Chapter 13 bankruptcy is known as a reorganization bankruptcy. Its central component is the structured repayment plan, which is the vehicle by which you repay creditors through a three-year plan or a five-year plan before your remaining balance is discharged.
A confirmed Chapter 13 repayment plan can help you stabilize your finances, pay off your debts, and even improve your credit. Because of the importance of the debt repayment plan in a Chapter 13 bankruptcy case, it is also important to understand how this plan works. That is the subject of this blog post.
At Stone Rose Law, we help people in Arizona who are struggling with mounting debt to get their financial life back via bankruptcy.
To learn more about bankruptcy debt relief in general and Chapter 13 bankruptcy repayment plans in particular, call us at (480) 739-2448 or reach us online to speak with an experienced Arizona bankruptcy attorney.
What is a Chapter 13 Debt Repayment Plan?
A Chapter 13 repayment plan is a court-approved payment schedule of calculated payments that you make to the bankruptcy trustee. These payments are distributed to your creditors to pay all or some of what you owe them during the plan period.
A debt repayment plan depends on you having a stable and sufficient income from which to make the required payments for the duration of the plan period. If you do not have a regular income, Chapter 13 bankruptcy may not be the best debt relief option for you. An experienced bankruptcy lawyer can help you determine whether to proceed with a petition for Chapter 13 bankruptcy or choose Chapter 7 bankruptcy.
Debt Prioritization
If you use a debt repayment plan, it works by prioritizing your debts.
Priority Debts
Priority debts like child support, alimony, and federal and state back taxes, wages, salaries, or commissions you owe to employees, and contributions you owe to an employee benefit fund must be paid in full.
Secured Debts
If you have secured debts like a mortgage, a car loan, or tax liens, how the repayment plan treats them depends on whether you want to keep the collateral. If you do, you must continue making payments. In most cases, if you wish to keep the collateral, the entirety of the loan will be paid through your repayment plan. The exception is mortgages. If you are current on monthly mortgage payments, the on-going payments can be excluded from the plan and you will make payment directly to the lender. If you are behind on mortgage payment, the repayment plan will include the default amount and the future mortgage payments.
The benefit of including your secured debt in the repayment plan is the assurance that the property will be protected from repossession or foreclosure as long as you stay current on plan payments. There is also the peace of mind that the monthly lump sum takes care of most or all your on-going debt payments. In some cases, the plan can modify the terms of a secured debt, like reducing the principal balance or interest rate. This is known as a “cram down”.
Unsecured Debts
Unsecured debts like credit card debt balances and medical bills are paid a percentage of their total balance based on your disposable income. You are not required to pay these debts in full unless your income permits.
Unsecured debts are often discharged after the plan is completed if your plan meets the “best interest of creditors” test. This test ensures that unsecured creditors receive at least as much as they would have in a Chapter 7 liquidation.
When you complete your plan, creditors cannot pursue you on any remaining debt balances if they hold a dischargeable debt. .
Plan Duration
The length of your repayment plan will depend on your income relative to the Arizona state median. If your monthly income is less than the state median, the plan duration can be set at the minimum three years and can be voluntarily set to the maximum of five years or anywhere in between. .
If your income is above the Arizona median income, your plan must be five years.
Filing the Plan With the Bankruptcy Court and Plan Confirmation
With the help of your bankruptcy attorney, you propose the repayment plan when filing your petition or within 14 days after doing so, unless the court grants an extension. Creditors may object to the plan if they disagree with how they are being paid through the plan according to the type of debt they hold. For a Chapter 13 plan to become final, the bankruptcy court must confirm it. In Arizona, this usually occurs between four to five months after filing. However, it could be longer depending on the case. There are many reasons confirmation can be delayed or denied. Common reasons are as follows:
- Missed plan payments
- Incorrect treatment of specific creditors
- All requested documents were not provided to the Trustee
- Not enough money is being paid into the plan
- Unresolved objections filed by creditors
- All taxes were not timely filed
- A Schedules and/or statement must be amended .
Once all parties are in agreement to the proposed order confirming the case, the Judge will attach their seal as approval. This means the plan is “confirmed” and the trustee distributes available funds under the plan as soon as is practical. The Trustee will make monthly distributions through the remaining term of the plan.
If the court does not confirm your proposed repayment plan, you still have options, including plan modification or converting your bankruptcy to Chapter 7.
