How Does a Chapter 13 Repayment Plan Work?

What Is a Chapter 13 Repayment Plan?

Chapter 13 bankruptcy can be a valuable tool to help you reorganize your finances and get out of debt. Depending on your situation and goals, you can use your Chapter 13 plan to extend loan terms, reduce balances and interest rates, bring delinquent loans current, and eliminate debts you can’t afford to pay. Your repayment plan is a written roadmap for how you intend to accomplish these goals.

When a Chapter 13 repayment plan is approved by a judge, it becomes a court order. Your creditors are legally required to comply with the terms of that order. In other words, Chapter 13 essentially allows you to modify and refinance your debts, all while backed by the bankruptcy court. This gives you a huge advantage over trying to negotiate with your creditors on your own. 

How To Qualify for a Chapter 13 Bankruptcy Plan

To qualify for Chapter 13 bankruptcy, you must have a source of regular income. This is why the Chapter 13 plan is sometimes called a “wage earner’s plan.” Unlike Chapter 7 bankruptcy, there are no income limits (though your income does affect the amount you must pay — more on that later). Also, unlike Chapter 7, the Chapter 13 trustee does not liquidate (sell) your assets to pay your creditors. This makes Chapter 13 the better — or only — option if you have too much income to qualify for Chapter 7 or have assets you can’t protect under the available bankruptcy exemptions.

When Is Chapter 13 a Good Choice?

Chapter 13 is also usually a better choice if you’ve fallen behind on your mortgage, car loan, or other payments. The Chapter 13 plan offers you a chance to catch up on these payments. In Chapter 7, by contrast, you must be current on payments to keep your house or car. Chapter 13 is ideal to help you get back on your feet after a temporary setback, such as illness or job loss. That said, Chapter 13 won’t usually help you if you’re in over your head with a house or car that you truly can’t afford.

Because of the options available, Chapter 13 bankruptcy takes longer and is much more complicated than Chapter 7. While it’s possible to file Chapter 13 bankruptcy yourself, the details that go into creating a Chapter 13 repayment plan are complex and often require extensive knowledge and experience. As a result, it’s usually best to work with a lawyer if you’re filing under Chapter 13.

How Long Does the Repayment Plan Last?

Most Chapter 13 plans last between 36 and 60 months, or 3-5 years. To determine your plan length, start by completing Form 122C-1. On this form, you’ll calculate your average household income, then compare it to your state’s median income for your household size. If your income is less than the state median, you’re eligible for a 36-month repayment plan. If your income is higher than the median, you must use a 60-month plan. 

Why? In a Chapter 13 case, you must make a good-faith effort to pay as much of your debt as possible. This means you must devote all your available, or “disposable,” income to your repayment plan. At the end of the plan, most remaining unpaid debts are wiped away, or discharged. Debtors with below-median income must pay as much as they can for three years to have their debts eliminated. 

Debtors with above-median income must pay as much as they can for five years to have their debts wiped out. If your household income is above the median, you must also complete Form 122C-2. This form calculates your disposable monthly income by considering your ongoing debt payments and establishing reasonable living expenses.

Even if you qualify for a 36-month plan, you can still propose a longer plan term. For example, if you’re trying to use your Chapter 13 plan to pay off a car, you might need to extend your plan to 48 or 60 months to afford the plan payment. A longer plan term usually means a lower monthly payment, but you may also pay more in interest and administrative fees. No Chapter 13 plan can last longer than 60 months.

What Debts Are Included in a Chapter 13 Repayment Plan? 

Different types of debt are subject to different treatment in a Chapter 13 repayment plan. Under the Bankruptcy Code, your debts are divided into three categories for Chapter 13 purposes: secured debts, unsecured priority debts, and unsecured nonpriority debts.

Secured Debts

Secured debts are debts that have some sort of collateral attached — something the creditor can take away from you if you don’t pay. Mortgages and car loans are common types of secured debts.

