The Chapter 13 Bankruptcy Repayment Plan

Your Chapter 13 repayment plan is an essential part of your bankruptcy. It details which debts will get paid and the amount your creditors will receive.

During a Chapter 13 bankruptcy, you'll make monthly payments to a bankruptcy trustee appointed to your case. The trustee will pay your creditors according to the repayment plan. In this article, you'll learn how the Chapter 13 repayment plan works.

Debts You Must Pay in the Chapter 13 Repayment Plan

Some debts move to the front of the line in bankruptcy. Others might receive some or no payment at all. It will depend on the type of debt and where it falls in the Chapter 13 payment hierarchy.

Paying Priority Debts in Your Chapter 13 Repayment Plan

Some debts are necessary enough to be characterized as priority debts. These obligations receive special treatment in your bankruptcy case. The most common priority debts are domestic support obligations such as alimony and child support, recently-incurred taxes, and wages owed to employees. Priority debts receive full payment through your repayment plan in Chapter 13 bankruptcy.

Secured Debt in Your Chapter 13 Repayment Plan

If a creditor has a right to take back property when you default (fail to make payments) on your loan obligation, then that is a "secured debt." Examples of secured debts are your mortgage (which is secured by your house) and car loans. You must address each secured debt in your repayment plan as follows:

• if you wish to retain the property, you must pay arrearages and the regular monthly payment, or
• return the property to the lender.

Depending on where you live, some courts will require you to pay your ongoing mortgage payments through your plan as well, but other courts will allow direct payments to the lender.

In most cases, you must also pay your car loans in full through your bankruptcy plan (unless you are surrendering the cars). Another benefit of Chapter 13 bankruptcy is that it might allow you to reduce the principal balance and interest rate on your car loan through a cramdown. Since your car payments will get stretched out over the life of your plan, this will likely reduce your monthly expenses as well. In certain situations, especially if your car is worth more than what you owe on it, you may also be able to exclude it from the plan and pay the lender directly outside of the bankruptcy.

In some cases, you can wipe out a junior mortgage on your residential property. You'll have to show that your house is sufficiently underwater that if sold, no funds would be available to pay any portion of the junior mortgage in question. Find out about stripping a lien in Chapter 13.

Nonpriority Unsecured Debts: Pro Rata Share in Chapter 13 Repayment Plan

Almost all of your remaining debts will be "nonpriority unsecured debts." These include credit card debts, medical bills, and personal loans. These debts do not have to be paid in full and do not receive individual treatment in your bankruptcy plan. Instead, they are lumped together and paid a percentage (anywhere from 0% to 100%) of the balance owed.

The percentage depends on your income because all of your disposable income after payment of priority and secured debts must go to your nonpriority unsecured creditors. These creditors usually end up receiving a small percentage or nothing at all, especially if your income is below the median income level of your state.

Learn about unsecured debts in Chapter 13 bankruptcy.

How Long is the Chapter 13 Repayment Plan?

If you are paying back all of your creditors in full (including your nonpriority unsecured creditors), there is no length requirement except that your plan cannot be longer than five years.

Many people won't pay back all creditors in full, and the plan length will depend on whether your income is above the median income level of your state. If you are below the median, then your repayment plan only has to last three years. However, you can extend it to as much as five years, depending on how much debt you have to pay back and what you can afford to pay each month. If your income is above the median income of your state for a family of your size, then your repayment plan must last five years.

For more information on plan length, see How Long Does a Chapter 13 Repayment Plan Last?

Other Factors That Determine Chapter 13 Repayment Plan Payments

Most Chapter 13 debtors want to know: How much will I have to pay each month? And for how long? Chapter 13 debtors must make monthly payments over three to five years in a Chapter 13 plan or repayment plan. The number and amount of required plan payments depend on three factors:

• the debtor's monthly income
• the amount of the debtor's disposable income, and
• whether the debtor's income will cover all obligations required by bankruptcy law.

For more information about the repayment plan, see the articles in The Chapter 13 Repayment Plan.

What Qualifies You For Chapter 13 Bankruptcy?

Only debtors with regular income are eligible to file under Chapter 13 bankruptcy. Regular income includes wages and commissions earned by a debtor in the ordinary course of employment. Regular income doesn't include:

• overtime pay or bonuses that a debtor receives on an occasional basis, and
• child support payments.

The court determines the "commitment period" or length of the repayment plan by comparing the debtor's monthly earnings to the median family income in the state where he or she lives. You can find your state's median family income by visiting the U.S. Trustee website.

For debtors who earn less than the state median family income, the commitment period is three years. The plan length for debtors who make more than the state median family income is five years. The court will allow a shortened plan length if all unsecured creditors, such as credit card balances and medical bills, can be paid in full. A filer would need to pay all debt except for long term debt, such as a home mortgage and student loans, in what bankruptcy lawyers informally call a 100% plan.

Calculating a Chapter 13 Repayment Plan Payment: "Disposable Income"

During the applicable commitment period, the debtor must make monthly plan payments equal to the amount of his or her disposable income. A debtor's disposable income is the difference between his or her monthly earnings and the amount "reasonably expended" for his or her family's maintenance and support. Reasonable expenses include:

• rent or mortgage payments
• utility and telephone charges
• food
• clothing
• medical bills and prescribed medications
• health and disability insurance
• motor vehicle and other transportation costs
• taxes
• child and elderly care
• tuition and other educational expenses
• child and spousal support payments, and
• Chapter 13 trustee fees (generally, 10% of total plan payments).

