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Chapter 13 Bankruptcy, often referred to as a wage earner’s plan, permits individuals with a steady income to develop a plan to repay all or a portion of their existing debts. Unlike Chapter 7, which liquidates assets to pay debts, Chapter 13 focuses on allowing debtors to keep their assets while making manageable monthly payments to creditors over a period of three to five years.
The cornerstone of Chapter 13 is the repayment plan, a document outlining how much you will pay each creditor, including mortgage arrearages, car loans, and credit card debt. In this post, our Massachusetts bankruptcy attorney discusses the specifics of this repayment plan.
Understanding Chapter 13 Bankruptcy:
When working through the Chapter 13 process, you and your attorney will propose a repayment plan allowing you to make installment payments to creditors over the course of three to five years. Federal law, specifically 11 U.S.C. § 1322 and 11 U.S.C. § 1325, provides the foundation for creating a feasible repayment plan, ensuring it’s fair to all parties involved.
Let’s break down these sections from the United States Bankruptcy Code in a way that’s easier to understand.
11 U.S.C. § 1322(a) – Requirements for a Repayment Plan
Under Chapter 13 bankruptcy, when you file for bankruptcy, you must submit a plan for how you intend to pay back your debts over a certain period. Section 1322(a) outlines what this repayment plan must include:
- Paying Priority Debts in Full: Priority debts are certain types of debts the law considers more important than others. These typically include things like back taxes, child support, and alimony. The repayment plan must arrange to pay these debts in full. In other words, if you owe money for these types of debts, your plan can’t shortchange them.
- Regular Payments: The plan must offer regular payments to the bankruptcy trustee. This can be weekly, bi-weekly, monthly, etc., based on your income and ability to pay. The trustee then distributes these payments to your creditors following the plan’s terms. This means you don’t pay the creditors directly; you pay the trustee, who then pays the creditors for you.
11 U.S.C. § 1325(a) – Confirmation of the Repayment Plan
Once you submit a repayment plan, it’s not automatically accepted. Section 1325(a) details the criteria for the court to approve (confirm) your plan. The court looks at several factors to ensure the plan is fair and feasible:
- Feasibility: The court needs to be convinced that you’ll be able to make the payments you’re proposing. If your income isn’t stable or high enough to cover the payments, the court might not confirm the plan.
- Best Interest of Creditors: Your plan must pay unsecured creditors an amount equal to or more than they would have received if your assets were liquidated under Chapter 7 bankruptcy. This ensures that creditors are not worse off because you chose Chapter 13.
- Good Faith: The plan must be offered in good faith, meaning you’re not trying to manipulate the bankruptcy laws to your unfair advantage.
- Legal Compliance: The plan must comply with all the legal requirements of Chapter 13, including paying priority debts in full and following the guidelines for payment amounts and durations.
- Disposable Income: The plan must apply all your projected disposable income (the money you have left after paying necessary living expenses) to the repayment plan for at least three years (or up to five years under certain conditions).
In essence, these sections ensure that if you’re filing for Chapter 13 bankruptcy, you have a structured plan that’s fair to everyone involved: you get a manageable way to pay off your debts over time, and your creditors get a fair share of what you can afford to pay.
Tips for Staying on Track
Once your plan is approved, sticking to it is crucial. Here are some tips to keep you on track:
- Automate Payments
- Adjust Your Budget
- Communicate with Your Lawyer
Get Help From a Massachusetts Bankruptcy Attorney Today
Navigating bankruptcy laws can be tricky. Consulting with a bankruptcy attorney can provide clarity and ensure that your plan meets all legal requirements. With the right preparation, knowledge, and support, you can create a repayment plan that complies with federal laws and sets you on a path to financial stability. Contact us today to schedule a consult.