The Chapter 13 Bankruptcy Repayment Plan

One of the primary differences between Chapter 7 and Chapter 13 is that in Chapter 13 bankruptcy, you repay some or all of what you owe creditors through a three- to five-year repayment plan. In this article, you'll learn about the debts you must pay in a Chapter 13 repayment plan, how long the plan must last, and the Chapter 13 confirmation hearing process.

How the Chapter 13 Repayment Plan Works

Completing a Chapter 13 plan isn't easy because you must commit all your disposable income to the plan for three to five years. Also, many people don't earn enough to meet all Chapter 13 payment requirements.

For instance, you'll need enough income to meet regular payments, such as rent or mortgage, car payments, utility bills, and other monthly expenses. But your responsibilities don't end there.

If you're behind on your mortgage, car payment, or another secured debt (an obligation secured by collateral) and you want to keep the home, car, or other property securing the debt, you must make up the missed payments through the plan. You must also fully pay priority debts, such as support arrearages and recently incurred tax bills.

Any money remaining is your "disposable income" and must be used to pay other debts, like credit card balances, medical bills, and personal loans. The idea is that whatever income is left over must be devoted to paying your creditors. You can't devise a payment plan and still have money left each month to go to the spa or take a trip to Europe.

Also, unlike in Chapter 7, the Chapter 13 trustee doesn't sell property you can't protect with an exemption. Instead, you must pay to keep nonexempt assets through your plan. An easy rule of thumb is that if you would have lost property in Chapter 7, you'll have to pay its value, or more, in Chapter 13.

Keep reading to learn more about calculating a Chapter 13 repayment plan.

The Chapter 13 Bankruptcy Plan and Confirmation Hearing

You are responsible for proposing a Chapter 13 plan that properly pays creditors when you file your case, and you'll begin making the payment within 30 days, even though the bankruptcy court won't have yet approved the plan. But you won't be approved for Chapter 13 until the court confirms your plan.

So when will that happen?

After the creditors' meeting with the trustee, the court will review your plan and any objections by the trustee and creditors at a Chapter 13 confirmation hearing. If your plan complies with the bankruptcy payment rules, the court will approve or "confirm" it. Once your plan is confirmed, the court will reset your obligations, and your creditors must accept your payments to satisfy their claims.

If the court doesn't confirm the plan, you'll likely be given time to fix the problem. If you can't satisfy the judge, the trustee will return your payments with a few exceptions. For instance, the trustee will likely pay your car payment before the plan is confirmed.

Debts You Must Be Able to Pay in a Chapter 13 Repayment Plan

Here are more details about the debts your Chapter 13 plan must address and that you must prove you can pay. We explain which debts you must pay to the trustee as part of your monthly Chapter 13 payment and those you'll pay yourself outside the plan.

If possible, opt to make the payments outside the plan. In the long run, you'll pay more on any payments made through the plan because the trustee gets up to 10% on all amounts paid to creditors. Learn about how bankruptcy trustees get paid.

Priority debts

Priority debts must be paid in full through your plan (except child support owed to a government entity, which is a rare situation). Priority debts include most federal and state back taxes, back child support owed to a spouse or child, wages, salaries, or commissions you owe to employees, and contributions you owe to an employee benefit fund.

Secured Debts

If you want to keep secured property, like a car or a home, you must show that you can continue to pay the mortgage or car loan. Filers who can't afford the payment can return the property to the lender.

You probably won't need to pay through the plan if you continue making payments. However, if you're behind when you file, you might have no choice but to pay a mortgage or car payment through the plan, along with any arrearages.

In some circumstances, you can reduce the balance of a car loan or eliminate a junior mortgage or home equity line of credit. Learn more about how a cram down works in a Chapter 13 bankruptcy.

You must fully pay other secured debts, such as tax liens, through your plan.

Arrearages on a Home, Car, or Other Secured Property

If you've fallen behind on a secured payment and want to keep the property, you must also be able to pay off the arrearage through your plan. Again, you can return the property to the lender if you can't afford to meet this requirement.

Administrative Expenses

These expenses include the bankruptcy filing fee, the trustee's fee, and attorneys' fees. You'll pay the required administrative fees in full through your plan.

Monthly Household Expenses

You must prove you have enough income to meet your monthly living requirements. During your Chapter 13 bankruptcy, you'll pay for utilities, rent, property taxes, and other monthly payments outside the plan. You also pay your current monthly child support amount outside of the plan but support arrearages within the plan.

Disposable Income and the "Best Interest of Creditors" Test

Any money left after paying the above amounts is "disposable income." Your remaining debts, or "nonpriority, unsecured debts," share your disposable income on a percentage or pro rata basis. Any portion of these balances you can't pay in full (except student loans and support paid to the government) gets erased or "discharged" after you complete your payments.

However, this final amount must also meet the "best interest of creditors" test. Specifically, you must pay your unsecured creditors (priority and nonpriority) at least as much as they would have received in Chapter 7 bankruptcy. You calculate this amount by determining how much of your property isn't protected by bankruptcy exemptions. You must pay unsecured creditors that much or more to pass the best interest of creditors test.

