Chapter 13 Bankruptcy Plan Payments

In Chapter 13 bankruptcy, the debtor creates a Plan to repay creditors that will be followed for three to five years.  As long as the Plan is maintained, the debtor is under the protection of the Bankruptcy Court.  This means that no creditor may call, mail, garnish, sue or do anything that would constitute a collection, besides file a claim for payment with the Court.

Is Chapter 13 Right For You? Can You Afford to Fund a Plan?

The Plan Payment is customized to the debtor’s particular circumstances, including income, living expenses, secured debt (such as car loans and mortgages), priority debt, attorney’s and trustee’s fees and unsecured debt (such as credit cards and medical bills).

 

We first look at income compared to living expenses (the Trustee calls this “Feasibility”).  We do this because a Plan is not going to be successful if the debtor can’t afford to pay living expenses and meet the requirements of the Plan.  In other words, you need to show some income after expenses every month that can be devoted to paying back something to your creditors. If this income simply isn’t there and you can’t afford to pay anything back, you like;y belong in a chapter 7 bankruptcy.

 

To get started calculating income and expenses, Make a list of your monthly take home pay and a list of regular monthly living expenses (do not include debt payments) and then compare the two.  Is there money left over after living expenses that could be used to make a Chapter 13 Plan payment?  If the answer is “No”, then it’s not going to work and filing a Chapter 13 would be a waste of everyone’s time and effort.  If the answer is “Yes”, then we go to the next step:

Minimum Plan Payment

What is the minimum floor for a Plan?  We have to look at several elements that go into calculating a Plan:  Secured Debt, Priority Debt, Unsecured Debt and Administrative Fees.

Secured Debt:  Jurisdictions differ, but in the Middle District of Florida all secured debt is required to be maintained through the Plan.  This means that mortgages and car payments (these are the most common kinds of secured debt) will be included in the Plan payment and those creditors will be paid by the Chapter 13 Trustee.  Any mortgage that is being kept and treated as secured debt (remember we are often reclassifying second mortgages and Home Equity Lines of Credit as unsecured debt right now) will be padded with two extra payments (we call them GAP payments) so the mortgage company can’t bombard debtors with surprise unpaid fees at the end of a plan.  I know it shocks you to hear that banks do that, but they do.  The secured portion of car loans can be “crammed down” to the NADA retail value of the vehicle if the loan is more than 2 ½ years old.  The balance is treated as unsecured debt.  The interest rates on vehicles paid through the plan can be changed to a fixed rate (on the day I write this it is 5.25%) for the life of the Plan.

Priority Debt:  Priority Debt is debt that cannot be discharged in a Chapter 7 or Chapter 13 Bankruptcy, but can be structured to be paid in full across a Chapter 13 Plan.  Priority Debt can be (but is not limited to): Back Child Support or Alimony, taxes owed to the IRS for recent tax years or wages owed to employees.  Priority debt must be paid in full across the Plan term.  So if a debtor owes $5,000.00 in Priority debt and goes into a 60 month (5 years) Plan, $83.33 of each monthly Plan payment would go toward satisfying that debt.

Unsecured Debt:  Unsecured debt is anything that is not Secured or Priority debt.  This category includes credit cards, medical bills, deficiencies from debt that used to be secured (like a car repo balance, property foreclosure).  Student Loans, even though unpaid amounts survive any bankruptcy, are classified as unsecured debt (pure evil, if you ask me).  Figuring the treatment of unsecured debt in a Chapter 13 Plan is involved and tricky.  The attorney has to figure out how much, if any, money would have been paid to the unsecured creditors if the case had been filed as a Chapter 7.  This is called “liquidity”.  The equivalent of liquidity must be paid to the unsecured creditors across the life of the Chapter 13 Plan.  That is a minimum.  If there is money available in the debtor’s budget (remember take home pay vs. living expenses?) to pay above liquidity to unsecureds, then that amount will be required.  It is the attorney’s job to make sure that no more than necessary is paid by the debtor/their client into the Plan to unsecured creditors.

Administrative Fees:  These vary among the jurisdictions.  In Orlando where I am, some attorney’s fees can be paid through the Plan (about ½ of mine are charged through the plan) and the Chapter 13 Trustee charges 10% to keep things going on her end.

Lori Patton, Orlando Bankruptcy Attorney