With a Chapter 13 repayment plan, you can secure a debt-free future! Although filing bankruptcy isn't for everyone, a Chapter 13 repayment plan can be a fitting solution for anyone who needs the protection of the bankruptcy code and yet does not wish to give up certain assets.
This article explains everything you need to know about Chapter 13 repayment plans. Our hope is that by reading this article you will come away more educated about this aspect of a Chapter 13 bankruptcy case. However, if you do have questions about filing the bankruptcy or the Chapter 13 repayment plan, Oklahoma Bankruptcy Law invites you to schedule a free consultation for the answers you need.
Who is Eligible for a Chapter 13 Repayment Plan?
To qualify for a Chapter 13 repayment plan, the debtor must meet two specific qualifications according to the bankruptcy code. Those requirements relate to income and debt.
To qualify for a Chapter 13 repayment plan, bankruptcy code states that as the debtor, you are required to have sufficient income so that you are able to make the monthly payment that is required. This monthly payment will be made using disposable income for the next three-to-five years. The debts are discharged after the plan is paid in full. That, however, does not mean that each and every debt is paid in full. You will learn more about the different types of debts and how they may be paid within the repayment plan later in this article.
For now, it is important to understand that you must have the income necessary to pay your monthly necessities and to make your monthly payment for your Chapter 13 plan.
A Chapter 13 plan requires that your secured debt as well as your unsecured debt not exceed certain amounts. Secured debt refers to debt that has some type of collateral attached. For example, a vehicle or home on which you make payments. Unsecured debt is debt that does not have collateral. For example, medical debt, personal loans, and most credit cards.
- The debt limit for secured debt is $1,257,850.
- The debt limit for unsecured debt is $419,275.
How Chapter 13 Repayment Plans Work
The Chapter 13 plan is monitored by the assigned Trustee after it is approved by the bankruptcy court. Here are a few key pieces that highlight how the repayment plan works.
The Relationship Between the Creditors and the Debtor
Initially, when the Chapter 13 bankruptcy case is filed, the bankruptcy court issues an automatic stay. The purpose of the automatic stay is to stop the collections-based actions of creditors. For example, debt collectors can no longer call or sue you. If you are in the foreclosure process, it is stopped. The exception to automatic stays is if a creditor asks the bankruptcy court if they can resume collections activity - for example, if a mortgage lender requests to continue with the foreclosure proceeding.
Creditors and the debts that you owe are arranged in the Chapter 13 plan according to priority. There are three levels:
- Priority claims. Priority claims are also known as priority debts. These are debts that will be paid in full as part of the Chapter 13 repayment plan. One example is child support arrearages. Certain tax debts are also considered priority claims.
- Secured claims. Secured claims are also known as secured debts. These are debts that are secured by collateral. A vehicle loan or a mortgage are the most common examples. When there are secured claims, the creditor is entitled to receive at least the value of their collateral.
- Unsecured claims. Unsecured claims are also known as unsecured debts. They have no collateral. The most common example is medical debt. Most credit cards are also unsecured. These claims may receive some payment toward what they are owed, but it may not be anything close to what is owed.
Additionally, during the life of the plan, the debtor does not deal directly with the creditors to make the payments.
The monthly payments made toward the Chapter 13 plan are made directly to the Trustee. As the overseer of the Chapter 13 bankruptcy case, it is the Trustee's responsibility to take the monthly payment, divide it, and distribute it to the creditors according to their class.
These payments are received by the Trustee for three-to-five years. Priority claims are paid in full. Secured claims will receive, at least, their value. Unsecured claims may receive payment based on the calculations of the payment plan and whether there were priority or secured claims.
Payroll Deduction Payments
One way that Chapter 13 monthly payments can be made is through payroll deduction. In Oklahoma, this is referred to as a wage deduction order. Opting for payroll deduction for your Chapter 13 repayment plan can make it easier to manage your budget. This is incredibly important considering that your Chapter 13 plan is based on your income, expenses, and calculated disposable income. Payroll deductions for these monthly payments can ensure that you fulfill your repayment plan obligations so that your debts are discharged.
Allows You to Retain Property
A Chapter 13 repayment plan allows you to retain certain property that might not be protected in Chapter 7 bankruptcy. For example, if you own a home and you fall behind on your mortgage, the foreclosure process may begin. A Chapter 13 repayment plan would enable you to catch up on your past-due mortgage payments while also stopping the foreclosure process. The past due mortgage payments would be secured claims. However, it is important to ensure that you continue to make all of your remaining mortgage payments on time.
