Chapter 13 Plan
The plan is a central document in a chapter 13 bankruptcy, which, among other thing, provides the amount to paid by the debtor and the amount to be received by creditors. A debtor proposes the plan, which must meet the requirements of the bankruptcy code and be confirmed by a bankruptcy judge.
Frequently Asked Questions
Our frequently asked questions also address Chapter 13 Plan:
A requirement to be a debtor in a chapter 13 case is having "regular income." Practically speaking, the source and regularity of the income is not as important as existence of the income. Chapter 13 bankruptcy involves a court approved payment plan. In order to obtain approval, a debtor must demonstrate to satisfaction of the court, trustee, and other parties that the plan is feasible, i.e. the debtor will be able to make the payments proposed. Usually, this means the debtor must disclose a source of income that will pay his or her basic living expenses as well as the proposed bankruptcy payment. Most sources of income, if large enough in size, will do.
The function of chapter 13 bankruptcy is paying certain debts over time. Examples include catching up a mortgage, paying off a car loan, and taking care of back taxes. But over how much time exactly?
The short answer for most cases is between 3 years and 5 years.
The requirements for repaying creditors in a chapter 13 are somewhat detailed. The following is a general summary that notes the basic rules without going into finer details or exceptions.
910 days (about two and a half years) is an important threshold in the life of a car loan for a prospective filer of chapter 13 bankruptcy.
Like other secured loans, a car loan can become underwater or undersecured, where the value of the car is less than the amount owed on the loan. This most often happens when cars are purchased new and depreciate faster than the loan balance is repaid. It also occurs when loans have high interest rates or when the car loses value unusually fast, as is the case of high mileage or an unpopular make and model.
No, a bank doesn't have discretion on whether or not a loan is involved in a chapter 13 bankruptcy.
When filing a chapter 13 petition, a plan payment is calculated based on the figures included in the petition, and a plan is proposed by the debtor. In some cases, this payment will be confirmed by the court and may continue for the life of the plan. In other situations, changing the payment may be necessary to obtain plan confirmation. If the debtor changes his or her mind about what plan to pursue, e.g. the debtor decides to pay for a car instead of giving it up, the payment usually changes, and this is no surprise. However, other things can impact the payment, including:
If you miss payments on your chapter 13 plan, you risk being dismissed from your bankruptcy case, or in more unusual circumstances converted to chapter 7. If your case is dismissed, your creditors will be able to resume efforts to collect from you, and you will not receive a bankruptcy fresh start. If a case is converted, a chapter 7 trustee will be appointed to sell your non-exempt property and pay your creditors.
Basically, adequate protection payments are early-case disbursements made by the chapter 13 trustee from funds the debtor as paid to the trustee, which are directed towards holders of car loans and other certain secured claims on personal property. The theory behind these small payments is to protect the lender from depreciation while the case is pending.
Chapter 13 bankruptcy provides debt relief that in many ways is more flexible and powerful than chapter 7. In addition to the elimination of old unsecured debts such as charge cards and medical bills, chapter 13 provides for ways to prevent foreclosure and repossession, as well as to pay certain debts like taxes over time. Despite the potential complexity, chapter 13 bankruptcy remains accessible as the chapter 13 plan can provide for the payment of attorneys fees over time.
We have discussed Chapter 13 Plan in the following posts on our bankruptcy blog:
A secured loan is any loan where the lender has an interest in collateral they could potentially take to pay the debt, including mortgages, deeds of trust, liens, and car loans. For bankruptcy debtors with secured debt, they can choose to file chapter 7 or chapter 13. Chapter 13 may offer options to adjust the terms on which the secured loan is repaid. Chapter 7 debtors who keep secured property generally pay the secured loan on the same terms as before bankruptcy. In both chapters, turning the property over to the creditor is also an option. This post discusses how and in what circumstances chapter 13 can alter secured loans.
Many people have credit card debt, and many people file chapter 13 bankruptcy. But what about when there is credit card debt in chapter 13 bankruptcy? Chapter 13 plans are repayment plans, a fact that causes a good bit of uncertainty for people considering bankruptcy as a way to get out from burdensome credit card payments. This post explains the basics of how credit cards are treated in chapter 13, and explains why many chapter 13 plans provide no payment at all to credit card lenders.
Most people do not use chapter 13 to repay credit card debts. It’s often the case that a debtor is permitted under the bankruptcy code to obtain confirmation of a chapter 13 plan that pays nothing to unsecured creditors. For debtors making payments on credit cards in chapter 13, the chapter 13 plan serves as a consolidation loan on terms favorable to the borrower.
Many chapter 13 bankruptcy plans take over payments on debts that the debtor beforehand was paying directly. Mortgage payments and car payments are the most common examples. Therefore, there is a transition between the last direct payment to the lender and the filing of the case and commencement of payments to the chapter 13 trustee. Careful timing of this transition can make coming up with the cash for the first month's chapter 13 payment more manageable.
The first meaning of feasibility is that of the "feasibility requirement" common to chapter 13 bankruptcy, chapter 11 bankruptcy, and chapter 12 bankruptcy. Simply put, the feasibility requirement is that debtor must demonstrate ability to do what is proposed in the plan, e.g. make the payments. The second meaning is disbursement feasibility: does the debtor propose to pay enough to the standing trustee that the standing trustee can then make all required disbursements to creditors.
Here in North Carolina, a car is typically essential transportation. Owning a car can be vital to continued employment. Lenders and car lots know this, and are very willing to loan money to buy a car. The catch, however, is a high, sometimes very high, interest rate. A high interest rate strains a household budget, and can prolong the debt burden beyond the serviceable life of the car. Bankruptcy offers tools for consumers to get out from the burden of crushing auto loan interest.
Coming into chapter 13 bankruptcy, a common experience of individuals is payment due dates and the sometimes harsh consequences that follow from missed due dates. When money has been tight, the experience of a late payment fee and a default interest rate is frustrating and stressful. Naturally, with that experience, there can be some anxiety when I discuss that the plan payment is due the first of each month (in the Eastern District of North Carolina -- Raleigh's Bankruptcy Court). The shadow of past interactions with credit accounts covers expectations regarding the process of paying the trustee. So, going into chapter 13 bankruptcy, there is an opportunity to gain insight in advance of how chapter 13 plan payments are administered.
A significant power of chapter 13 bankruptcy is the ability to propose a plan that cures a default associated with a long-term debt, i.e. to catch up a delinquent mortgage so that it is once again current. Due to this, chapter 13 is an option frequently considered by families who have fallen behind on their home mortgage payments. Understanding the basics of how a cure payment is calculated is important for appreciating the value and constraints of chapter 13.