Bankruptcy courts apply a means test to determine the reasonableness of expenses if the debtor earns more than the median family income in the state where he or she lives. The means test allows the debtor to use actual expenditures for some expenses, and expense amounts permitted under national and local standards issued by the Internal Revenue Service for others. Payments for housing and utilities can exceed the IRS' local standards if the debtor demonstrates that they are reasonable and necessary.

Charitable contributions and job-related expenditures also can be deducted in calculating the amount of a debtor's disposable income. You'll want to be prepared to demonstrate a history of such payments. Expect the court to view new or recently increased expenses with skepticism.

Learn more about calculating a Chapter 13 repayment plan payment.

Administrative Expense Claims, Cure Obligations, and the Best Interests of Creditors' Test

Determining a debtor's plan payments often requires more than a mechanical calculation of disposable income. In many cases, the filer will have to make adjustments so that the debtor's plan payments are sufficient to cover administrative expense claims and meet the Bankruptcy Code's "best interests of creditors" test.

Administrative Expenses

Administrative expenses are costs incurred in connection with administering a bankruptcy case. Generally, the primary administrative expenses in a Chapter 13 case are legal fees owed to the debtor's counsel and trustee fees owed to the United States Trustee. Administrative expenses have priority under the Bankruptcy Code. A debtor must ensure payment in full through the repayment plan.

Cure Obligations

Typically, a Chapter 13 debtor's primary assets are his or her home and motor vehicle. Many Chapter 13 debtors file bankruptcy after defaulting on home mortgages or motor vehicle loans. Defaults on home mortgage and motor vehicle loans can be cured—or caught up—under Chapter 13, and spread out over the plan.

"Best Interests of Creditors" Test

A Chapter 13 plan cannot be confirmed unless it provides that unsecured creditors—those owed credit card obligations, medical bills, and the like—would get paid at least as much as they would receive in a Chapter 7 case.

In most Chapter 7 cases, unsecured creditors receive little or nothing. In some cases, however, unsecured creditors are entitled to at least a percentage return, because a trustee appointed in a Chapter 7 case would be able to sell assets and distribute the proceeds to creditors. The Chapter 13 trustee must pay that same amount Chapter 7 creditors would receive to creditors in Chapter 13.

In Chapter 13, however, the trustee doesn't sell property. Instead, the debtor must have sufficient income to pay the equivalent amount through the repayment plan. You can determine this cost by adding up the value of property that you can't protect with a bankruptcy exemption.

Learn more about the best interests of creditors test.

What if a Debtor Can't Afford All Required Chapter 13 Repayment Plan Payments?

If the amount of your disposable income isn't enough each month to cover administrative expenses, cure obligations, and meet the best interests of creditors test, the bankruptcy trustee will object to your repayment plan. Several options to deal with this problem exist.

First, you can try to make adjustments to increase your disposable income or make other funds available. Some ways to do this include:

• changing employment, or taking on additional work
• selling assets
• utilizing anticipated tax refunds, or reducing excessive withholdings, and
• decreasing expenses.

Another way to increase plan payments for debtors who qualify for Chapter 7 is to extend the commitment period from three to up to five years.

How to Modify the Chapter 13 Repayment Plan

Any time a significant change occurs to your income or expenses, you should modify your Chapter 13 plan so that your payments are still manageable while sufficient to accomplish the plan's goals. You might pay some creditors less, reduce or raise your payment, give up a house or a vehicle, or extend or reduce the length of your plan.

Consider modifying your Chapter 13 plan if:

• you lose your job
• you get a pay cut
• you have a new child
• you need to keep a tax refund
• you want to surrender your house or your car
• you need to add a creditor you inadvertently left out of the plan, or
• your mortgage payment has changed.

To modify a Chapter 13 plan, you must file a plan modification with the court. The modification should state why you need to modify the plan and how you wish to modify it. You should include supporting documentation, such as exhibits if any. At this time, you should also file an amended forms Schedule I: Your Income and Schedule J: Your Expenses if you are modifying the plan because the information disclosed in these forms has changed.

The trustee and your creditors will have a certain time to file an objection to your plan modification. If no objections are filed, you can submit an order to the court, and your plan will most likely be modified. If there are objections and you cannot resolve them, you may have to go before the judge.

Example. Alice is in the second year of her Chapter 13 plan when she receives a pay cut at work. She can no longer afford her Chapter 13 plan payments while still supporting her family. She files an amended Schedule I: Your Income bankruptcy form to show her reduced income and files a plan modification with the court to reduce her plan payment.

Example. Joe files a plan modification to reduce his plan payments because his wife has just had a baby. He files an amended Schedule J to show the baby expenses. To reduce his payment and still make his plan work, he proposes to reduce the percentage paid to unsecured creditors. The trustee objects and the court sets a hearing date. Joe tries to negotiate with the trustee, but the trustee will not cooperate. The court holds the hearing, and Joe convinces the judge that his plan modification is appropriate. The court enters an order modifying the plan to reduce the payment.

Once your plan is modified, you will need to change your wage order, so the correct amount is taken out of your paycheck. For more on how this works, see How to Lower Your Chapter 13 Plan Payments.

What Happens After Chapter 13 Repayment Plan Completion?

When you complete all required payments under your plan, you won't owe anything on your priority debts, mortgage arrearages, and cars. Also, any balances on qualifying nonpriority unsecured debts, such as credit card balances, medical bills, and personal loans, will be discharged (wiped out) by your bankruptcy.

One exception is student loans. Bankruptcy will not discharge student loans unless you can show that paying them will be an undue hardship on you, which is extremely hard to prove.