The Chapter 13 bankruptcy repayment plan is the crux of a Chapter 13 bankruptcy. You must be able to devise a repayment plan that you can afford for the repayment period (three to five years), and the court must approve the plan. The plan tells the court and your creditors how you intend to pay your debts, how much each creditor will receive, and how long your plan will last.
The plan must comply with the law, which sets forth rules about which debts must be paid in full, which debts get priority over others, and which debts may be paid at a discount. If you are considering Chapter 13 bankruptcy, make sure you understand these rules so you know what you are getting into and what will be required of you. (To learn more about how Chapter 13 bankruptcy works, see Chapter 13 Bankruptcy: An Overview.)
Some of your debts will be paid through your plan – which means you’ll pay them to the trustee who will then distribute payments to your creditors. Others might be paid outside of your plan – that is, you will pay the creditor directly.
Here’s how it works.
All of the following must be paid through your Chapter 13 plan:
Priority debts (other than child support owed to a government agency.) Priority debts must be paid in full through your plan. Priority debts include:
Secured debts that come due within the life of your plan. If you have a secured debt that is contractually due to end within the life of your plan (for example, a home equity or car loan), you must pay it in full through the plan. (Although you may be able to reduce the balance of a car loan or other secured debt in certain circumstances. See How a Cram Down Works in a Chapter 13 Bankruptcy Case, for more information).
Secured debts that aren’t due within the life of your plan. You must also pay these through your plan. An example is a tax lien on your home.
Arrearages on your home, car, or other secured property. If you want to keep the property, you must pay off the arrearage through your plan.
The amount that your unsecured, nonpriority creditors would have received if you filed for Chapter 7 bankruptcy. This is the minimum amount you must pay through your plan. You may have to pay more based on your disposable income (see the last item on this list). If you can’t afford to pay this amount, you won’t qualify for Chapter 13 bankruptcy. Keep in mind, however, that because your creditors probably wouldn’t have received full payment in a Chapter 7 bankruptcy (the amount they get depends on how much of your property is exempt), you probably won’t end up paying these creditors in full through your Chapter 13 plan either.
Administrative expenses incurred as part of your bankruptcy. These include the bankruptcy filing fee, the trustee’s fee, and attorney’s fees.
Your “disposable” income must be devoted to your plan. The idea is that whatever income is left over after you’ve paid certain allowed expenses must be devoted to paying your creditors. That is, you can’t devise a payment plan and still have money left over each month to go to the spa, or take a trip to Europe. To learn how to calculate your disposable income, see Chapter 13 Bankruptcy Laws: Your Disposable Income.
Some debts are paid directly to the creditor, and some might be paid to the creditor through your plan, depending on what your bankruptcy court requires.
Mortgage payments. If you want to keep your home, you’ll have to continue making your regular, monthly payments through the duration of the bankruptcy. Courts are split as to whether you make your mortgage payments directly to your lender, or whether you have to make them through the Chapter 13 plan. If possible, opt to make the payments outside of the plan. If you make them through the plan, you’ll pay more in the long run since the trustee gets about 10% on all payments made through the plan.
Car payments. If you are paying off an arrearage on your car loan through your plan, you may have to make your regular car payments through your plan as well. This goes for other secured debts as well (if you are paying an arrearage on them through your plan).
Current payments for other things. During your Chapter 13 bankruptcy, you make your current payments outside of the plan for things like utilities, rent, telephone, child support, and taxes.
Your plan must last either three or five years, depending on your income. If your income is less than the median income in your state (there is a formula for determining this, and a chart listing the median income for each state), you may propose a three-year plan. If your income is more than the median income in your state, your plan must last five years. The idea is that higher-income filers pay more to their creditors.
For purposes of this rule, you must use your average gross income for the six months prior to filing for bankruptcy. You can find your state’s median income on the U.S. Court’s website at: www.justice.gov/ust/eo/bapcpa/20110315/bci_data/median_income_table.htm.