What Is the Chapter 13 Bankruptcy Repayment Plan?

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 What Is Chapter 13 Bankruptcy?

Bankruptcy is a type of legal procedure that is used to eliminate, restructure, and reduce debt. The bankruptcy process is governed by the main source of federal bankruptcy law in the United States, which is known as the “U.S. Bankruptcy Code”. This Code outlines several different chapters of bankruptcy and the conditions for when an individual or entity may file for a certain chapter based on their distinct set of circumstances.

Some types of bankruptcy filings include Chapter 7, Chapter 9, Chapter 11, and Chapter 13. The remainder of this article will focus on the different requirements and consequences of filing for Chapter 13 Bankruptcy.

Chapter 13 Bankruptcy is ideal for individuals who are in need of debt relief, but want to protect some forms of assets or property they own from being reached by creditors. A person may also be forced to file for Chapter 13 Bankruptcy when their income is too high to file for Chapter 7 Bankruptcy, or if a court orders them too.

Although Chapter 7 and Chapter 13 Bankruptcy proceedings are both meant to aid individuals who are in need of debt relief (as opposed to businesses), there are a few differences between the two. The first is that Chapter 13 Bankruptcy does not necessarily eliminate debts. Instead, it aims to reorganize the debt in a way that makes it manageable to pay off over a longer period of time (usually within three to five years).

On the other hand, Chapter 7 Bankruptcy can completely eliminate debts. The trade-off here, however, is that it provides almost no protection over the majority of a person’s assets. Thus, an individual who can afford to restructure their debt to eventually pay it down over a longer period of time, may use Chapter 13 as a strategy to protect their property and/or assets.

Again, a federal bankruptcy court may order an individual who originally filed for Chapter 7 to file for Chapter 13 when it determines that an individual has the ability to repay a debt. A court may also order such a switch if a person failed to disclose a significant amount of funds or received a sudden increase in their income (e.g., inheritance, promotion, etc.).

Finally, if you are unsure of which chapter of bankruptcy you qualify for or want to learn more about Chapter 13 Bankruptcy, you should speak to a local bankruptcy lawyer to obtain some more personalized legal advice.

How Long Is a Chapter 13 Bankruptcy Plan?

In general, the standard length of most Chapter 13 Bankruptcy Plans may last anywhere from three to five years. This means that the average debtor will need to make a schedule to repay down their debts before this time period expires. However, if a debtor requires more time to pay down their debts, they may request an extension from the bankruptcy court in which they submitted their original Chapter 13 filings.

How Do I Know If My Chapter 13 Plan Will Be Three or Five Years?

The amount of time that a debtor will have to pay off their Chapter 13 debts will depend on a number of factors, including the bankruptcy court’s decision, the laws of the jurisdiction where the petition was submitted, the debtor’s monthly income, and an estimation of how long it may take the debtor to pay down their remaining debt.

Similar to Chapter 7 Bankruptcy filings, Chapter 13 also applies the “means test” to assess the debtor’s situation. The difference in a Chapter 13 Bankruptcy, however, is that in this instance it is used to figure out whether the debtor should be given three or five years to pay down all of their debts.

In most cases, a debtor will only be granted three years to pay off their debts if they earn less than the median family income level in their state. On the other hand, the length of time may be increased to five years if the debtor earns more than the state median income or if the debtor requests an extension from the court. A debtor may be able to modify their repayment plan if they can demonstrate they suffered some kind of financial setback or short-term issue.

Will the Judge Confirm My Chapter 13 Bankruptcy Plan?

