Chapter 13 Payment Plan: Requirements for Confirmation
- The Chapter 13 plan describes how the debtor will pay his creditors while under Chapter 13, and this plan must be confirmed by the court for the bankruptcy petitioner to proceed with the bankruptcy.
- §1322 and §1325 of the Bankruptcy Code describe the plan's contents and what is necessary for confirmation.
- The applicable commitment period — how long the plan must last — is 5 years if the debtor's income is more than the state median; otherwise it is 3 years.
- The debtor must pay all projected disposable income, which is the average monthly income earned during the 6 months before bankruptcy minus living and other necessary expenses, earned over the life of the plan to his creditors.
- The plan must be confirmed by the court 20 to 45 days after the 1st creditors meeting.
Under Chapter 7, a debtor liquidates his nonexempt assets to pay his unsecured creditors. Under Chapter 13, the debtor gets to keep all his property, but pays his creditors with his future income over a 3 or 5 year period.
The Chapter 13 repayment plan is the document that the debtor submits explaining how the debtor's claimants will be paid and how much. Most courts have their own form for the repayment plan, and it is usually submitted with the bankruptcy petition, but the petitioner must submit the plan within 15 days of filing — failure to do so will result in dismissal.
The plan contains information about:
- how long the plan will last,
- how much will be paid to the trustee, usually either monthly or biweekly,
- descriptions of each creditor, whether they will paid directly or through the trustee, any applicable interest rate, and how many payments will be made to each creditor and how much those payments will be,
- what secured property will be surrendered,
- how much unsecured creditors would receive under a Chapter 7 liquidation by the debtor,
- how arrearages will be paid,
- claim classification and modification,
- what contracts the debtor will assume or reject,
- and what property the debtor wants to strip (or avoid) liens from.
The actual content of the plan will depend on the debtor's financial state.
Plan Length: the Applicable Commitment Period
The plan consists of several sections, including information describing the plan. One necessary statement stipulates how long the plan will last — the applicable commitment period, which is either 3 or 5 years. If the debtor's family monthly income is below the state median, then the applicable commitment period will be for 3 years; higher income debtors must pay for 5 years.
The debtor's monthly family income is calculated by subtracting living and other necessary expenses from what both spouses earn, even if the other spouse is not filing for bankruptcy. If the income is above the median for the applicable state, then the plan length must be for 5 years and the projected disposable income must be calculated using the means test.
A payment plan can be less than the applicable commitment period, but only if the debtor pays all creditors in full in less time; otherwise, he must commit all projected disposable income to pay creditors during the bankruptcy.
Since the purpose of bankruptcy is to give the debtor a fresh start, Congress has set strict limits to the applicable commitment period. Under no circumstances can the payment plan extend beyond 5 years. If the annual income of the debtor and spouse is less than the median for the state for a family of similar size, then the payment plan cannot extend beyond 3 years, unless the court extends it for cause — but it cannot be extended beyond 5 years in any case. However, the debtor may ask that the plan be extended if it is necessary to pay 100% of the priority payments that must be made to get a plan confirmed. Even if the plan is amended after confirmation, the time length from the date of the original plan cannot exceed 5 years.
While the Bankruptcy Code provides no minimum period, the trustee or any unsecured claimants that are being paid less than the full amount of their debt can, and probably will, object if the debtor tries to pay less by paying over a shorter duration. Furthermore, a debtor who proposes to pay less than the full amount of the debt over a shorter period will be considered acting in bad faith, which may prompt the court to deny confirmation of the plan, or even dismiss the case or convert to Chapter 7. The only way that the debtor can receive a discharge sooner is by paying 100% of his debts.
After the debtor submits the plan, the plan must be confirmed by the court, usually within 20 to 45 days after the creditors meeting (§1324).
To be confirmed, a plan must satisfy the mandatory provisions under §1322(a):
- subject future earnings to the supervision and control of the trustee for the execution of the plan;
- pay all priority claimants in full, unless the claimant agrees to accept less;
- and if the plan classifies claims, then each claimant in the same class must be treated equally.
One exception to paying all priority claims in full is that the debtor is permitted to pay less than the full amount for those domestic support obligations that are due to a government unit, but only if the plan provides that the debtor apply all projected disposable income for a 5 year period, beginning on the 1st date that payment is due.
Section 1325(a) lists the requirements for confirmation. If the plan satisfies the requirements, then the court must confirm the plan. However, if all the requirements are not satisfied, then the court has some discretion to confirm the plan anyway, although it is unlikely to do so unless there is no objection from impaired creditors to the confirmation, or if the deficiency does not impair any creditors.
