In a Michigan Chapter 13 bankruptcy case, you partially or fully repay your creditors through a Chapter 13 payment plan. That is, you make monthly payments to your creditors through the US Bankruptcy Court in Detroit, Flint, or Bay City. The amount of each payment is based upon your net available income each month, on a household basis.
What does that mean, exactly? We’ll explain. But, first, some basics regarding Chapter 13 bankruptcy in Metro Detroit.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy works differently than Chapter 7 bankruptcy—and it has a different purpose.
The purpose of a Chapter 7 “liquidation” bankruptcy is to discharge debt without any direct payment by the debtor filing the bankruptcy case.
To the extent that creditors receive any payment at all in a Chapter 7, it is because the Chapter 7 Trustee assigned to the case seized and liquidated (sold off) non-exempt property to make that payment.
In a Chapter 13 bankruptcy, no property is ever liquidated or sold off.
Instead, in a Chapter 13, you make a payment every month for 3-5 years to the Chapter 13 Trustee assigned to your case by the US Bankruptcy Court.
You do not, for the most part, pay any creditor directly while in a Chapter 13.
Creditors receive payment only from the Chapter 13 Trustee, who will disburse funds to them from your monthly payments.
How does the Chapter 13 Trustee know how much to pay to which creditors and in what order?
They disburse funds according to the Chapter 13 Bankruptcy Payment Plan that you draft with your bankruptcy lawyer and file with the court.
Chapter 13 is a “payment plan” bankruptcy.
How Much Do You Pay Each Month In Chapter 13 Bankruptcy?
First, the #1 question asked by all potential Chapter 13 clients: How much will my monthly Chapter 13 Plan payment be?
The answer to this question will be different for everyone.
Your Chapter 13 plan payment is, essentially, the difference between your household’s take-home pay and your household’s total average necessary expenses.
“Household” means that your spouse’s income (and that of any other contributors) is included in the calculation along with your own, even if your spouse is not filing the Chapter 13 jointly with you.
Luckily, your spouse’s own expenses are also considered.
Thus, for example, if your total household “take-home” (after deduction) pay is $2,000 per month and your household has total average necessary expenses of $1,800 per month, your Chapter 13 Plan payment is going to be $200.00 per month.
If your total average household income is $10,000 per month with the same level of expense, your Chapter 13 plan payment would be $8,200 per month.
Most Chapter 13 plan payments are nowhere near that level, of course.
The Chapter 13 Bankruptcy Payment Plan Defined
So what exactly is the Chapter 13 Payment Plan?
In short, it is a document that you draft along with your bankruptcy lawyer according to rules from the US Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the Local Bankruptcy Court Rules of the Eastern or Western District of Michigan Bankruptcy Courts.
The Chapter 13 Payment Plan is filed with your bankruptcy petition to initiate your Chapter 13 bankruptcy case.
The Chapter 13 Plan essentially states how much you are intending to pay each month (see above) and which creditors are to be paid how much of that money and in what order.
In addition, the Plan provides:
- The number of months through which you will be making payments;
- Whether or not your tax refunds will be turned over to the Chapter 13 Trustee;
- Whether or not you have any non-exempt assets that require your Chapter 13 Plan payment be higher than the basic “income minus expenses” formulation described above.
- And whether or not you are stripping off a 2nd or 3rd mortgage, cramming down the value of an automobile or other secured loan, or doing any of the other interesting things that can be done in a Chapter 13.
Chapter 13 Creditor Payment Priority
In the Chapter 13 payment plan, debts are paid in a priority order.
- Administrative Expenses
First to be paid are the so-called “administrative expenses” of the case. These are the fees charged by your Chapter 13 Trustee and by your bankruptcy attorney.
Anything you do not pay in advance retainer to your attorney is paid through your Chapter 13 Payment Plan a high priority administrative expense.
The Chapter 13 Trustees’ fees are percentage-based. Depending on which Trustee you draw and in which Michigan bankruptcy jurisdiction, the percentage will be anywhere from 7% to 9.5%.
- Secured Creditors
Next to be paid are your secured creditors.
These are your mortgage, auto loan, boat loan, and other creditors to whom you have pledged some property (such as your home or car) as collateral guaranteeing repayment of the loan.
If you do not pay these loans, the creditor can foreclose on the home or repossess the car, and so on.
Ongoing mortgage and other secured payments are paid in first priority in the Chapter 13 Payment Plan.
If you are behind in your mortgage and other secured payments, you can pay the arrearage off at 0% interest (usually) over the life of the Chapter 13 Plan at this same level of priority.
- Contract and Lease Obligations
Contract and lease obligations are paid at the next level of priority—including, again, arrearages and deficiency amounts.
- Priority Unsecured Creditors
Next to be paid are the so-called “priority unsecured debts.”
Priority unsecured debts are those debts which are not “secured” by collateral but which are classified as “more important” by the US Bankruptcy Code.
These include child support arrearages, spousal support arrearages, recent Federal and Michigan State tax debt, wages owed to former employees, and others.
- Non-Priority Unsecured Creditors
Finally, last to be paid are non-priority unsecured creditors.
These debts include credit card debt, medical debt, deficiency debts resulting from prior foreclosures or repossessions, back rent for former rental residences, civil money judgment awards, and more.
The “typical” debt that drives most people to consider filing for Chapter 7 or Chapter 13 bankruptcy fits into this spectrum.
Non-priority unsecured creditors are paid only whatever is left over after all of the higher priority creditors and expenses are paid from your specific monthly Chapter 13 Plan payment.
In most cases, this means that unsecured creditors are paid little to nothing toward what is owed.
Chapter 13 Payment Plan: Binding On All Parties
The Chapter 13 Payment Plan, once filed, initiates the Chapter 13 proceeding.
However, simply because you’ve drafted and filed it, does not mean that other parties in interest must immediately comply with it.
The Chapter 13 Payment Plan is only binding on the parties to your case (you, the Chapter 13 Trustee, your creditors) once your Bankruptcy Judge enters an Order Confirming your Plan.
Until then, the initial, “pre-confirmation” phase of your Chapter 13 proceeding will involve the Chapter 13 Trustee and any creditors filing various objections to your Plan’s confirmation and your attorney’s negotiation and, as necessary, litigation over those objections.
It will generally take 4-6 months to confirm a Chapter 13 Payment Plan.
Once confirmed, however, it is legally binding on everyone. Including yourself.
If you lose your job and need to make changes to the Plan payment amount or other particulars, your bankruptcy lawyer must file a Motion in the Bankruptcy Court seeking a modification of the confirmed Plan.
Chapter 13 Payment Plans: In Conclusion
In conclusion, the Chapter 13 Payment Plan is a pleading like any other. It is a request to the US Bankruptcy Court for an Order approving your proposition to pay less of your debt than you owe.
As such, other parties involved in your case are entitled to response.
That response can be quite silent—or it can be a very loud, combative response. It all depends upon your particular circumstances and your particular creditors.
The bottom line is that, to maximize the odds of successful confirmation of your Chapter 13 Payment Plan and your Chapter 13 bankruptcy process, you need the assistance of an experienced Michigan bankruptcy attorney.
Bankruptcy Attorney John Hilla has successfully represented Metro Detroit Chapter 7 and 13 bankruptcy clients for over 16 years, providing premium customer service at affordable rates.
To schedule a free initial bankruptcy consultation, click the button below or contact us at (313) 380-0492.