Discharge of Debts on Plan Completion
If the court confirms your plan, you are legally bound to the plan, and your creditors must accept the terms of the plan. When you have made all your plan payments, all remaining eligible unsecured debts are discharged. These debts include:
- Unsecured debts such as medical bills, personal loans, and most credit card bills
- Some tax debts
- Some lawsuit judgments
- Legal judgments for willful destruction of property
- Divorce property settlements other than child support or alimony arrears
- Debt acquired to pay non-dischargeable taxes
Not all debts can be discharged in a Chapter 13 bankruptcy. Examples include:
- Domestic support obligations like child support and alimony
- Student loans
- Criminal fines
- Mortgages (if you are keeping the property)
- Vehicle loans (if you are keeping the property)
How is a Debt Repayment Plan Calculated?
The starting point in calculating a possible Chapter 13 debt repayment plan is to know what kind of debts you have. Secured debts and priority debts set the very minimum of your repayment plan. For most, this is their car loan, taxes, child support, alimony, and administrative fees (attorney fees and trustee fees). If there is a mortgage default, this will include the default amount and on-going mortgage payments through the term of the bankruptcy.
The second part is determining whether you can afford the bare minimum. You will need enough income to make your regular expenses, like your rent or mortgage (if current at the time of filing), property taxes, monthly child support, food, clothing, vehicle gas, utility bills, and other reasonable living expenses not included in your proposed plan.
If your income is not enough to cover your priority and secured payments, you will not qualify for Chapter 13 bankruptcy.
Any money left over is your disposable monthly income. From this income, you must be able to pay the bare minimum required for your repayment plan. If you have more than the minimum, the plan may pay a portion or all of your unsecured debt such as credit card balances, medical bills, and personal loans.
Disposable Income and the “Best Interest of Creditors” Test
Your monthly repayment plan payment will depend on the highest of three calculations: your disposable income, the full repayment of your priority debts, or the amount required to satisfy the “best interest of creditors” test.
Any money left after paying the above amounts is disposable income. Your remaining debts must be paid from your disposable income on a percentage basis. What you cannot pay in full, except for student loans and support paid to the government, will be discharged after you complete your payments.
Your debt payment amount must also meet the “best interest of creditors” test. What this means is that you must pay your priority and non-priority unsecured creditors at least as much as they would have received in a Chapter 7 bankruptcy.
To figure out your monthly payment amount, you’ll start by calculating the bills you must pay in full, which are your secured and priority debts. Your unsecured creditors will share any remaining income, so you’ll address unsecured obligations last.
Mortgages in Chapter 13 Bankruptcy
If you want to keep your home, you must be current on your mortgage payment and continue to make your monthly payments on time while you are in your bankruptcy. If you are behind on payments at the time of filing, then you will be required to include the default amount and the regular mortgage payments in your repayment plan. .
Other Debts Secured by Property
Secured debts are debts attached to personal property. A common secured creditor is a car lender. Even if you are current on your car loan at the time of filing, secured loans must be included in your repayment plan. There are specific circumstances where they can be excluded, but it is rare. There are occasions where the car loan balance and interest can be reduced. Consult with your Bankruptcy Attorney to see if you are a good candidate for this.
Calculating Unsecured Debt Payments
Debts that do not qualify as priority or secured debts are nonpriority unsecured debts. These debts are paid from your monthly disposable income, up to the total amount you owe to your unsecured creditors.
How Much is an Average Chapter 13 Payment Plan Payment?
Your monthly Chapter 13 payment will depend on your disposable income, the total amount you owe, the duration of the repayment plan, and specific obligations such as secured debt arrears, priority debts, and administrative fees.
This means that the monthly payment for a Chapter 13 bankruptcy plan can vary significantly based on your individual financial circumstances.
Is a Chapter 13 Bankruptcy Payment Plan Right for You?
This blog post aims to introduce you to the key considerations that inform a Chapter 13 repayment plan. Understanding exactly how your debt can be restructured under a Chapter 13 repayment plan will require a careful examination of your financial situation, including your total debt, your current monthly income and how stable your income is, how much disposable income you have, your required debt payments, whether your secured debts are subject to adjustment such as through lien stripping or cramdown, and more.
If you consult with an experienced Arizona bankruptcy lawyer at Stone Rose Law, we can advise you on the full range of your debt relief choices, including Chapter 13 bankruptcy. You can reach us by telephone at (480) 739-2448 or contact us through our online contact form to schedule a no-cost initial consultation at our Phoenix office.To learn more about how bankruptcy law in Arizona may work for you, see our Bankruptcy Calculator.
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