A major part of undergoing a Chapter 13 Bankruptcy is the Chapter 13 Repayment Plan. The repayment plan is designed to help you catch up on missed payments and pay off your debts partially or fully, depending on the circumstance. When filing for Chapter 13 relief, you are required to submit paperwork that discloses several pieces of personal information in addition to all of your financial matters. This includes listing any assets you own, as well as any outstanding debts you have with other parties. Within 14 days of filing, you must submit a Chapter 13 Plan with the Court. This document controls the remainder of your case and will structure out your relief for the next 3 to 5 years. The Chapter 13 Plan will dictate who is to be paid, how they will receive those payments, how much they will receive, and the duration of the payments.
To create an effective repayment plan, it is important to know the different types of claims you may have. Claims can fall under three basic categories: priority, secured, and general unsecured claims. Priority claims include most taxes and delinquent child support/alimony payments. Priority claims must be paid in full as part of your Chapter 13 Plan. Thus, if you have $3,000.00 owed for last years taxes and $8,000.00 in back child support, that $11,000.00 must be paid in full within the confines of your 3 to 5 year Chapter 13 Plan. Secured claims allow for the creditor to take back certain property if the debtor has failed to make payments. An example of a secured claim is a home mortgage. Thus, the basic premise is that if you don’t make your mortgage payments, the lender can foreclose on your home and take it from you. In a Chapter 13 Plan, some secured claims require you to pay back only the fair market value of the collateral, others may require the full debt to be paid off, and others require the ongoing payments be paid plus the delinquent amounts. General Unsecured claims, such as credit card debt, medical bills, and personal loans, do not necessarily have to be paid in full. If the debtor agrees to make payments over the set amount of time, the remaining debt on any unsecured claims may be discharged. Thus, one person filing for Chapter 13 relief might only be required to pay 5% of his/her general unsecured claims while another might be required to pay 100% of his/her general unsecured claims.
Once you have finished creating your repayment plan and feel it is effective and doable, you must file the plan with the Court and serve it on all involved parties. If creditors feel any part of the plan seems unreasonable based on the applicable rules, they have the opportunity to file any objections and the Court will look it over. Generally speaking, if no objections are filed within the deadline, the Judge will approve the plan (as long as he/she does not see anything that needs to be addressed) and it will become the confirmed Chapter 13 Plan. Regardless of whether your plan has been confirmed by the Court, you must begin making payments to your creditors, based on the local rules in our District, by the 25th of the month following when your case is filed. Thus, if you file your case on September 10th, the first payment is due on October 25th. If any changes occur that may affect the confirmed plan, it is important to report them to your attorney to prevent any issues or violations from occurring. If necessary, the Court may allow for adjustments to be made that reflect these changes. If any payments are missed, the Court could dismiss the case entirely or convert it to a Chapter 7 case and allow for liquidation proceedings to occur. During this time, it is also important to avoid incurring any new debts. If you maintain all payments and have demonstrated this to the Court, you will receive a discharge at the end of the 3 to 5 year period and your case will be completed.
During the duration of your Chapter 13 Plan, you must demonstrate that you are making your best effort to complete payments. This means allocating all remaining disposable income towards your unsecured debts. Disposable income is the amount that remains after you have deducted your required monthly payments from your monthly income. This does not mean you may use the extra money to take a vacation, but instead make sure you are paying off balances, like credit card debt.
CONTENTS OF THE PLAN
The plan is divided into several sections. This includes but is not limited to the following:
SECTION 1 – NOTICES
The first section of the Chapter 13 Plan lists out all of the notices you must be aware of when filing for Chapter 13 relief. In California, each district has its own set of laws that are to be followed, and you are required to file according to those set by your filing district.
If you feel any additional information is necessary, Section 1 provides the opportunity to include anything that has not previously been included in the plan. Only those provisions that have been listed in Section 1 will be accounted for, and any additional provisions will not affect your plan.
2ND SECTION – HOW LONG IS THE PLAN?
This section determines the length of the established plan. A Chapter 13 Plan generally lasts for a minimum of 36 months (3 years) and a maximum of 60 months (5 years). If you agree to pay the debt in full in few than 3 years, the Court may make an exception to the minimum length required. However, if you are only proposing to pay 8% of the general unsecured debt, the Chapter 13 plan cannot be for less than 3 years.
Section 3 of the Chapter 13 plan outlines who is to be paid and how much money they will be receiving. This includes any administrative fees, as well as creditors involved in your case.
Administrative Expenses – When it comes to filing for bankruptcy, you will incur your attorney's fees. Here, you will document the amount paid to your attorney before the initial filing, the remaining balance, and establish the amount of money designated that will be sent to your lawyer each month. In general, each district has an “opt-in” amount for what the Chapter 13 Attorney charges for his/her fees. This amount will be disclosed here.
