example, you may be able to modify the plan amount being paid to unsecured creditors. If your income loss is only short-term, you may be able to temporarily suspend your plan payments. In rare circumstances, if you can’t pay a required debt, the court may allow you to discharge certain debts due to a hardship. An example of a hardship might be a devastating illness that causes an inability to work.

If none of the previous options are do-able, it’s sometimes possible to convert a Chapter 13 plan to a Chapter 7 bankruptcy. Another option is to dismiss your Chapter 13 case; unfortunately, you would still owe any outstanding debt.

Once you complete your Chapter 13 repayment plan, you must demonstrate to the court by way of a certificate that you’ve completed a debtor education financial management course (the second course you must take during the course of your Chapter 13 case) and that you are current on any domestic support obligations.

If you meet all the court’s requirements, any remaining balance on qualifying dischargeable debt gets eliminated. Typically, you would be debt-free except for a mortgage payment, student loans, and certain interest on tax debt.