Most types of secured debts must be paid in full through the Chapter 13 plan. There are several ways you can use your repayment plan to make your loan easier to pay:

• If you owe more than your car is worth, and it’s been at least 910 days since you took out the loan, you can pay the car’s value instead of the whole loan balance. This option is called a “cramdown.” The remaining loan balance is added to your unsecured debt.

• You can usually reduce your interest rate. The new rate is determined by your bankruptcy court based on the current national prime rate. Chapter 13 interest rates are typically 1-4 percentage points above prime.

• Your payments will be divided over your entire Chapter 13 plan term (36-60 months). Combined with a reduced principal balance and lower interest rate, this often results in a much lower monthly payment than before you filed for bankruptcy.

Bankruptcy law has different rules in place for a mortgage on your primary residence since most people can’t reasonably pay off their whole mortgage in 36-60 months. If you’re current on your mortgage payments, you can continue paying them as usual. Some courts will require that you make these payments through your Chapter 13 plan, while others will let you pay the creditor directly.

If you’re not current on your mortgage, you can use your Chapter 13 plan to get caught up. Your total arrearage (past-due) amount freezes at the moment you file bankruptcy. Then, that amount is divided equally over the whole plan term. Each month you pay your regular house note, plus a portion of the arrearage. At the end of the plan, you’re current on the loan.

If you have a mortgage, car loan, or other secured debt that you can’t afford or don’t want to keep, you can surrender the collateral by turning it over to the lender. 

Unsecured Priority Debts

Unlike secured debts, unsecured debts don’t have any collateral attached. The Bankruptcy Code specifies that certain types of unsecured debts should be given priority over your other unsecured debts in your Chapter 13 plan. Past-due alimony or child support and certain tax debts are common types of unsecured priority debt. 

You must pay unsecured priority debts in full through your Chapter 13 plan. The rules about which debts qualify for priority status can be complicated, so it’s usually best to consult with an attorney.

Unsecured Nonpriority Debts

In a Chapter 13 plan, your remaining unsecured debts, such as medical bills or credit cards, are all added together. You pay a percentage of these debts through your Chapter 13 plan. The exact percentage depends on your disposable income, which is determined using the information in your bankruptcy paperwork. Generally speaking, your disposable income is the amount of money you have left over each month after paying your necessary living expenses and other debts. 

In some cases, this percentage is 0%, meaning you pay nothing to your nonpriority unsecured creditors through your bankruptcy plan. Any portion of these debts that is still unpaid at the end of your plan term is wiped away in your Chapter 13 discharge, meaning you no longer owe them.

How Do You Create and File a Chapter 13 Repayment Plan?

Your Chapter 13 plan is the physical document that explains how your bankruptcy reorganization will work. Different bankruptcy districts use different plan forms, so be sure you use the format required by your district. At a minimum, your plan must specify:

• The amount and frequency of your proposed plan payments — in other words, how much money you’ll pay into the plan — and

• Instructions for how that money will be distributed among your creditors.

The details of drafting a Chapter 13 plan can be complex. To be approved, your plan must comply with all the relevant rules and laws. You must also ensure that you correctly calculate all relevant interest rates, amortized payments, unsecured percentages, and administrative fees, among other details. A mistake could result in you paying more than necessary for the next 60 months, or, worse, could result in your plan being rejected by the court. 

The complex details involved and specialized knowledge required to draft a successful Chapter 13 plan, combined with the serious consequences of making a mistake, make hiring a bankruptcy attorney well worth the cost in a Chapter 13 case. Also, you may be able to include some or all of your bankruptcy lawyer’s fee in your Chapter 13 plan, allowing you to pay it over time. 

You must file your proposed repayment plan with the bankruptcy court within 14 days of filing your initial bankruptcy forms. You’ll need to make your first plan payment to the trustee within 30 days of your initial bankruptcy filing (not 30 days after you file the plan). 

What Happens After I File My Plan With the Court?