In order for a debtor to increase their chances of getting a judge to confirm their Chapter 13 Bankruptcy Plan, they must demonstrate a few reasons why their plan is feasible first. Some factors that a court will consider in assessing how strong a plan is include the following:

  • The first item that a judge will look at when reviewing a bankruptcy repayment plan is how realistic it is in succeeding. Although most courts are lenient when it comes to this requirement, no payment plans should exceed a debtor’s expected amount of income.
  • Next, the debtor must provide proof of all available income, including wages, loans from family or friends, and any other forms of payments that can be used to pay off their debts.
  • Additionally, the plan must be proposed in good faith and must not violate any laws. If a debtor proposes to pay back a loan shark before they take care of their child support payments, then this plan would clearly not exhibit good faith intentions because it would violate a bankruptcy law concerning the priority of creditors.
  • One other important factor that can significantly impact the chances of obtaining a court’s approval is similar to the good faith requirement, but has to do with creditors. For instance, an unsecured creditor (e.g., a credit card company) cannot receive payments that are less than what they would have received if the debtor had filed for Chapter 7 Bankruptcy instead.
    • As an example, if in a Chapter 7 Bankruptcy the credit card company would have been paid at least $500, then a debtor who filed for Chapter 13 Bankruptcy may not pay that credit card company less than $500 under their Chapter 13 repayment plan.

Will My Bankruptcy Case Get Dismissed If I Fall behind or Miss Payments on My Chapter 13 Plan?

A debtor may face many consequences if they miss or fall behind on their payments under a Chapter 13 repayment plan. For instance, their plan or case may not get confirmed by the time it gets to court. Chapter 13 proceedings take much longer than Chapter 7 cases.

In other words, it may be months until a court hears and rules on a Chapter 13 Bankruptcy petition. Thus, if a debtor misses payments under their plan before a court even confirms it, then the court may dismiss their case or object to their repayment plan.

Another consequence to missing or falling behind on payments is that the debtor’s creditors may seek relief from a court’s automatic stay.

For example, if a court grants a Chapter 13 Bankruptcy petition, it will place an automatic stay on creditors that prohibits them from collecting or harassing a debtor for overdue debts. By continuing not to repay creditors, the creditors can ask for relief from the court to lift the automatic stay, so they can continue collections on the debt.

Lastly, a debtor who defaults on their repayment plan may have their case dismissed. A default can trigger the bankruptcy trustee to ask the court to dismiss the case for failure to comply with the plan. If the court grants the bankruptcy trustee’s request, then the court can dismiss the case without discharging any debts, meaning the debtor will still be on the hook for any remaining payments.

What Happens If I Can’t Complete My Chapter 13 Plan?

In general, there are four main options available to a debtor who can’t complete the Chapter 13 bankruptcy repayment. These options include:

  • The federal bankruptcy court may dismiss the case or the debtor may ask the court to dismiss it. Unfortunately, this is the worst option that a debtor can choose because they may still be liable after months or years of repaying creditors.
  • A debtor may request that the court discharge their debt. The court may grant this request if a debtor can demonstrate that certain circumstances beyond their control prevented them from completing their Chapter 13 repayment plan and that modification of the repayment plan would be impractical. This is true even in cases where the debtor never satisfies the requirements of their repayment plan.
  • A debtor may also ask the court to modify their plan. If granted, the court may tweak either all of the plan or some parts of it, such as the amount of payments owed on certain debts, the length of time already spent on the plan, and/or the amount of payments that each individual creditor receives under the existing plan.
  • Finally, in extreme cases, a court may convert the case to a Chapter 7 Bankruptcy. It is important to note that in this scenario a debtor may lose property or assets they were trying to protect under the Chapter 13 case, but ultimately, the case will be terminated quickly and many of the debts will be discharged.

Do I Need a Lawyer for Help with Chapter 13 Bankruptcy?

Understanding all of the laws, requirements, and processes associated with bankruptcy filings can be very confusing without the support of a legal expert. In particular, Chapter 13 Bankruptcy filings can become fairly complicated when it comes to the stage regarding a debtor’s repayment plans. Therefore, if you have decided to file for Chapter 13 Bankruptcy, it may be in your best interest to speak to a local bankruptcy lawyer to receive further guidance.

An experienced bankruptcy lawyer can help you create, review, and submit a proper Chapter 13 repayment plan to the federal bankruptcy court. Your lawyer can also assist in filing the other documents required to file for Chapter 13 Bankruptcy and can provide representation in court. Lastly, if you have any questions about your repayment plan or about Chapter 13 Bankruptcy in general, your lawyer will be able to answer your questions as well.

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