Chapter 13 Plan Payments • Video
We all want affordable Chapter 13 plan payments. Medical bills and credit cards are types of unsecured debt that can be managed within a Chapter 13 plan. However, if the plan is not affordable, Chapter 13 will fail sooner or later. A bankruptcy attorney who omits the necessary items from the budget may get a plan confirmed, but the plan won’t work.
When your bankruptcy attorney prepares the petition the Chapter 13 plan payments should pay back only a part of unsecured claims, the unsecured creditors may not be happy. A car loan, mortgage, or plan payments won’t be paid if you leave out reasonable and necessary items from the budget.
Your specific circumstances will determine an optimal repayment plan. You are required to use your best efforts and all of the disposable income in your Chapter 13 bankruptcy to pay unsecured creditors. But no bankruptcy court confirms a plan when the Chapter 13 monthly payment fails to cover your monthly medical bills or daycare costs.
Your Bankruptcy Attorney and Chapter 13 Bankruptcy
To make Chapter 13 bankruptcy affordable, some people file Chapter 7 first before filing a Chapter 13 bankruptcy. Why? You may want to file a Chapter 13 first because if you discharge unsecured debt first in Chapter 7, you do not have to repay those discharged debts later in Chapter 13. This makes the Chapter 13 bankruptcy more affordable. Those unsecured creditors generally do not get paid in a later Chapter 13 bankruptcy. If they file claims, you can file motions to have these claims disallowed.
Lowering the debts you owe almost always lowers the payments. But, even if you file a “Chapter 20,” which is Chapter 7 followed by Chapter 13, you might still have to repay some nondischargeable unsecured debt in Chapter 13 such as taxes less than 3 years old.
How to Win Great Chapter 13 Monthly Payments
The Three Items that Control Your Chapter 13 Plan Payment
If a plan becomes unaffordable, it’s sometimes possible to lower payments or suspend them and catch up later. The bankruptcy court reviews and then confirms the repayment plan proposed by the debtor. The trustee also reviews necessary documents. The court hears objections from trustees and creditors, and ultimately decides whether to approve the plan during a confirmation hearing. The confirmation hearing can be part of the 341 hearing when a judge makes a local rule that plans over 50 or 70% will be automatically approved.
A Debtor should review the mortgage company proofs of claim and mortgage arrears. To confirm or modify a plan and get the lowest payment, you first must understand what the repayment minimum is for your situation.
Three items drive the amount you have to pay back.
- Disposable income,
- non-exempt assets, and
- secured/priority debt may increase a plan payment.It isn’t as simple as just decreasing income and increasing expenses to make your payment low. You never falsely claim expenses, but you often forget expenses you must repay and forget your income may decrease. You must base the plan on your lowest income and your highest expenses or it will eventually fail.
1. Debt-Based Repayment • The Plan Must Repay Priority and Secured Debts
There are three types of claims in Chapter 13. These are the priority, secured and unsecured claims. The most common priority claims include income taxes that are less than three years old, child support, and alimony. Mixed in with that attorneys fees and the trustee’s fee are administrative claims which are given priority.
Only secured and priority debts must be paid up-to-date during Chapter 13. So, if the mortgage is mature or matures during Chapter 13, the loan must be repaid during Chapter 13. Most often, Chapter 13 only has to bring mortgages current.
Priority Tax Debt in Chapter 13 plan payments
Priority debts, like income taxes that are less than three years old, can also be secured debt. The IRS may place a lien on the property and become a secured debt. The debtor is obligated to ensure secured creditors receive payments commensurate with the value of their collateral during the bankruptcy repayment plan.
The debtor must also pay unsecured creditors based on disposable monthly income and the ‘best interest of creditors’ test. Your median income will be part of whether you get a three to five years Chapter 13 repayment plan due to bankruptcy laws.
When the assessment on your taxes is complete, a silent and special lien automatically go into effect ten days after the assessment. This silent lien (unrecorded lien) is against all the property that you own but it is not recorded. The IRS can record a lien on a home at the courthouse to ensure the home is not sold without them being paid. The recorded lien automatically expires after 10 years.
Essentially, any income tax debt less than three years old is a priority debt that must be repaid in full during Chapter 13. Your goal is to turn priority debts and secured debts into dischargeable unsecured debt and repay them at 10% not 100%. As a former tax prosecutor I love repaying taxes less than 100%. You a Chapter 13 repayment plan that turns debt that can’t be discharged into debts that are discharged. Or that turns debts which have to be repaid into debts that don’t have to be fully repaid.
2. The Plan Must be the Debtor’s Best Effort to Repay
When we file Chapter 13, the debtor promises to use his best efforts to repay the bankruptcy case. The debtor’s current monthly income influences the length of the repayment plan. If the debtor’s current monthly income is less than the applicable state median, the repayment plan will typically last three years; whereas, if it exceeds the median, a five-year plan is generally required. A Chapter 13 bankruptcy must fully repay priority and secure debts. But it may repay zero to unsecured debts if there is no sufficient income or I should say disposable income. Whether it repays 100% or 0 is based on the debtor’s ability to repay at the confirmation hearing.
