Building Blocks of a Chapter 13 Plan
Updated: Mar 30
A Chapter 13 Bankruptcy Petition is a powerful thing.
It allows the debtor to take back control of their financial lives. It allows those who have the financial ability to bypass the difficulty of dealing with creditor demands
and force a fresh start for themselves.
Generally speaking, Chapter 13 is a great way to avoid foreclosure and save your home. This can be done by proposing a repayment plan in Chapter 13 that pays off your arrears or back payments. You must, however stay current on your current mortgage payments while repaying your back payments.
Anyone who has tried to reinstate a mortgage when they are 3 or more months behind know too well just how unforgiving lenders can be. At this point, the lender usually says that the property is on the Foreclosure Track. Once on this track, the lender usually refuses to accept any payments unless it is for the whole back amount due.
Many individuals will not be able to come up with the whole back (arrears) amount because the amount suddenly morphs or grows uncontrollably. Now, instead of just looking at simple back payments, the debtor has to pay various additional fees that are mostly legal in order to attempt to get back on course with their payments and save their home.
The example above deals with mortgages, however, a Chapter 13 Bankruptcy deals with much more than that. In general, a Chapter 13 Bankruptcy can be a good solution for those who need time to pay off certain debts and have a strong enough income to satisfy the requirements of Chapter 13.
Under a Chapter 13 Bankruptcy, an individual gets to keep all of their property regardless of the property value. The only real catch here is that the individual debtor must pay their Unsecured Creditors the amount the individual debtor would have paid if they had filed a Chapter 7 Bankruptcy instead.
Unsecured Creditors are the creditors who are entitled payment on debts which have no underlying security interest. Credit cards, most court judgments, lawyer fees and medical bills are a few examples of this type of debt.
The repayment plan, being the heart of the Chapter 13 Bankruptcy Petition, will determine if the Chapter 13 case is successful or not. Within the repayment plan, the debtor shows the Bankruptcy Court the how and to what extent you the debtor plan to pay off your debts.
In a Chapter 13 Repayment Plan, some of the debtor’s debts must be paid in full. The extent that you can pay the rest of your debts depends on the amount of income you have left over.
At the start of the Chapter 13 Bankruptcy case, the debtor must show that he is able to stay current on the secure collateral he wants to keep. Secure collateral like a car note or a home mortgage are good examples of secure collateral that can be repossessed if the debtor fails to pay for it.
Generally speaking, the Chapter 13 Repayment Plan must show that the debtor will be able to pay certain debts in full over the life of the plan. If the debtor’s expected monthly income, minus reasonable living expenses will not allow the debtor to pay these required mandatory items, then the court will not approve the Chapter 13 Repayment Plan.
In addition to the mandatory items that must be paid by the debtor, the court will look to see if there is enough to be able to pay the Bankruptcy Trustee. Commission varies but is usually 10% of the monthly plan payment.
In drafting a typical Chapter 13 Plan, usually the following formula is followed:
1. Computing the basic household income over the past 6 months.
2. Computing the actual living expenses including monthly installment payments.
3. Deduct expenses from income.
4. Add up all Priority Debts, secured debts and secured debt arrearages for property debtor plans to keep.
5. Subtract your total mandatory debts (including expenses like Trustee Commission, etc.) which is left over after paying living expenses.
After the math, the resulting number is what will determine if the plan is approvable or not. The goal is to have enough monthly funds to pay mandatory debts with enough left over to pay Unsecured Creditors what is due them. If you have enough left over to pay your Unsecured Creditors their due, the numbers for the expenses and income look reasonable, then your plan should be good. If on the other hand, you do not show enough left over income after paying the mandatory debts, then you have a problem. The debtor will have to go back and make adjustments to make the proposed Chapter 13 Plan confirmable.
The Chapter 13 Plan must show that there are sufficient funds to at least compensate Unsecured Creditors as much as they would have received if the debtor had filed a Chapter 7 in the first place. This is one of the main objectives of a Chapter 13 plan. If there is too little money leftover, then the plan is rejected.
Chapter 13 is a powerful tool that debtors can use to get control of their financial lives and stop the attacks by creditors. However, much has to be done to get a confirmable plan and that sometimes is not an easy thing. Often times, the debtor and attorney have to make adjustments to get the Repayment Plan just right.
Under Chapter 13, there are other tools that can help the debtor. For example, a debtor can reduce the amount of a secured car loan to the actual value of the vehicle using a technique called cramdown. Also, using lien stripping, the debtor can remove a second or third mortgage, HELOCS , or home equity loans if they are no longer secured by equity in their home.
The Chapter 13 Plan, once carried out and completed with all payments made, will allow a debtor to regain control of their finances. The debtor, once again will achieve financial freedom and feel the benefits of a fresh start.