The primary difference between a Chapter 7 case and a Chapter 13 case is the Chapter 13 Plan. If you do not qualify for a Chapter 7 case under the Means Test, or you qualify but want to take advantage of benefits of Chapter 13 (such as lien stripping), then you will submit a Chapter 13 Plan. The Plan will typically allow you to pay your creditors over a three to five year period, using your “disposable income.” Your disposable income will be paid to the Chapter 13 Trustee (either directly by you or by payroll deduction), and the Trustee will then distribute the money pursuant to Bankruptcy law and the provisions of the Plan. How does the Plan work? Volumes of books can be, and have been, written on Chapter 13 and Chapter 13 Plans. In fact, I started my career as a judicial law clerk for a well-known Bankruptcy Judge in Georgia and one of my duties for two years was researching and assisting in updating a book on Chapter 13. In this post, we will provide a basic overview of a Chapter 13 Plan.
When you file a Chapter 13 case, the Plan must be filed with the initial Petition or within two weeks, unless an extension is requested. In the Plan, you will propose to pay your disposable income (generally, what you have left after you pay your ongoing living expenses) to the Chapter 13 Trustee to pay your pre-petition debt. Debts are typically divided into three types: Secured, Priority and Unsecured. Each is treated differently in the Plan:
- Secured Debts include home and vehicle loans. Most districts allow you to continue making your normal monthly payments for long term debts directly to the lender. This is normally called payments made “outside the Plan.” However, past due payments, or arrearages, are typically paid in the Plan. For example, if you are behind $5,000 on your mortgage, and propose a 60 month Plan, this arrearage will be divided up into 60 monthly payments of around $83, plus a relatively small amount of interest.
- Priority Claims are usually unsecured claims and include taxes, debts owed to governmental units (such as overpayments), domestic support obligations such as alimony and child support, the Chapter 13 Trustee’s expenses and the balance of your legal fees. Congress has decided that these debts must be paid in full, and are non-dischargeable in any Bankruptcy case. They generally must be paid in full in the Chapter 13 repayment period, unless the creditor agrees to another arrangement.
- General Unsecured Debts come last in line, and generally do not have to be paid in full in the Plan. However, if your disposable income is sufficient, you will have to pay these debts in full (with no interest) over the Plan’s repayment period. This category includes credit card debt, medical bills, loans and secured debts when you decide to give up the collateral (ie, home, vehicle, boat, etc.). It is not uncommon to have Chapter 13 Plans that propose to pay 1% of general unsecured claims. When you complete all requirements of the Plan, you get a discharge of the remaining general unsecured debt.
Again, this is a very general overview of the Chapter 13 Plan. As we go along in this Blog, we will get into more detail about all of these elements and requirements. The confirmation of a Chapter 13 Plan can be one of the most difficult and contested parts of a case. The chances of getting a Chapter 13 Plan confirmed, and completed, without a good Bankruptcy lawyer are about as close to 1% as you can get. A few more notes on Chapter 13 Plans:
- You do not get to tell the Court and Trustee how much you want to contribute to the Plan as “disposable income.” While there is a little room to move on some expenses, the Court uses certain local averages and standards for your expenses. For many people, Chapter 13 may give them the same or better standard of living going forward as they already have a reasonable standard of living or they have already changed their lifestyle because of debt. For people used to shopping at Whole Foods, eating at restaurants for lunch or dinner, going to the club or spa, and keeping up with the latest clothing trends, a big lifestyle change will have to happen.
- It is not enough to propose a Plan that meets the legal requirements. A Plan must be feasible in order for it to be confirmed. That means that you have to actually be able to do what you say you will do in the Plan. For example, if you do not have enough monthly income to pay your ongoing basic living expenses, plus pay your secured debt arrearages and priority claims in full in the Plan, the Plan will ultimately fail. A good Bankruptcy lawyer will spend quite a bit of time making sure you can actually do what you will say you will do in a Plan and the Chapter 13 Trustees will object to a Plan that, on its face, is not feasible.
- You typically must pay all disposable income to the Trustee, even if you are going to pay all creditors in full (a “100% Plan”). In other words, if your disposable income will allow you to pay all creditors in full in 36 months, you typically cannot propose a 60 month Plan just so you can contribute a little less monthly income to the Trustee.
- Although Bankruptcy law controls the substance of Chapter 13 Plans in all states, the actual practice can vary in different districts. Some Chapter 13 Trustees are more picky than others, and may object to a Plan if there is a $15/month difference in what they believe is your real disposable income. They may require a significant amount of documentation to support monthly expenses (such as prescriptions, school expenses, etc.). It is very important to have an experienced lawyer to guide you through the process as they are familiar with local practice.
- Most people will experience changes in income (increases or decreases) during the life of the Plan. Others may receive an inheritance, significant tax refund, or a recovery in a lawsuit. These must typically be reported, and can change the amount of disposable income paid in the Plan. For others, emergencies such as unexpected medical expenses, car repairs and other expenses come up. Your lawyer can often request that Plan payments be suspended for a short period of time.
- Amendments are common. It is not unusual to make one or two amendments to a Plan before confirmation or during the life of the Plan. It is generally not a reason to be stressed. Many good lawyers will try to propose a Plan that is as beneficial as it can be to their clients, as long as it complies with the law. They will try to get that extra $20-30 a month for their clients. Sometimes it works and sometimes a Trustee will object.
- Finally, many Bankruptcy lawyers will include some of their fees in the Plan and these fees are paid from the disposable income you pay into the Plan. This effectively means that you do not have to pay these fees from your pocket. I do not like to use the term “free lawyer,” but unless you have a 100% Plan, this portion of your legal fees is shared by your creditors who get the benefit of your Chapter 13 Plan payments.
Chapter 13 is a complicated process, but for many individuals and families it is a process that allows them to get back on track and reduce the daily pressure in their lives. If you think that a Chapter 13 will do this for you, contact a Georgia lawyer or find a good, experienced Bankruptcy lawyer in your area. Virtually all lawyers offer a free initial consultation.