Making Sense of Bankruptcy: The Chapter 13 Payment Plan
Chapter 13 is all about what you can and can’t do with your creditors in your court-approved plan.
With our last blog post we started a series to help you understand bankruptcy better, by having us explain the legal terms in a sentence you might hear, so that it all starts to make sense.
Here’s today’s sentence: A Chapter 13 case usually requires a 3-to-5-year payment plan, in which you pay your secured, priority, and general unsecured debts according to a detailed set of somewhat flexible rules.
The point of Chapter 7 is to discharge—write off—your debts; the point of Chapter 13 is to pay a portion of your debts, especially special one that you want to or need to pay, and then discharge whatever you don’t pay. They are very different in purpose and procedure, but with same overall benefit of getting relief from your debts.
People file a Chapter 13 case usually because of the benefits it comes with. And some of the potential benefits are huge. It can help you save your home by giving your years to catch up on a mortgage arrearage, and maybe by “stripping” your second mortgage off your title. It can potentially “cram down” your vehicle loan, reducing your monthly payments and shave thousands of dollars off what you end up paying for your vehicle. Chapter 13 can stop your ex-spouse or support enforcement agency, the tax collectors, and student loan creditors in much more effective ways than Chapter 7 can. Especially if you have these types of debts, the Chapter 13 “adjustment of debts” can give you tremendous tools for solving your financial problems.
People also sometimes file a Chapter 13 case because they are effectively forced to when they would rather file a Chapter 7 one, such as if their income is too high for the “Means Test” or if they’ve filed a Chapter 7 case too recently
Chapter 13 is all about the plan.
It’s a formal proposal that you and your attorney present to the bankruptcy court, with your creditors allowed a certain amount of input that sometimes results in changes in the terms of the plan, before it is approved by the court. It becomes your blueprint for how you deal with your debts for the 3 to 5 years that a Chapter 13 case lasts.
We referred to Chapter 13 being particularly helpful if you have certain kinds of debts, and mentioned how it can help save your home and/or vehicle. Your home mortgage(s), other debts against your home including any back property taxes, judgments with liens on your home, income taxes with a tax lien on your home are all debts secured against your home. Your vehicle loan is secured against your vehicle. Any debt which is legally secured by anything you own is a secured debt.
Debts may be secured because you directly agreed to make them secured, like when you buy a vehicle and allow the lender to be a lienholder on the vehicle. But debts can also be secured involuntarily, because the law gives certain creditors the right to create liens on your assets in certain circumstances, such as an income tax lien on your home or other possessions.
Secured creditors have rights against whatever asset of yours is securing their debt. That gives them power in a Chapter 13 case, but often that power helps you because it can allow you to favor that creditor over other creditors in a way you might appreciate. For example you can usually catch up on a vehicle loan instead of paying your credit card debt in your Chapter 13 plan. Or you can—if you wish—surrender that vehicle so that the debt is no longer secured and doesn’t need to be favored.
Priority debts are simply those which the law has determine are worthy of more favored treatment over other debts. Each type of priority debt has a principled reason for being treated specially.
Some of the most common and important priority debts include child and spousal support and recent income taxes.
In a Chapter 13 plan, priority debts in general must be paid in full before other unsecured creditors are earmarked to receive anything. As with secured debts, that can be turned to an advantage if you want to favor those debts, if for no other reason that you have to pay them no matter what.
General Unsecured Debts
These are everything else, debts that have no collateral or any right to anything you own, and are not on the list of priority debts.
A Chapter 13 plan may pay unsecured debts anything from 0% of what you owe them to 100%, depending on the circumstances. In fact, you may well hear your plan be called by the percentage it is set to pay the unsecured debts beyond what your secured and priority debts are paid, such as “your 10% plan.”
How much your unsecured debts are paid in each case is relatively complicated to determine, because it involves many factors, especially what you can afford to pay to all your creditors based on your income and expenses, and how much of that you are paying go to your secured and priority debts. You might sometimes also be required to pay a certain minimum to your general unsecured creditors based on assets you are protecting or other factors.
Somewhat Flexible Rules
The beauty of Chapter 13 is in the fact that you have to follow a rather intricate set of rules but that there is a certain amount of flexibility in those rules. The rules give structure to a Chapter 13 plan, the flexibility can help make it work in ways that fit your unique personal circumstances. We’ll make more sense of this with our next few blog posts that get into the details of how Chapter 13 can help you with your special debts.
The sentence we started with is:
A Chapter 13 case usually requires a 3-to-5-year payment plan, in which you pay your secured, priority, and general unsecured debts according to a detailed set of somewhat flexible rules.
The translation is:
The “adjustment of debts” type of consumer bankruptcy requires and allows you to favor certain creditors, those you likely need or want to pay, over other creditors, in a way that can solve a variety of debt problems much better than Chapter 7 can, often making the extra time it takes highly worthwhile.