Chapter 13 Repayment Plan
The Chapter 13 repayment plan is your roadmap to how you will pay all your debts with your disposable income as calculated on your forms in your bankruptcy petition. The previous article summarized the requirements of a confirmable chapter 13 repayment plan; this article presents more detail on how the chapter 13 repayment plan will actually work. A copy of your plan will be sent to the trustee and to each of your creditors. Most bankruptcy courts require the plan to be in particular format and they may have a local form — which can usually be found on the court's website — that you will be required to use to submit your plan. Find the bankruptcy court for your district and its website by going to https://www.uscourts.gov and clicking the relevant links.
Most of your debts you will be paid through your plan. However, some debts may be paid outside of the plan, such as your mortgage payment. You will continue to pay most of your ongoing expenses, such as rent, utilities, and communication services, directly. Generally, the payments for your debts that are paid through your plan are sent to the trustee biweekly or monthly; the trustee takes about 10% — the usual commission — out of each payment and sends the rest to your creditors according to your plan. Hence, it would benefit you to pay as many debts as possible outside of your plan, to save on the 10% commission, particularly your mortgage. However, courts differ as to whether they will allow the debtor to pay their mortgage or car payment through the plan or not.
The trustee will send you periodic statements, showing:
- filed claims and their amount;
- the amount paid to each creditor; and
- the balance due to each creditor.
You must pay all administration expenses, including the trustee's and your lawyer's fees, all priority debts, all secured debts that will contractually end within the duration of the plan and any arrearage on secured debt for property you want to keep. The remainder of your payments will be paid pro rata to your unsecured, nonpriority creditors.
If your income is more than the state median for your household size, your plan must last for 5 years; otherwise, your plan may last for 3 years, but you can extend it to 5 years if you need that much time to pay the total value of your nonexempt property so that your plan can be confirmed. How much you pay to your remaining unsecured creditors depends on your remaining disposable income — they may get only a fraction of their debt or even none at all.
The length of your bankruptcy and the calculation used to determine your disposable income is determined by whether your family income — the income of both you and your spouse, if any — is more or less than the state median. If it is less — as determined by the means test — then you calculate your disposable income by subtracting the expenses listed on Schedule J, Current Expenditures of Individual Debtor(s), from either your current monthly income shown on Form 22C or the monthly income figures shown in Schedule I, Current Income of Debtor(s). If your income is more than the state median, then the law requires that you calculate your disposable income by completing Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period and Chapter 13 Calculation of Your Disposable Income, but not all courts enforce this and may allow you to use Schedule I if it is more representative of the your actual income.
Income Deduction Orders
If you are an employee with regular income, the bankruptcy judge may issue an income deduction order at the confirmation hearing so that your monthly plan payments will be automatically deducted from your wages and sent to the bankruptcy court, because it has been demonstrated that income deduction orders increase the likelihood that the debtor will complete the Chapter 13 plan successfully. Nonetheless, courts have different rules regarding income deduction orders: some order it automatically, some only if you request it, and in other jurisdictions, the court doesn't issue the order unless you miss a plan payment.
The trustee will only pay allowed unsecured claims, where the creditor filed a Proof of Claim. Rule 3001. Secured creditors are the only creditors who do not have to file a proof of claim. The deadline for filing a proof of claim is 90 days after the first creditors meeting. Rule 3002. Usually, the confirmation hearing for your repayment plan must be held within 45 days after the first meeting of creditors, which may result in several creditors filing a proof of claim after your plan is confirmed. Because of this scheduling misalignment, include all creditors that you assume will file a proof of claim. If some do not file the proof of claim and they are dischargeable debts, then you can amend your plan to eliminate those payments, since they will not be allowed claims, and those debts will be discharged after the completion of the repayment plan.
If you have debts that are priority debts or are otherwise nondischargeable, you may want to file a proof of claim on behalf of those creditors, so that the debts are paid by the time you receive your discharge, which will give you a better fresh start, which is one of the major objectives of bankruptcy. However, you must submit a Proof of Claim for the creditor within 30 days after the creditors' deadline to file a claim. Rule 3004.
Your payment plan should provide full payment to all secured creditors listed in Schedule D, Creditors Holding Secured Claims, and all priority creditors listed in Schedule E, Creditors Holding Unsecured Priority Claims, except for child support owed to a government agency, and the amount that will be paid to all unsecured, nonpriority creditors listed in Schedule F, Creditors Holding Unsecured Nonpriority Claims. If you intend to object to any priority or secured debts listed in your petition, then indicate that in your plan, although it is rarely beneficial, because even if you win, the money that you saved will be used to increase your payments to your unsecured creditors.
Individual bankruptcy courts may have a local form for the chapter 13 repayment plan, and if there is a local form, then use that. However, if there is no local form, then you may be able to use the following sample provided by the Maryland Bankruptcy Court for the general content and format; however, be sure to modify the plan by any local rules, which also should be published on their website, that the court may require.
Sample Chapter 13 Repayment Plan Outline
The first part of a Chapter 13 repayment plan generally consists of a notice to creditors: what they have to do to file a proof of claim and how they may object to the repayment plan if they wish. Generally, a creditor can object to the plan by filing a written notice to the court and serving the notice upon the debtor, trustee, or other parties in interest no less than 8 days before the date set for the first meeting of creditors; otherwise the court may confirm the plan as drafted. The rest of the plan will generally have 1 or more of the following sections:
- An indication of whether the plan is original, amended, or modified.
