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:
You'll start making your proposed plan payments shortly after filing your case. If your plan complies with all of the bankruptcy payment rules, the court will approve it at the confirmation hearing.
Completing a Chapter 13 plan isn't easy because you're required to commit all your income for three to five years. First, you'll need enough income to make your regular payments, such as rent or mortgage, car payment, utility bills, and other monthly expenses. But your responsibilities won't end there.
If you're behind on your mortgage, car payment, or another secured debt (an obligation secured by collateral), you'll need to make up the missed payments through the plan. You also must pay certain debts known as priority debts in full. Common priority debts include support arrearages and recently incurred tax bills. You must use any income remaining to pay your other debts, like credit card balances, medical bills, and personal loans. Any portion of these balances that you cannot pay in full (except student loans) gets discharged (erased) after your complete your payments.
But your payment responsibilities don't end there. Unlike in Chapter 7, the Chapter 13 trustee doesn't sell any of your property. However, you must pay for all assets that you can't protect with an exemption through your plan. An easy rule of thumb is that if you would have lost the property in Chapter 7, you'll have to pay for it in Chapter 13.
If you can't meet all of these requirements, the bankruptcy judge won't confirm your plan. Keep reading to learn more about calculating a Chapter 13 repayment plan.
Here is a more detailed explanation of the debts your Chapter 13 plan must address.
Priority debts must be paid in full through your plan. Priority debts include:
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. You might be able to reduce the balance of a car loan or another secured debt in certain circumstances, however. Learn more about how a cram down works in a Chapter 13 bankruptcy.
You must also pay these through your plan. An example is a tax lien on your home.
If you want to keep the property, you must pay off the arrearage through your plan.
This is the minimum amount you must pay through your plan. You might have to pay more based on your disposable income (see the last item on this list). If you can't afford this amount, you won't qualify for Chapter 13. However, 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. So you probably won't end up paying creditors in full through your Chapter 13 plan either.
These include the bankruptcy filing fee, the trustee's fee, and attorney's fees.
The idea is that whatever income is left over after you've paid certain allowed expenses must be devoted to paying your creditors. 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 get paid through your plan. It will depend on what your bankruptcy court requires.
If you want to keep your home, you'll have to continue making your regular, monthly payments through the duration of the bankruptcy. Courts disagree whether you must make mortgage payments directly to your lender or whether you must 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.
If you are paying off an arrearage on your car loan through your plan, you might have to make your regular car payments through your plan as well. You'll pay other secured debts through the plan if you're paying an arrearage on them through your plan, too.
During your Chapter 13 bankruptcy, you make your current payments outside of the plan for things like utilities, rent, telephone, child support, and taxes.
Higher-income filers pay more to their creditors in Chapter 13. Whether your plan must last three or five years depends on your income. You'll start by comparing your income to the median income of your state. If your income is less than the state's median income, you can propose a three-year plan. If your income is more than the median income in your state, your plan must last five years.
For purposes of this rule, you must use your average gross income for the 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").
Just proposing a Chapter 13 plan is not enough, however. The court will hold a confirmation hearing. This hearing is central to your Chapter 13 case because it is where the court decides whether to approve (or confirm) your proposed repayment plan. Once your plan is confirmed, the court will reset your obligations, and your creditors must accept your payments in satisfaction of their claims.
The confirmation hearing must take place within 45 days after the creditors meeting in your Chapter 13 case. The court will send out 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 which have to 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 its own procedures. You might be able to find out more about your area's procedures by checking the court website or the website for any standing Chapter 13 trustees in your area.
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 there is a related matter pending which involves their particular claim or if they are objecting to your plan. If you are representing yourself, you must attend the confirmation hearing.
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 all of 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 the bankruptcy laws). You must be paying creditors by classification (secured, unsecured, and priority) at least as much as required by the bankruptcy laws. (For details on these plan requirements, visit our Chapter 13 Repayment Plan topic area.)
In large part, the court 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 they feel that your plan does not correctly deal with their claims. Objections must be filed before the confirmation hearing to give you some 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 issues, the court may require that evidence, in the form of testimony, documents, or affidavits be presented.
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 agreement. If the parties can't agree, the court will make a decision on the issue. The outcome of the confirmation hearing can vary depending on the circumstances. Below are the typical outcomes.
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.
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.
The court can dismiss your case or convert it to a Chapter 7 if you aren't making your payments under the proposed plan, if you don't have sufficient income to fund the plan, or the plan doesn't meet the requirements of the law. In Chapter 13, in most circumstances, you have the right to dismiss your case. As a result, the court will generally dismiss the case if you do not request that it be converted to a Chapter 7.
The court must consider objections to confirmation at the confirmation hearing. Other than that, court procedures vary on the matters that will be heard at the same time as 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 or motions for cram down and to avoid or strip liens on your property could be heard at the same time. Usually, however, courts require these matters to be determined before the date for the confirmation hearing.
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 complicated using our bankruptcy quiz—it will point out areas you'll want to review with your bankruptcy attorney.