Common Chapter 13 Plan Questions
By Stephen Behrends, Feb 29 2020 11:39PM
Q: Do I have to pay all of my bills in full in Chapter 13? Isn’t it just a Court Ordered Debt Repayment Plan?
A: Only a few Chapter 13 cases require 100% payment to all of your creditors, both secured and unsecured. Most plans pay only a small percentage to their general unsecured creditors. Secured creditors will get potentially different treatment under the plan, and your attorney will be able to discuss this with you as that treatment depends on your individual circumstances.
Q: Do my creditors get a copy of the plan? Can they object to it?
A: Yes, due process requires that the creditors get notice in the form of a copy of the plan and are told that they have an opportunity to object to it. Certain secured creditors will get an additional copy of the plan from your attorney. A certificate of service has to be filed with the Court showing that this was done.
Q: Why do people file Chapter 13? Why doesn’t everyone file Chapter 7?
A: There are three main reasons why people choose to file Chapter 13 rather than Chapter 7, and two reasons why for some people, the only way to get bankruptcy court protection is to file Chapter 13.
The primary reasons people choose to file Chapter 13:
The first, and the most common, reason is to save their home from foreclosure. They can reinstate their mortgage or land sale contract and catch up on missed payments over the life of the plan (3-5 years).
The second is to handle big (but not too big!) tax problems. They get protection for the duration of their plan from the state (ODR) and the IRS while they pay their taxes.
And the third is to retain non-exempt assets that a Chapter 7 trustee might take and sell to pay creditors. Instead of taking assets, the Chapter 13 trustee just takes the payments made monthly through the plan and disburses the money to the creditors himself, while you, the debtor, gets to retain these assets and, depending on what they are, continue to pay for them through the plan.
A few reasons some people can only use Chapter 13 and can’t file Chapter 7:
They have already filed Chapter 7 within the last eight years. You can file Chapter 13 four years after the filing of a bankruptcy case (any chapter) that resulted in a discharge but you must wait eight years before you can file another Chapter 7.
And perhaps the most complicated reason: Too much income! This is measured by something called the means test and has multiple parts.
First, the form requires that you put in your income from the last six full months before the month in which the case is filed and this number is then compared to the median income for a household the same size as the yours in your state.
If you are above that figure, the means test form then requires that you look at the numbers derived from the IRS local and national standards for income and expenses, compare your numbers to them, and see if there is any money left over. And if so, the form then looks at whether that left over income could make a significant payment on the debt.
The determination that a payment could be make a meaningful reduction in your debt is a determining factor for the requirement that some people have to file Chapter 13 versus Chapter 7.
Q: Who determines the amount of the Chapter 13 plan payment?
A: The debtor and the debtor’s attorney propose the payment amount in the plan and the trustee responds to that proposal.
Q: How much will my plan payment be?
A: There are three tests to determine how much the proposed plan payment has to be:
The best interest test: This test says that you have to pay your creditors as much as they would have received in a hypothetical Chapter 7 case. So, for example, if you had assets that could have been sold by a Chapter 7 trustee to pay back your creditors (after any expenses associated with the sale are deducted, as well as any applicable exemptions as to that asset), then whatever that net amount the creditors would have received in the Chapter 7, they must now also receive in Chapter 13.
The best effort test: This test says that you have to pay all of your income above your reasonable and necessary expenses into the plan.
The feasibility test: This test requires that the plan payments must be sufficient to pay what has to be paid through the plan. This includes mortgage arrears or back taxes the trustee’s commission, additional attorneys fees for your lawyer, priority claims, other secured claims being paid through the plan, including interest, and the best interest test number to the unsecured claims.
Q: What if my income or expenses change a great deal? Can the plan payments be adjusted?
A: Under the best effort test, if your income goes up more than 10% you are required to tell the Court and then you and your attorney will probably have to prepare an amended plan to increase your plan payments. The payments probably won’t go up dollar for dollar the same as your income increase, but they will likely go up.
On the other hand, if your income goes down, you may be able to decrease your payments but only if the plan still meets the feasibility test. So if there are priority claims, secured claims or a best interest number that has to be paid, your payments have to stay high enough to pay them all even if your income goes down.
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