- The term of the plan, which will generally be either 36 or 60 months, unless you can pay 100% of your debt before then, and the amount of the monthly payments.
- How the trustee will disburse the payments received and the order in which the creditors will be paid, with priority given to domestic support obligations, trustee commissions, and other priority claims, and whether secured claims will be paid in full, either through the plan or outside the plan, or whether the collateral will be surrendered to the creditor. After the payment of priority and secured claims, the balance of funds will be paid pro rata on allowed general, unsecured claims.
- Any motion to value a secured claim or to avoid a lien on the property.
- Payment for any arrearages on secured property.
- Secured creditors that are holding claims that will be subject to a cramdown for property that is worth less than the debt, where their claim will be bifurcated into a secured claim equal to the value of the collateral and unsecured claim for the remainder of the debt.
- Whether executory contracts or unexpired leases will be assumed or rejected.
- A statement that the title to the debtor's property shall revest to the debtor after the discharge is granted, or upon dismissal or closing of the case.
- Any nonstandard provisions.
- The date and signature of the debtor, and possibly a joint debtor and attorney.
Because of the length of time of a chapter 13 bankruptcy, secured creditors may require adequate protection payments to protect their property until the plan is confirmed. The trustee generally pays these from the first payment that you make, which must be within 30 days after you file your petition.
Generally, most Chapter 13 plans classify their creditors into various classes. The Bankruptcy Code does not specify how the various classes are named, but most schemes simply number the classes, with higher priority creditors being listed first. because every member of each class must be treated equally, your classes will depend on the number of different claims and your treatment of them. Your plan must specify how each class will be paid and the percentage of the debt that you intend to pay. Although claims can be classified in various ways, the following sample classification will give you a better idea of how claims are classified:
- Class 1: priority claims from Schedule E.
- Class 2: secured claims, listed in Schedule D - Creditors Holding Secured Claims, that must be paid in full under the plan, including property secured by tax liens, mechanics liens, or judicial liens that cannot be avoided, and secured claims whose contracts will expire during the plan. Any secured claims with contracts lasting longer than the repayment plan are usually paid outside of the plan.
- You must pay an interest rate for your secured debt. This interest rate usually equals the prime rate + 1.5%, as adjudicated by the Supreme Court in Till v. SCS Credit Corporation, 541 US 465 (2004). The 1.5% is to compensate the creditors for the slightly increased risk of non-payment from a bankrupt debtor.
- Class 3: Arrearages on secured property, which must be paid through the plan, even if you are making regular payments directly to the creditor.
- Class 4: under-secured debts, where the debt exceeds the value of the collateral. In these cases, you may be able to modify the plan so that the secured portion is reduced to the value of the property, while the rest of the claim is treated as an unsecured, nonpriority claim — called a cramdown.
- Generally you cannot cram down primary mortgages, unless the mortgage was for a business purpose such as a multi-unit building or farmland. Cramdown may be possible for a loan that is not secured solely by your residence. Generally, a loan for a mobile home can be crammed down because it is considered personal property. However, even if you can cram down the mortgage, you will generally have to pay it off in full during the term of the plan. Secondary mortgages or more junior loans, however, may be stripped from the residence and reclassified as an unsecured, nonpriority claims or bifurcated into a secured claim and an unsecured claim, depending on the value of the collateral.
- Class 5: Long-term debts based on contracts with remaining terms longer than the repayment plan. These debts are usually paid outside of the plan, which should be specified. By paying these creditors directly, you will save the trustee's 10% commission.
- Class 6: unsecured, nonpriority claims listed on Schedule F, plus any unsecured portion of a bifurcated secured claim.
- Class 7: debts with cosigners or co-debtors, which must be paid in full to prevent the creditors from trying to collect from the cosigners or co-debtors.
- Class 8: business debts, if you have a business, you will probably have to incur some debt so that you can continue to run it. These debts must be paid in full.
- Class 9: nondischargeable debts, such as student loans or child support, owed to a government entity that must be paid in full.
- Class 10: you may want to pay 100% of your small debts that are less than a certain amount and a smaller percentage of your larger debts.
- Class 11: the remainder of your unsecured, nonpriority debts where you either pay a certain percentage or not at all. However, if you have nonexempt property, then you must pay them the total value of your nonexempt property.
Your repayment plan may have far fewer classes than those listed above, depending on your debts and how you intend to classify them. Creditors really only need to be in a different class if you intend to pay them a different percentage of their claim or if they have a different legal priority, but everyone within the class must be paid the same percentage.
The repayment plan should also have additional clauses to satisfy legal requirements, such as:
- The value of your nonexempt property under a Chapter 7 liquidation, because the unsecured, nonpriority creditors would have to be paid at least this amount.
- Whether you will surrender any personal or real property that you don't want to continue making payments on. However, if the property is worth less than the amount of the loan, than giving the property back to the creditor extinguishes the secured portion of the debt, but not the unsecured debt, which must be included with your payments to your other unsecured, nonpriority creditors.
- Any amounts that will be paid for adequate protection insurance, and how the payments will be made.
- Limits on the amount of debt that you can incur during the life of the plan.
- A statement that you will remain current on your domestic support orders and your taxes.
- Your authorization to the trustee to disburse funds as provided in the plan.