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The Chapter 13 Repayment Plan

Posted by attorney Andrew Hawes

The Chapter 13 Repayment Plan Confirmation Hearing

The debtor must file a repayment plan with the petition or within 15 days after the petition is filed. Fed. R. Bankr. P. 3015. A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims. The amount that the debtor will have to agree to pay will depend upon the type of the claim.

Priority Claims

The plan must pay “priority claims" in full unless a particular priority creditor agrees to different treatment of the claim or, in the case of a domestic support obligation, unless the debtor contributes all "disposable income" - discussed below - to a five-year plan.11 U.S.C. § 1322(a). “Priority claims" are those claims granted special status by law, such as most taxes and the costs of bankruptcy proceedings.

Secured Claims

Secured claims also have special treatment. A secured claim is a claim for which the creditor has the right take back certain property (the collateral) if the debtor does not pay the underlying debt. If the debtor wishes to retain the property securing a particular loan, the plan must provide that the holder of the secured claim receive at least the value of the property (which is typically less due to depreciation). If the obligation underlying the secured claim was used to buy the property (e.g., a car loan), and the debt was incurred within certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the value of the property. Payments to certain secured creditors (i.e., the home mortgage lender), may be made over the original loan repayment schedule (which may be longer than the plan) so long as any arrearage is made up during the plan. This area of the bankruptcy law is complicated, and the debtor should consult with an attorney to ensure property treatment of secured claims under the repayment plan.

Unsecured Claims

The most common type of unsecured claim is credit card debt. Unsecured claims are generally those for which the creditor has no special rights to collect against any particular property of the debtors. A Chapter 13 repayment plan does not need to pay unsecured claims in full as long it provides that the debtor will pay all projected “disposable income" over an “applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor's assets were liquidated under Chapter 7. 11 U.S.C. § 1325. “Disposable income" is income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents and less charitable contributions up to 15% of the debtor's gross income. If the debtor operates a business, the definition of disposable income excludes those amounts which are necessary for ordinary operating expenses. 11 U.S.C. § 1325(b)(2)(A) and (B). The “applicable commitment period" depends on the debtor's current monthly income. The applicable commitment period must be three years if current monthly income is less than the state median for a family of the same size - and five years if the current monthly income is greater than a family of the same size. 11 U.S.C. § 1325(d). The plan may be less than the applicable commitment period (three or five years) only if unsecured debt is paid in full over a shorter period.

Payments Under the Repayment Plan

Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, the debtor must start making plan payments to the trustee. 11 U.S.C. § 1326(a)(1). If any secured loan payments or lease payments come due before the debtor's plan is confirmed (typically home and automobile payments), the debtor must make adequate protection payments directly to the secured lender or lessor - deducting the amount paid from the amount that would otherwise be paid to the trustee.

Confirmation Hearing for the Repayment Plan

No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. 11 U.S.C. §§ 1324, 1325. Creditors may object to confirmation. Fed. R. Bankr. P. 2002(b). While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if the debtor's assets were liquidated or that the debtor's plan does not commit all of the debtor's projected disposable income for the three or five year applicable commitment period.

If the court confirms the plan, the Chapter 13 trustee will distribute funds received under the plan "as soon as is practicable." 11 U.S.C. § 1326(a)(2). If the court declines to confirm the plan, the debtor may file a modified plan. 11 U.S.C. § 1323. The debtor may also convert the case to a Chapter 7 Bankruptcy. 11 U.S.C. § 1307(a). If the court decides to dismiss the case, the court may authorize the trustee to keep some funds for costs, but the trustee must return all remaining funds not already disbursed to the debtor. 11 U.S.C. § 1326(a)(2).

Modification of the Repayment Plan

A change in circumstances may jeopardize the debtor's ability to make plan payments. For example, a creditor may object to a plan, or the debtor may inadvertently have failed to list all creditors. In such instances, the plan may be modified either before or after confirmation. 11 U.S.C. §§ 1323, 1329. Modification may be proposed by the bankruptcy trustee, the debtor, or an unsecured creditor. 11 U.S.C. § 1329(a).

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