Explaining Chapter 13 Repayment Plan

Chapter 13 Repayment Plans

A Chapter 13 bankruptcy is a reorganization of somebody’s debt, in Chapter 13 bankruptcy the debtor, which is what we call the person who has filed the bankruptcy, is required to make regular monthly Chapter 13 payments for a set time.

There’s a minimum amount of time that those payments must be made, and in general, the maximum time is 5 years.

With the CARES Act some cases we’ve been able to extend to 7 years, but in a typical existence, it’s somewhere between 3 and 5 years that you’ll be making those Chapter 13 plan payments.

How Are Chapter 13 Repayment Plans Made?

It takes an attorney who knows what they’re doing, a plan is calculated by balancing what has to get paid, and it needs to be paid in full before your plan is discharged.

Those would be things like some taxes or if you’re in Chapter 13 plan to cure your mortgage or rear edge, so there are things that must get paid, and then there are some things that can get paid and that would be things that are based on a debtor’s budget.

We factor in what you can afford to pay, some plans will repay unsecured debt like credit cards and medical bills, it will repay those in full, but most of them do not.

Most of them will pay a portion of that and then the rest gets discharged at the end of your plan period.

Some get paid pennies on the dollar, but whatever doesn’t get paid at the end of the plan will get discharged usually, and there are exceptions like student loans.

How Can Chapter 13 Help With Foreclosure?

A foreclosure is a particularly scary thing to be facing if you’re about to lose your home, then you want something that has a really powerful effect and an immediate effect, a bankruptcy does that.

We’ve talked about the automatic stay which as soon as the bankruptcy is filed, prohibits any further collection action.

A foreclosure is a kind of collection action, so if you are behind on your mortgage payments then you can file bankruptcy, and then you have up to 5 years to catch up on those mortgage payments.

The nice thing about bankruptcy is that you have those mortgage arrearages that you’re paying with no penalties and at zero interest.

Oftentimes people will try to modify their mortgage and then that arrearage gets wrapped back into your loan.

Sometimes the loan gets extended to 40 years, and then all of that also gets re-amortized, so you’re actually paying interest on the arrearage, but with bankruptcy, it isolates that arrearage amount, and then you pay that back over 5 years in addition to your ongoing mortgage payments and people get caught up and then you’re out of foreclosure.

The same thing goes with tax debt, if you have a tax obligation that you must repay it does have to get paid in full by the time you’re out of the bankruptcy, but you’re repaying it and not accruing any more interest, no more penalties from the taxing authority.

It is the same with child support, it has to be all the way caught up by the time you’re at the end of your bankruptcy, but it gives you a structure to do that, that’s accepted by the child support division, by the taxing authority, by the mortgage company so it’s a really powerful tool to help you in those very scary emergencies.

Is Bankruptcy A Tool?

There is no shame in filing bankruptcy, you are using a financial tool, it’s in the old testament, it’s in the constitution, you are using a tool that you are 100 percent entitled to use so that you can get back on your feet.

No one wants you to live in fear, no one wants you to live in poverty, this is a way to get back on your feet where it may last years and years, now we’re just looking at 3 to 5 years, and then it’s done, then you’re ready to move forward with your life.

The experts have been wrong for the past 18 months or so, but we might be facing a foreclosure crisis because there has been a moratorium on federally backed mortgage payments.

We don’t know how those are going to play out now that moratorium is going to be lifted or has recently been lifted, we don’t know if the lenders are going to be forgiving or if they’re going to say: you know those 48 months of payments you were supposed to be paying they’re due tomorrow, so we could be facing a crisis with foreclosures.

What If I Can’t Pay A Chapter 13 Payment Plan?

So many things can happen in 3 to 5 years, your business might go under, you might get covered and you can’t go to work for a few weeks, the nice thing is that there is a structure in place when those kinds of things happen, you don’t get an ax thrown at you the minute that you’re late.

The courts, the Chapter 13 trustee here in Austin is great, everybody understands that, and so there are some mechanisms in place to catch up on a missed payment, usually, you can just make arrangements to repay that over time.