How the Repayment Is Calculated
When you file Chapter 13 bankruptcy, you must propose a repayment plan. There are several pieces of information that you and your bankruptcy attorney can use to calculate your proposed monthly payment. Your Chapter 13 repayment plan can last three-to-five years.
- The amount of your income as well as your monthly expenses. Part of determining your monthly payment is looking at your income as well as your monthly expenditures. Your disposable income will be used to pay your Chapter 13 plan.
- The full amount of all of your debts divided by the number of months your repayment plan will last. As your bankruptcy attorney prepares your bankruptcy schedules, that will give you a better idea of the full amount of your debts. Remember to include the amount you are behind on any property you wish to keep, such as your mortgage.
Priority debts are the most important debts on the Chapter 13 repayment plan. Priority claims are technically unsecured claims. However, they are of great significance. Most commonly, priority claims involved in a Chapter 13 plan are domestic obligations: support alimony and child support arrearages. Recent tax debt is another example of a priority debt. The administrative costs involved in the bankruptcy case also fall into this category as a debt.
Priority debts must be paid in full in Chapter 13 bankruptcy cases.
Unsecured debts can be considered non priority as well. Examples include unpaid utility bills, unpaid medical bills, unpaid credit cards, and unpaid personal loans. After priority claims and secured claims are paid, the unsecured debts will be addressed. They will receive a pro-rata share of the remaining time left on the Chapter 13 repayment plan. This means that in some cases, unsecured debts may receive nothing..
Length of Repayment Plan
Chapter 13 repayment plans are beneficial because they give you a significant amount of time to repay the debt according to a plan you propose that is approved by the bankruptcy court. The Chapter 13 plan you propose can be as little as three years if you qualify for a plan that is less than five years or the plan can be as long as five years if your income requires it. It depends on your income and the length of time that you need to repay your debt. You receive your discharge once your repayment plan is complete.
What Happens If You Fall Behind or Can't Make Payments?
If you fall behind on your Chapter 13 plan monthly payments or you can't make your monthly payments, the Trustee assigned to oversee your bankruptcy case or any of your creditors could ask the bankruptcy court to dismiss your case. If you fall behind on your plans, you do have options that may help you avoid a dismissal.
Converting to Chapter 7
Converting to Chapter 7 can help you get a discharge, but there may be some drawbacks. This option may be best if you are unable to make your monthly payments because of a substantial financial hardship that is long-term in nature. This is because if you decide to convert to Chapter 7, you will be required to pass the means test. You will also be required to have a Chapter 7 Trustee liquidate your assets that are in excess of the bankruptcy exemptions. However, if the conversion is successful, it may be worth it since it could enable you to get a discharge.
Modifying the Repayment Plan
Under certain circumstances, you may be able to successfully modify your repayment plan. This requires a motion filed with the court. You must be able to prove that you have circumstances that require this modification, such as a job loss. However, if your current plan only repays domestic support arrearages and certain tax debt, a modification will not be successful.
Curing Your Default
If it's possible for you to do so, you can cure your default and pay what you owe. First, call your attorney. More often than not, they can assist you to come to an agreement with the Trustee and ensure that you are able to catch up on your monthly payment. The Trustee may be willing to give you time to catch up if you have a convincing reason.
A hardship discharge is available under very limited circumstances if you are unable to complete your repayment plan. To qualify, modification of the Chapter 13 plan must not be possible, your ability to complete your plan payments must have failed for circumstances that are beyond your control, and your unsecured creditors must have already received as much money as they would have received if you would have filed Chapter 7. For example, if you were diagnosed with a serious medical condition in the middle of your Chapter 13 repayment plan that renders you unable to work to be able to continue your payments and you meet the other qualifications, you may qualify for a hardship discharge. However, the loss of a job would not qualify for a hardship discharge.
Receiving Your Discharge
You receive your discharge after you complete your Chapter 13 payment plan. This could be three-to-five years, depending on the length of time that you set with your approved Chapter 13 plan. After your payment plan is complete, you are essentially debt-free, unless you are still paying off ongoing domestic obligations, student loans, or continuing to make mortgage payments!
Creating Your Custom Plan to Living Debt Free
If you are looking to create financial freedom for yourself and your family, Chapter 13 can act as a financial tool to help you gain control of your current debt and help you develop a plan to pay it off within a timeframe of three-to-five years. While it may not be for everyone, it could be a tool for you. To learn more about Chapter 13 and whether it could be the key to financial freedom, schedule your free consultation with Oklahoma Bankruptcy Law now!