After you file your Chapter 13 repayment plan, the court will send copies to your trustee and all your creditors. The court will also set a date for a confirmation hearing, which is usually around 30-60 days after your meeting of creditors. The trustee will go over your plan with you at your meeting of creditors and will likely ask you some questions about your plan. Some of your creditors might also appear at the meeting to ask questions.

If the trustee or any creditors object to your repayment plan, they must file an objection with the court before the confirmation hearing. Most of the time, you or your lawyer can discuss these issues and settle any objections before the scheduled confirmation hearing.

Confirmation Hearing

At your confirmation hearing, the bankruptcy judge will review your Chapter 13 plan to be sure that the plan was filed in good faith and is feasible based on your income and expenses. If any objections haven’t been settled yet, the judge will also address those at the hearing. Some common reasons for objections include:

• You’ve left a major creditor out of your plan

• A creditor disagrees with the debt amount or collateral value stated in your plan

• You aren’t paying all of your disposable income into the plan

• You’re proposing a plan payment that you can’t reasonably afford

• You haven’t made enough, or any, plan payments since your case was filed

Once the judge confirms your repayment plan, the court will issue a confirmation order and send copies to all your creditors. This lets the creditors know that your plan is now part of a court order and that they must abide by the plan terms.

Make Plan Payments

The Bankruptcy Code requires that you make your first plan payment to your Chapter 13 trustee within 30 days of filing your bankruptcy petition. If you’re making payments directly to the trustee, check with their office to see how and where to submit your payment. 

Many Chapter 13 trustees will require that your plan payments be deducted from your paycheck, like a garnishment. This is called a wage order. It can take a few weeks to set this up. You’re still responsible for making the plan payments yourself until the wage order takes effect. Chapter 13 plans that are funded through wage orders are usually more successful than plans in which the filers pay directly.

If you fall behind on your plan payments, your creditors won’t get paid. A creditor who isn’t getting paid can file a motion to lift the automatic stay in your case. If the stay is lifted, the creditor can proceed with foreclosure, repossession, garnishment, or other actions as if there was no bankruptcy. 

If you miss plan payments, your trustee can also file a motion to dismiss your case. If your case is dismissed, you’ll be responsible for all the interest, late fees, past-due amounts, and other charges going back to before you filed for bankruptcy. Also, if your case gets dismissed, your creditors are no longer bound by the confirmation order or the automatic stay, and they can pursue collection action against you.

If you’re having a hard time making your plan payments, contact your trustee and/or your attorney as soon as possible to discuss your options. You may be able to temporarily stop your plan payments or work out a deal to catch up on the missed payments. If your situation changes and you can no longer afford your plan payments, you may be able to modify your plan to reduce the payment amount. 

Another option might be to convert your bankruptcy from Chapter 13 to Chapter 7. This way, you won’t have any more plan payments, and you may still be able to discharge some or all of your debts. You must still pass the means test to qualify for Chapter 7, even if you’re converting from a Chapter 13 case.

Chapter 13 Discharge

After you complete all of your Chapter 13 plan payments for the entire 3-5 year plan term, you’ll be eligible for a discharge. Your trustee will file notices to your secured and priority creditors letting them know that they’ve been paid in full under the plan terms. They must release any liens and can’t try to collect any additional amounts from you on those debts. 

Any portion of your nonpriority, unsecured claim that wasn't paid through your plan will be eliminated, just like it would be in a Chapter 7 discharge. You won’t be responsible for paying any of these debts after your discharge. 

Let’s Summarize… 

Your Chapter 13 repayment plan specifies how much money you’ll pay in and how that money will be distributed among your creditors. In Chapter 13, most secured debts — other than home mortgages — are paid in full through the plan. You can use your plan to modify these debts to make it easier to pay them. Unsecured priority debts are also paid in full through the plan, but they can’t be modified like secured debts. Unsecured nonpriority creditors are paid a percentage of the total balance based on your disposable income. After you make all your plan payments, any remaining amounts will be wiped out in your discharge.