Let’s say that you missed a payment and for the rest of your plan you increase the future payments so that you’re caught up by the end, you can’t just forgive it, you can’t just say that’s okay, don’t pay it, but there are ways that you can catch up.

There are no late fees or interest associated with Chapter 13 plans.

What If I Lose My Job During My Chapter 13?

If you lose your job and you truly have no hope of getting another job, and you’re not going to make any further payments, then you have a couple of options.

Eventually, when the trustee doesn’t see any payments coming in, they’re going to ask the court to dismiss your case.

If your case gets dismissed then you might consider refiling if you have another job ready to go, if you’ve gone too long without work and you can’t make your current Chapter 13 case work out with whatever mechanisms are in place to help you with that, it might be a good idea to just let that one go and then you can refile your Chapter 13.

There are a few more steps that you have to do in that case, but it’s an option for you if you do regain employment or have other regular monthly income.

In some circumstances you can ask for what’s called a hardship discharge, this is reserved for people who may be facing a catastrophic illness, or their spouse has passed away, and you’ve had a drastic reduction of your household income.

We had two cases years ago where our client actually passed away and that is a hardship if you’re buried then you can’t be making your plan payments, and post-mortem we were able to go to the court and ask for a hardship discharge, so there were no issues with the debt after they passed away and their estate was being managed.

How Do Chapter 13 Creditors & Trustees Get Paid?

The plan payments go to Chapter 13 trustee, so usually if you’re employed in our district most plan payments are made by what’s called a voluntary wage deduction, it’s not a garnishment, it’s a voluntary wage deduction to a certain extent.

It has to be done that way, so those payments go directly to the trustee, then they get paid by taking 10 percent of that amount that comes in just right off the top.

The rest of the funds that come in it is their job to distribute to the different creditors, now the amount that they send to each creditor is going to depend on what’s laid out in the plan that’s submitted by the debtor, the person who filed the bankruptcy, and then that plan gets confirmed by the court.

If for example, the Chapter 13 plan has you catching up on a mortgage or marriage, they are going to make the regular monthly mortgage payment that’s a set amount, but if there is money left over to pay credit card bills, medical debt, if there’s any money left over to pay that, then everybody in that basket of unsecured debt, they all get the same pro-rata amount so everybody will get 10 cents on the dollar, 60 cents on the dollar, or zero cents on the dollar, it’s whatever the plan dictates.

Now for a creditor to get paid, they have to file a claim with the court, so just like if you get into a car accident and you want your insurer to pay for those car repairs from that accident, you have to submit a claim to your insurance company.

The same goes for creditors if they want to get paid in this plan, they have a limited time where they can submit a claim.

Let’s say you have a doctor’s bill that’s a thousand dollars, your doctor’s office will have to submit a claim to the court, and then the trustee knows how much is owed and how much to pay them based on that.

If they don’t submit a claim, they can’t come back later for payment, it’s you use it or you lose it.

Are There Benefits To Finishing A Chapter 13 Early?

When you file your case you are given what’s called a minimum commitment period, and that’s going to be either 3 or 5 years, that is based on your income, if you are below the means, you’re usually going to have the means test, then if you have on the lower end of your income, your minimum commitment period is going to be closer to 3 years.

If you’re above means it’s going to be 5 years.

If you want to pay your Chapter 13 plan off early, if you do it before your minimum commitment period, the danger of that is that you will automatically have to pay all of your creditors everything they owe.

You have to pay 100 percent and, unusually, plans are 100 percent plans, so financially it makes more sense for you to stay on that plan and make that plan payment for the minimum commitment period so that you can benefit from the discharge of the debts at the end of that plan.

Do I Have To Keep Paying All Of My Bills During My Chapter 13 Plan?

The bills that you will stop paying are your credit card bills, the old medical bills, things like that.

You do have to keep up with your regular household expenses, you want to keep the lights on, so keep making that electric bill, keep making your gas payment, keep paying your phone bill, your homeowner’s insurance, or your renter’s insurance, all of that you still need to pay.

Whatever is reasonably necessary to keep you afloat is what you want to keep paying, the other stuff that’s addressed in the Chapter 13 plan, don’t pay those, because it’s addressed in the plan payment.

