If you’re considering bankruptcy, you may be wondering about the Chapter 13 payment plan. This payment plan is a crucial part of Chapter 13 bankruptcy. Unlike Chapter 7, Chapter 13 allows you to repay a portion of your debt over time.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a form of debt reorganization. Unlike Chapter 7, which involves liquidating assets, Chapter 13 helps you keep your property. It allows you to repay debts through a payment plan over 3 to 5 years.
In Chapter 13, you make monthly payments to the Chapter 13 Trustee. The Chapter 13 Trustee is a person assigned to oversee your Chapter 13 case by the US Bankruptcy Court. The Trustee distributes funds to your creditors according to the terms of the Chapter 13 payment plan. Your Livonia bankruptcy attorney will draft this Plan with the information you provide.
How Much Do You Pay Each Month in Chapter 13 Bankruptcy?
The amount you pay each month depends on your income and expenses. The Chapter 13 payment plan will reflect the difference between your household income and necessary expenses. Your spouse’s income and household expenses will also be considered, even if your spouse is not filing for bankruptcy with you.
For example, if your household earns $2,000 per month and your expenses are $1,800, your payment will be around $200. If your household earns $10,000 with the same expenses, your payment could be $8,200. Your Livonia bankruptcy attorney will help you determine an appropriate amount.
What Is the Chapter 13 Payment Plan?
The Chapter 13 payment plan is a formal document you create with your Livonia bankruptcy attorney. This plan outlines how much you will pay each month and how creditors will be paid. The plan is filed with your bankruptcy petition.
The Chapter 13 payment plan must follow the U.S. Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and local court rules. It will specify:
- The number of months you’ll make payments.
- Whether tax refunds will be used in the plan.
- If you have non-exempt assets that require higher payments.
- Whether you’ll modify certain debts, such as reducing the value of a car loan or stripping a second mortgage.
- Any leases or contracts that are being rejected.
- What percentage of the debt that you owe will be repaid to creditors, if any.
Chapter 13 Creditor Payment Priority
Debts are paid in a specific order under the Chapter 13 payment plan:
- Administrative Expenses: The Chapter 13 Trustee’s fees and your attorney’s fees are paid first.
- Secured Creditors: This includes your mortgage and car loan. If you’re behind on payments, you can catch up on them through the Chapter 13 plan.
- Contract and Lease Obligations: This covers arrearages and other obligations under contracts or leases.
- Priority Unsecured Creditors: These debts include child support arrears and recent tax debt.
- Non-Priority Unsecured Creditors: These include credit card debt, medical bills, and personal loans. These debts are paid last, often only partially or not at all. Any unsecured debt not fully paid is then totally discharged at the end of the Chapter 13.
How the Chapter 13 Payment Plan Works for Creditors
Your creditors do not receive payments directly from you. Instead, they get payments from the Chapter 13 Trustee based on the payment plan. The Chapter 13 Trustee ensures funds are distributed to creditors in the correct order. In order to be paid by the Trustee, creditors must file a “proof of claim” form with the Court. This proof of claim states the amount owed, the type of debt, and provides evidence that you really owe the debt to that particular creditor.
If your bankruptcy attorney believes that a proof of claim is fraudulent or legally insufficient, you can object. If the Bankruptcy Judge agrees with your objection, that claim will be “disallowed.” The creditor will be paid nothing.
Is the Chapter 13 Payment Plan Binding?
Once you file the Chapter 13 payment plan, it isn’t immediately binding. Creditors and the Chapter 13 Trustee may object to it. Your bankruptcy attorney will help negotiate and address any objections. These objections are generally resolved in a court order known as an “Order Confirming Plan,” or OCP. It usually takes 4 to 6 months for entry of an OCP. After “confirmation,” the plan is legally binding on all parties. If your financial situation changes later, however, you can request a modification of the plan through the court.
If the change is significant, such as a total loss of employment or income, you can dismiss the Chapter 13 voluntarily or convert it to a Chapter 7 if there are no asset-protection issues to worry over.
Chapter 13 Payment Plan: Key Takeaways
The Chapter 13 payment plan is a powerful tool to help you reorganize debt and keep your property. To ensure the best outcome, it’s important to work with an experienced Livonia bankruptcy attorney. Our attorney, John Hilla, has successfully represented Livonia and Metro Detroit Chapter 7 and 13 bankruptcy clients for nearly 20 years. Offering skilled representation, aggressive creditor defense, and friendly customer service, Attorney Hilla will confidently guide you through the “noble path” of your bankruptcy proceeding.