The Chapter 13 payment plan is, essentially, a list of debts to be paid in a certain order, according to a certain timeline, and, in the case of the unsecured creditors at the bottom of the priority order, to a certain percentage of what was originally owed to them—anywhere from 0% to 100%.
- For more information generally on Chapter 13 bankruptcy, read here.
- For information on how Chapter 13 bankruptcy can help you save your home, read here.
The priority order of debts to be paid is fixed by the Bankruptcy Code:
- “Administrative” Costs: These are the Trustee’s percentage earned of the total paid into the plan by the debtor (currently around 8% in the Eastern District of Michigan), as well as the balance of Attorney’s fees not paid prior to filing. Unlike in a Chapter 7 bankruptcy, the majority of Attorney’s fees are paid through the Plan rather than up-front, and these fees are highly scrutinized by the Bankruptcy Court.
- “Secured” Debts, such as home loans and car loans, come next.
- Arrearages on secured debts are the next priority payment. Arrearages may be made up in a Chapter 13 plan and must be paid in full by the end of the Plan payment period. This is one of the advantages of a Chapter 13 bankruptcy over a Chapter 7, and it is one of the mechanisms through which a filing debtor may save a home or other property through bankruptcy.
- Contracts or leases, including rental leases, automobile leases, cell phone contracts, which may be “assumed,” or continued in a Chapter 13—or “rejected” and totally severed and discharged.
- “Priority” unsecured debts, such as child-support and IRS tax debt are paid next in line.
- Non-Priority unsecured debt, such as credit-card and medical bill debt, as well as personal loans to family members or friends and student loans, are paid last. Unsecured creditors received a disbursement only upon completion of the Chapter 13 Plan, and they only receive what is left after the other creditors are all paid their necessary amounts.
Chapter 13 Payment Plan Installment Amounts
The amount of the monthly Chapter 13 payment plan installment payment is simple: it is the entire net income of the entire household of the filing debtor—regardless of whether one earning member of the household is not also filing for bankruptcy. So, for example, if a debtor, together with a non-filing spouse, earn a net income of $2000 per month between them, and they share monthly household expenses of $1800, then the remaining $200 is what is paid into the plan each month.
The typical Chapter 13 Plan requires monthly payments for no longer than a typical car loan (and, given the proliferation of 72-month and longer car loans these days, often shorter).
Plan payments are typically automatically deducted from the filing debtor’s pay-check. If the debtor does not earn a regular paycheck, lives on Social Security or other non-traditional income, or earns cash income from tips, etc., an ACH draw each month on the individual’s bank account by the Trustee is the alternative.
Plan payments are made directly to the Trustee assigned to the case and are not paid directly to creditors, although it is possible to continue to make home mortgage, car loan, and other secured debt payments that will contractually continue beyond the length of the Chapter 13 Plan directly, outside of the bankruptcy.
Chapter 13 Bankruptcy is a complicated process, and it is essential that you retain an experienced bankruptcy attorney to assist you with it.
The Hilla Law Firm, PLLC is experienced with all aspects of the Chapter 13 Bankruptcy process and will work closely with you to draft a Chapter 13 Plan that will work for your family and your circumstances.