My Repayment Plan Is Not Ideal, Is It Too Late To Change It?

Not, 5 years is a long time, if you want to get some legal advice halfway across the ocean do it.

You do want to be careful though, not all bankruptcy attorneys are willing to take your case mid-plan, not all bankruptcy attorneys are very well versed with Chapter 13s, and not all bankruptcy attorneys even do Chapter 13s.

Make sure you do some shopping around, make sure it’s somebody who has good experience calculating these plans, it’s kind of a science and art to calculate these Chapter 13 plans.

The other thing is that you may be expected to pay your attorney upfront, if you are in a Chapter 13 plan where all of your leftover money is going towards your planned payment, you probably don’t have a lot of disposable income sitting around in a savings account to be able to pay an attorney, so find out what their expectation is for payment.

Co-Signers & Bankruptcy

Your co-signer did not sign up for the bankruptcy, so they can’t be on the hook for the plan payment, it’s the person or the people that filed the bankruptcy that is responsible for the plan payment.

The nice thing about Chapter 7 is that as long as you’re making those plan payments your cosigner will not be pursued for payment on those debts, so unlike in Chapter 7 let’s say: my brother and I both cosigned on a credit card, and I filed bankruptcy then in Chapter 7, the credit card company could go to my brother for payment so I get discharged of that debt but my brother does not.

It’s not the same thing in Chapter 13, so, same situation: my brother and I both signed up for this credit card. I now have filed a Chapter 13 and I’m making my regular monthly plan payments, my brother is not on the hook for my Chapter 13 plan, and nor is he on the hook for the credit card, so even though he will also probably get shut off from being able to use it, but he’s not on the hook for paying it at this point.

Is Chapter 13 Affected By My Family?

It depends, let’s say just for the sake of this question that you’re married but your spouse is not filing the bankruptcy.

In general under those certain circumstances, no, your Chapter 13 plan payment will not affect them generally, but it could affect the success of your plan, it won’t affect their credit, it won’t affect their ability to borrow money in the future, or anything like that.

The way it could affect them is that if they live with you, if your adult children live with you and they’re contributing to household income, then their income could be used to calculate your plan payment, and any changes to their income, or if they move out and take their income with them, that could impact the success of your plan.

The same thing goes true for your spouse, if your spouse is not filing, we still have to calculate household income, but just like we were just talking about how a cosigner gets the benefit of the bankruptcy in Chapter 13, in Texas it’s a community property state, so all of your debts are also your spouse’s debts.

If you filed a Chapter 13, then your Chapter 13 payments protect your spouse from the collection as well.

Another way it might affect your spouse is that that household income situation, we have to calculate all household income minus your spouse’s separate expenses, so your household expenses are limited to what is reasonable and necessary, the way it may affect your spouse is that while you’re in bankruptcy, you’re not going on big vacations, she’s not gonna get the diamond tiara for valentine’s day this year, it could affect how your household normally runs, but it will not affect their credit.

What Information Is Needed For Chapter 13?

It’s the same information that you would give your attorney if you were filing a Chapter 7, all of your pay stubs are proof of income for the last 7 months, 2 or more years of tax returns, a list of all of your assets, and how much they’re worth, a list of all of your debts.

You’ll need a tax transcript for your most recently filed tax return, your attorney will ask you for all the odds and ends.

There’s some random stuff that you have to disclose, but disclosure is the key, it’s better to have more information than less.

We don’t want to give the appearance of any kind of hiding or collusion or anything like that.

Can I Buy A Car During Chapter 13?

We have talked before about how bankruptcy is not a financial death sentence, you can keep moving forward with your life and while you’re in bankruptcy yeah, your car might blow a gasket, you might drop a transmission in the middle of the highway, and then you need a different car, it’s not impossible.

The only thing is that if you’re going to borrow money for this car, you’re going to take out a loan, you’re going to incur more debt.

You need approval from the trustee’s office, so you will go to the dealership and you will start shopping around for a car, and they’re going to say we can sell it to you for this amount of money at this interest rate, then you come back to us, your attorney who communicates with the trustee, and we will ask for a letter of approval to take out this loan to buy the car.