For instance, suppose you can protect all property with bankruptcy exemptions other than a recreational vehicle worth $25,000. You'd lose the property in Chapter 7, and the sales proceeds would be paid to unsecured creditors.

However, you don't lose property in Chapter 13. Instead, you pay to keep property if you can't protect it with an exemption. So, in our example, you would need to pay unsecured creditors at least $25,000. If you didn't have at least $25,000 in disposable income, the judge wouldn't confirm a Chapter 13 plan.

How Long Does a Chapter 13 Plan Last?

Whether your plan must last three or five years depends on your income. You'll start by comparing your income to your state's median income. You can propose a three-year plan if your income is less than the state's median income. If your income is more than the median income in your state, your plan must last five years.

For this rule, you must use your average gross income for six months before filing for bankruptcy and multiply it by two. You can find your state's median income on the U.S. Trustee Program website (look under "Means Testing Information").

When Will the Chapter 13 Confirmation Take Place?

The confirmation hearing must take place within 45 days after the creditors meeting in your Chapter 13 case. The court will send out a notice of the hearing in advance. It is not uncommon for the hearing to be continued one or more times if there are pending matters before the court that must be decided before the court can confirm your plan. Depending on your plan, the confirmation hearing may need to be continued until the deadline for creditors to file claims in your case has passed.

Generally, you or your attorney must attend on the scheduled date to request that the hearing be continued. Each court has procedures, which you can learn by checking the court website or the Chapter 13 trustee's website.

Do I Go to the Chapter 13 Confirmation Hearing?

In many cases, only attorneys attend the confirmation hearing; this can vary by court. Also, you might have to participate if other matters related to confirmation will be heard simultaneously or if the judge requires it. Creditors generally only attend the hearing through their attorney and only if a related matter is pending involving their particular claim or if they are objecting to your plan. If you are representing yourself, you must attend the confirmation hearing.

How Does the Court Decide on Chapter 13 Confirmation?

Chapter 13 bankruptcy is very complicated. A lot of different factors are involved. The papers you file with the court must show that you are using your disposable income (as calculated under the bankruptcy laws) to fund your plan. The length of your plan must be appropriate for your situation (three or five years as determined by bankruptcy laws). You must pay creditors by classification (secured, unsecured, and priority) at least as much as the bankruptcy laws require.

The court largely relies on the Chapter 13 trustee to perform the case analysis and bring any defects in your plan and your calculations to the court's attention. The trustee does this by objecting to your plan. Creditors may also object if your plan does not handle their claims correctly. Objections must be filed before the confirmation hearing to give you time to prepare. In most cases, the trustee will have communicated any concerns to you or your attorney before filing a formal objection so that you have time to work on a resolution.

If you cannot reach an agreement, the court may be able to determine some issues after hearing each party's concerns and considering the law. With other problems, the court may require that evidence, in the form of testimony, documents, or affidavits, be presented.

What Happens at the Chapter 13 Confirmation Hearing?

Most objections to confirmation are resolved through agreement. Depending on the situation, the case might still need to go before the judge to get a court order finalizing the deal. If the parties can't agree, the court will decide on the issue. The outcome of the confirmation hearing can vary depending on the circumstances. Below are typical results.

Your Plan is Confirmed

If there are no problems with your plan and no parties object, or any objections are determined in your favor, your plan is confirmed. Once this happens, you and your creditors are bound by the terms of your plan. As long as you comply with your plan, creditors have to accept the terms in payment of their claims.

If The Confirmation Hearing is Continued

The court may do this to allow you to finish dealing with matters affecting confirmation, have more time to work out agreements with your creditors or amend your plan to correct errors or resolve objections. It is not unusual for Chapter 13 confirmation hearings to be continued more than once as long as the court is convinced that you are using the time to resolve any problems and not just to delay the process.

Your Case is Dismissed or Converted to Chapter 7

The court can dismiss your case or convert it to Chapter 7 if you aren't paying under the proposed plan. The court might also convert if you don't have sufficient income to fund the plan or it doesn't meet legal requirements. In Chapter 13, you can dismiss your case in most circumstances. As a result, the court will generally dismiss the case if you do not request that it be converted to Chapter 7.

What Other Chapter 13 Matters Could Be Heard?

The court must consider objections to confirmation at the confirmation hearing. Other than that, court procedures vary on the matters that will be heard simultaneously with the confirmation hearing. The court may consider whether or not to require your Chapter 13 payment to be deducted directly from your paycheck.

Objections to creditor claims, cramdown motions, and hearings or adversary proceedings to avoid or strip liens on your property are rarely heard simultaneously. Usually, courts require these matters to be determined at another hearing or through an adversary proceeding.

Talk With a Lawyer

Because Chapter 13 cases are complicated, you'll want to speak with a bankruptcy lawyer before filing your case. You can find out whether your case is simple or complex using our bankruptcy quiz—it will point out areas you'll want to review with your bankruptcy attorney.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.