If your plan pays a high enough percentage, a judge may not review your plan. As of June 2021, two of our judges in the Western District will not review the plan if the plan repays over 70%. The other judge does not normally review the plan if it repays over 50%. If a plan repays 100% with interest, a debtor has protected any comaker.
The debtor is also not required to file an annual budget or turn over tax refunds if his plan is a 100% plan. The confirmation hearing will normally only repay the principle of unsecured debts with no interest. Many plans pay less than 50%. But if it does the judge will review the budget in the confirmation hearing to make certain the Chapter 13 bankruptcy is repaying the debtor’s best efforts.
3. Asset-Based Repayment • The Plan Must Repay all that Chapter 7 Would have Repaid to Unsecured Creditors
Another factor that can increase payments is if the debtor has too much equity in his property. Your exemptions allow you to retain the property. If you have too much equity it becomes nonexempt property which can be sold by a Chapter 7 trustee. The Chapter 13 trustee will save a home if it is possible. It is the Chapter 7 trustee that likes to sell a debtor’s property. Often personal injury awards for pain and suffering are non exempt assets.
A Chapter 13 must repay what Chapter 7 would. The bankruptcy code plays a critical role in determining the repayment obligations under Chapter 13. Bankruptcy law includes specific legal requirements such as determining disposable income and the length of payment plans.
Excess equity and the ability to repay are the liquidation or feasibility issues. If Chapter 7 would have repaid $5,000 to the creditors from the sale of the property, then Chapter 13 has to repay the same to creditors. However, you are allowed to deduct what the property would cost to sell and what the trustee would have charged for selling the property in determining how much must be repaid.
Additional debt makes some Chapter 13 Plan Affordable
You are allowed to deduct from your income for daycare, retirement which you have been contributing to for some time before filing, and several items that you might forget to consider. I had one elderly couple who needed to replace the roof furnace and air conditioner during their plan.
By producing receipts for these repairs at the confirmation hearing, we reduced their plan payment to $300 per month, and the plan allowed major home repairs. Then, at the end of the Chapter 13 repayment plan, the home is ready to see them through retirement.
You have to drive to work. Often a debtor’s budget does not have car payments. Because there is no auto payment, the plan payment becomes higher. I often have to point out it is far better to have a new car payment of 500 and a 300-dollar Chapter 13 plan payment than it is to have no car to get to work and an 800-dollar Chapter 13 plan payment to repay credit cards.
I can not ethically advise someone to buy a car on credit just before filing. But I can advise him how he can’t get to work without a car and needs one. Often burying that car makes the plan more feasible than the debtor with an 800 dollar chapter 13 repayment plan and not having a car.
Paying a particular claim on time and the entire amount is the right track
Some necessities must be paid on time and in full or the plan is not feasible. During bankruptcy proceedings, particularly Chapter 13, it is crucial to continue making regular payments on secured debts like mortgages and car loans to retain your home and vehicle. Any arrears on the car loan can be addressed through a structured repayment plan.
Debtors forget many expenses, and we have a common list of overlooked expenses. You normally cannot take a 22-year-old as a dependent expense unless the child is disabled and truly dependent. You can take private school as an expense if the school is needed for a child’s disability. Daycare is also seen as one of these necessities in the budget.
Special Budget Considerations in Chapter 13
One of our judges looks at the telecommunications expense and expects it to be below 5% of your net income. The telecommunications expense is the combined cell phone, internet, and cable expense. Understanding your reasonable budget is crucial to determine disposable income and the feasibility of making required payments to creditors. Some families are losing cars and homes because the communications expense is as high as a car or home mortgage. It is illogical to lose a home or auto because of an expense for something which did not even exist 25 years ago. If it is a choice between Netflix and your home mortgage Netflix has to go.
In our office, we often have to look for the expenses which would cause Chapter 13 repayment plan to fail so Chapter 7 can be justified. We make budgets reasonable, so your payment in Chapter 13 is affordable, and your Chapter 13 is more likely to be approved.
Never file a Chapter 13 just to make your attorney richer. But you be forced to file a Chapter 13 if one or more of the following fit your situation:
- Your income is well over $100,000, and you can afford to repay creditors due to the means test.
- Because you filed Chapter 7 within the previous eight years, you cannot file another Chapter 7 until 8 years have passed.
- You are facing foreclosure and want to keep the home.
- You are being sued for income taxes or student loans which would garnish income if you are not in a 13. Chapter 13 stops this for 5 years as a shield. After that, the private student loan collection attorney has often had the case dismissed and has moved on to another case.
Resources for Bankruptcy
Louisville, Kentucky Bankruptcy Forms
How to Qualify for Chapter 7 • Video
How to Calculate Your chapter 13 repayment plan payments
Chapter 13 repayment plan Modifications in Louisville, Kentucky
How to Get an Affordable Chapter 13 Budget
Chapter 13 Plan Modifications in Louisville, Kentucky
If you are considering bankruptcy, don’t delay because timing is crucial. Legal guidance is essential throughout the bankruptcy case, especially when dealing with the bankruptcy court, which reviews necessary documents and confirms the repayment plan. I am here to help you. So, contact my office right away to start planning your bankruptcy. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.