The reason the car purchase is pretty streamlined, is it’s a very common circumstance that happens all the time, and we want you as a debtor, as somebody who has filed bankruptcy, we want you to have reliable transportation to get to that job so that you can make a monthly plan payment and be successful at that.

For good reason, it’s a well-covered territory in bankruptcy courts.

Does A Chapter 13 Changes If I Move To A New State Or Country?

It all stays the same, it would be a logistical nightmare every time somebody moved, even if you didn’t go across state lines, let’s say you moved to Dallas or you moved to Galveston, you’re in a different part of the state, which means you’re in a different judicial district, you’re in a different bankruptcy court, and it would just be awful to have to transfer case whenever that kind of thing happens.

We keep it local, the administration of your Chapter 13 case stays where it started, in Austin or the surrounding metropolitan area, and then we might send a wage deduction order to your new employer wherever that new employer is, even if it’s local, if it’s overseas it doesn’t matter.

You just have to keep us informed of where you are, make sure we still have an active phone number and a mailing address, and you’re still able to make those Chapter 13 plan payments, then sure go to whenever you have to, if it’s a wonderful opportunity go for it.

Chapter 13: Harmful Or Beneficial?

It can make your life a little bit more difficult in certain circumstances.

One is that if you need to move in the middle of your bankruptcy, it can be harder to rent a new place if you’re in active bankruptcy because they’re going to do a record search, and landlords are a little bit afraid of renting to somebody who’s in bankruptcy.

Once your bankruptcy is over it’s a different story, but it can be hard to get approved for rentals.

The other thing that might come up is that if you’re going to school while you’re in a Chapter 13 bankruptcy, and you need to take out student loans every semester, not only could it be more difficult to get approved by the lender for taking out student loans, you also just like with the car, you need court approval to take out any kind of loan while you’re in bankruptcy.

Student loans, renting a new place in the middle of bankruptcy, those two things can be a little more difficult.

Can Businesses File For Chapter 13?

Chapter 13s are not available for businesses, they’re only for individuals and families.

The Chapters that are available for businesses are going to be a Chapter 7, which would be more of a liquidation type of bankruptcy, or a Chapter 11, which is the big giant that you hear all kinds of different companies filing for, and then there’s a subsection kind of a new bankruptcy, that’s a sub Chapter 5 which is for small businesses, it kind of streamlines the Chapter 11 processes, but a Chapter 13 is simply for individuals and families.

Can I Appeal A Chapter 13 Dismissal?

You can appeal it but you have to have grounds to appeal it, you would have to be able to identify that there was some error in the decision to dismiss a constitutional problem, or a miscalculation or something there was some error in the decision to dismiss.

Appeals are pretty rare in bankruptcy, they’re very expensive and people in bankruptcy generally don’t have a lot of income left over to fight legal battles, unfortunately.

The better solution might be if you’re able to refile a new Chapter 13 case rather than appealing it, you only want to appeal something if you think a decision was very wrong.

Can I File For Another Chapter Instead Of Chapter 13?

If you qualify, you could, if it’s been more than 8 years since you filed a Chapter 7 and you’re under means, you could file a Chapter 7.

You would want to consider why you filed a Chapter 13, to begin with, Chapter 7 won’t help you catch up on old taxes, it won’t help you catch up on mortgage payments, but if you’re okay with letting your house go, then maybe a Chapter 7 would be a better option.

Usually, what we see is people refiling Chapter 13.

The only situation where it might not be a good idea to file a Chapter 13, is sometimes if you’re a repeat filler, the court in its motion to dismiss your case.

Sometimes they’ll say that you cannot file again for another 6 months or another 12 months if you’re a repeat filler but barring that situation, you can usually take another bite at Chapter 13.

What Happens At The End Of Chapter 13?

You get discharged, you file your second class that we’ve talked about before, there are a couple of online classes you have to take, you sign a certification that you’re currently on any child support obligation, and then you send Austin Bankruptcy Lawyers a box of chocolates and you move on.