There are additional requirements for confirmation listed in §1325, including:
- The plan must comply with any other applicable provisions of the Bankruptcy Code.
- All fees must be paid before confirmation.
- The plan must have been proposed in good faith.
- Each unsecured creditor must be paid the present value of what they would have received under a Chapter 7 liquidation. Present value is used because the debtor pays the claim over time, so interest must be added to compensate creditors for the opportunity cost of receiving money over a period of years instead of receiving it as a lump sum.
- For secured property, the debtor must either surrender the property to the claimant or pay the present value of the secured claim.
The plan must also be feasible according to the information the debtor provided in the bankruptcy petition. All priority debts must be paid in full. If the debtor's income allows a 3 year plan, but the debtor cannot pay priority claims in that time, then he can ask the court to extend the time period to up to 5 years. If the debtor cannot pay all priority claims within 5 years, then the plan is not feasible, and so the case would have to be dismissed or converted to another chapter.
The debtor must have paid all domestic support obligations that were due after the bankruptcy filing date.
Under §1325(b), the trustee or an impaired, unsecured claimant receiving less than full payment can object to the confirmation if the debtor is paying less than his full disposable income during the bankruptcy. Creditors can object to the plan by filing a notice with the debtor, the trustee, and other parties of interest no later than 8 days before the date set for the creditors meeting.
The debtor has the most discretion in how unsecured claims are paid. However, claimants or the trustee can object to the plan confirmation if the proposed payments do not satisfy the best interests test or the disposable income test, or if different creditors with the same types of debt are being paid differing percentages of their debt.
Best Interests Test
Section 1325(a)(4) requires that unsecured creditors receive at least the present value of what they would have received under a Chapter 7 distribution. However, if the debtor does not have nonexempt assets, then unsecured creditors would have received nothing in a Chapter 7 distribution. If the debtor does have nonexempt assets, then these assets would be sold and the proceeds would be distributed equally among the unsecured creditors.
Because the debtor is paying the creditors over time, they are entitled to receive interest on the portion; hence, the debtor must provide for interest in the payments.
Disposable Income Test
A payment plan that passes the best interest test may not pass the disposable income test, which requires that the debtor commit all projected disposable income earned during the bankruptcy to the payment plan; otherwise, either the trustee or any unsecured claimants can object to the confirmation of the plan.
Generally, disposable income is what is left over from the debtor's current monthly income after subtracting monthly living expenses. The current monthly income is the average of what the debtor earned in the 6 months prior to the bankruptcy filing date.
Current Monthly Income = (Income Earned in 6 Months before Filing Date) / 6
However, if the debtor's family income exceeds the state median, then the debtor must use the means test to calculate projected disposable income.
Note: both the applicable commitment period and disposable income are calculated on Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period and Chapter 13 Calculation of Your Disposable Income.
Unsecured Claim Classification
The debtor can classify unsecured creditors into distinct classes that will be paid a different percentage of their claim. For instance, a debtor might classify all claims with a co-debtor (or cosigner) and all debts not dischargeable into 2 classes that will be paid 100% of their claim, while other unsecured claims will be paid a percentage of their claim. Business debts are also usually placed in a separate class. Another classification of claims sanctioned by the courts is a separation of claims based on the amount, with small claims put in one class that will be paid 100% of the amount owed while larger claims are placed in a separate class where only a smaller percentage of the claims will be paid.
However, §1322 places limitations on the classification of claims. Specifically,
- §1322(b)(1) requires that claims within a class be substantially similar, meaning that the debtor has the same type of liability with the class;
- §1322(a)(3) requires that creditors within a class must be treated alike — which usually means they must be paid the same percentage of their claim, and
- §1322(b)(1) requires that the plan does not discriminate unfairly among the classes.
Any classification of creditors must be reasonable and not unfairly discriminatory. Although the Bankruptcy Code does not define unfair discrimination, the courts have developed a four-part test for judging the fairness of any discrimination:
- Does the discrimination have a reasonable basis?
- Could the debtor carry out the plan without the discrimination?
- Is the discrimination proposed in good faith?
- Is the degree of discrimination directly related to the basis for the discrimination?
Source: Wolff, 22 B.R. 510 (B.A.P. 9th Cir. 1982), p.4, reaffirmed: Labib-Kiyarash, 271 B.R. 189 (B.A.P.) 9th Cir. 2001