What Is the Payment Plan Featured in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a legal form of debt reorganization for individuals with regular income who require an extended period to repay what they owe. Filers must have enough regular income to afford monthly payments determined by income, debt type, and ongoing expenses. Their unsecured debt cannot exceed $383,175 and secured debt cannot be more than $1,149,525.

The ability to reorganize debt through Chapter 13 is made possible by a payment plan that lasts for three to five years. Filers keep property, including cars and homes, but must repay the equivalent value of their nonexempt assets. If they satisfy the requirements, they may be able to remove unsecured junior liens from their homes and reduce the principal balance of secured debts through a process called a cramdown.

A Chapter 13 payment plan allows filers to repay their debts in a consistent, ongoing manner. The plan is submitted at the same time or shortly after the bankruptcy petition is filed. It must be approved by the court and may offer creditors less than the balances due on relevant debts. In most cases, the filer submits each repayment to the bankruptcy trustee on a monthly basis. The trustee distributes the designated amount of the payment to each creditor according to the plan document.

Priority claims from creditors, which include bankruptcy proceeding costs and most taxes, must be repaid in full under this plan unless the creditor agrees otherwise. Holders of secured claims, which are guaranteed by property, must be repaid an amount equivalent to the current value of the property. Creditors with unsecured claims do not have special collection rights on owned property and may not receive repayment in full.

If circumstances change and affect the ability to issue plan payments, the payment plan may be modified at the request of an unsecured creditor, the filer, or the bankruptcy trustee. This may occur when the filer forgets to list a creditor or a listed creditor objects to the plan. Modification can take place before or after the confirmation hearing held by the bankruptcy court.

Chapter 13 bankruptcy filers and their creditors are bound to the stipulations outlined in a confirmed payment plan. Though you can save your home with Chapter 13, permission of the bankruptcy trustee is required to incur new debts. To learn more about Chapter 13 and its repayment plan, fill out the Free Evaluation Form to schedule an initial consultation.