Class 1 - Class 1 creditors are lenders that have a security interest in an asset that you own, are in contract to be fully paid after your case is completed and are delinquent on payments when the Chapter 13 case is filed. One of the most common examples of this is creditors related to your mortgage payment. Consider the following situation:
You are a homeowner and owe a mortgage of $200,000. Each month you are set to pay $1,000, however you have defaulted on the last 10 installments. The contract states that the full obligation is to be paid in full in 25 more years. With this information, you would know that the home’s mortgage would fall under Class 1. Assume your plan lasts for 60 months. When making payments to the trustee assigned to your case, you will make two payments: one of $1,000 and the other of $166.67. The first payment is your regular scheduled mortgage payment and the second is 1/60th of the defaulted amount. If you consistently complete both of these payments monthly for the 60 month period you will no longer be behind on your house loan.
Car loans may also fall under Class 1. However, it is important to note, in general, these typically matures in 60 months, making it more likely to mature before the completion of a Chapter 13 Plan. There are situations where clients are current on their car loan and the maturity date is longer out than the length proposed for the bankruptcy case. In those situations, you can also include the car loan in Class 1.
Class 2 – The second class is divided into three subcategories. Here, you will find any modified secured claims, as well as claims that will mature or are set to be fully paid (based on the contract) before your bankruptcy case is completed.
Section (a) includes any claims with a security interest that remain unchanged. Most commonly, car loans will be listed in Class 2(a).
Section (b) includes any claims with a security interest that may be lowered considering the fair market price of the collateral. As previously mentioned in Class 2(a), a car loan may fall under this section. If a car loan began longer than 2.5 years before the Chapter 13 was filed and is a purchase money security loan, the debtor is not obligated to fund the full amount of the loan but instead only the loan’s fair market value.
Section (c) includes any claims with a security interest that are to be reduced to $0.00 due to the fair market value of the actual asset. If a debtor demonstrates to the Court that the current market value of the house is an amount less than the dollar amount owed to the senior lien holder, it qualifies them to include the 2nd loan into this class. If successful, this will eliminate the secured amount of the 2nd loan and then would be lumped together with the General Unsecured Claims.
Class 3 – Class 3 includes any claims with a security interest that are fulfilled with the Debtor turning the asset in to the lender. In some situations, a client has a car with a loan on it that they no longer wish to keep. Thus, they would include that car loan into Class 3, which advised all parties involved that the person filing for Chapter 13 relief is going to surrender their interest in that car.
Class 4 – The 4th class includes any claims that will mature upon the end of the filed plan. Although they are found in Class 1, mortgage loans can also be considered in Class 4. However, in order for these claims to qualify in the 4th Class, the person filing the case is required to not be behind on the loan’s payments upon the initial filing. If he/she is behind on the payments, the debtor will not be able to pay the lender directly but instead it would be required to be in the 1st class. Thus, to be a Class 4 creditor, the loan must be current when the case is filed and the maturity date must be further out than the end of the Chapter 13 case.
Class 5 – Class 5 includes any non-secured claims where they must be addressed differently than previously listed unsecured claims. This includes things like a child support or alimony claim or maybe even last year’s tax obligations, pursuant to 11 U.S.C. § 507.
Class 6 – Similar to Class 5, Class 6 includes any non-secured claims where they must be handled differently. Common examples include a debt where a third part is also obligated on the loan or a loan for educational purposes. The treatment for these claims is included in non-standard provisions of the plan. You would add an additional page to the standard plan and label it as the 7th section.
Class 7 – Class 7 includes any standard non-secured claims. This includes any credit card debt, hospital bills, non-secured loan from a bank, etc. Here, you will list the aggregate dollar amount of standard non-secured claims and a percentage required to be paid on these claims. Example to explain this: If this category is required to be getting 25 cents per dollar, 25% of the aggregate dollar amount would be listed.
4TH SECTION - LEASES
Section 4 of the Chapter 13 Plan lists out any leases or contracts you are currently involved in. It is important to list ALL lease and contracts, otherwise, they will be excluded. An example: You are leasing a home and desire to make payments through your plan, it must be included within this section. In addition, you will be able to catch up on missed payments.
COMPLETING YOUR PLAN FOR CHAPTER 13?
For the next few years, you will continue making payments as established in your Chapter 13 Plan. Generally, the plan is designed to last no less than 3 years and no more than 5 years. During this time, circumstances may change and you might have had a turn around with your finances. Potentially, you might now be in a position where you can pay the remainder of your balances before the completion date of your plan and complete your plan early. However, like most contracts, the repayment plan cannot be terminated earlier than the anticipated date. The terms of the plan are generally to repay all of your disposable income to your creditors over the established time within the next 3 to 5 years. Once that has been done, then you may have your general unsecured debts eliminated and discharged. The only exception to this is if you have paid ALL of your creditors in FULL. By doing so, the rest of the payment plan will be unnecessary and you will no longer have any debts that need to be discharged.
Once you have completed your repayment plan and demonstrated to the Court that you have done so, your case will be discharged and the remainder of your unsecured debts will be eliminated.
HOW CAN WE HELP?
When filing a Chapter 13 Bankruptcy, the Chapter 13 Plan plays a crucial role throughout. It is important to communicate with your attorney and develop this alongside them. Contact us today to begin analyzing your situation and creating a plan that is most effective for you.
We help clients in the following areas: Modesto, Stockton, Turlock, Ceres, Empire, Escalon, Hughson, Lathrop, Linden, Manteca, Oakdale, Patterson, Ripon, Riverbank, Salida, Tracy, Waterford