What is a Chapter 13 Plan?

What is a Chapter 13 Plan? A Chapter 13 Plan is a repayment plan you design in a Chapter 13 bankruptcy. It determines the payment schedule, who gets paid, and a number of other provisions. Every bankruptcy district has their own Chapter 13 Plan so we will provide specific information for each bankruptcy district, but here, we’ll talk about the general provisions of a Chapter 13 Plan. (There is a National Chapter 13 Model Plan, but most bankruptcy districts do not use this form).

Chapter 13 Plan Notices

A Chapter 13 Plan must provide certain notices to creditors. Form plans generally have check boxes asking three questions:

  1. Does the Plan limit the amount paid to any secured creditors?
  2. Does the Plan avoid a judicial lien?
  3. Are there any non-standard provisions?

A Plan limits the amount paid to secured creditors when you are attempting to pay the creditor less than the full amount. This happens in situations where you are trying to “strip a second mortgage” or “cramdown a car loan”. We’ll address these situations below. If you are using the plan for this purpose, you must notify the creditors.

Sometimes lawsuits (such as credit card suits) can result in a “judgment lien”. This is a lien that attaches to all property you own. You can use a Chapter 13 Plan to “avoid” (remove) the lien. If you are using the plan for this purpose, you must notify the creditors.

Non-standard provisions are anything custom that you place in your plan. Chapter 13 plans have a great deal of customization, but if you do elect to customize the plan beyond the normal form provided by the court, you have to notify the creditors that you are doing so.

Chapter 13 Plan Payments and Lengths

A Chapter 13 Plan must specify a payment schedule. Generally, a Chapter 13 Plan can last anywhere between 3 to 5 years depending on whether you are over or under median income, but there are exceptions where it may be shorter. You must specify your specific payment schedule in the Plan and the source of the payments.

Your payment schedule may be as simple as $100 per month for 60 months. It’s also possible to use funds from other sources though. For example, it is possible to say that you are going to pay $100 per month from your wages, but that you are going to commit $2,000 per year from a tax refund. We’ve also had clients fund plans using personal injury settlements or back payments from social security disability cases.

You may also elect to sell property to fund the plan. This is called a sale plan. We would use this in cases where a person had equity in property that they no longer need. They can sell the property through the Plan and pay certain creditors. In many cases, you can even keep most (or all) of the money from the sale after you pay the liens on the property.

Treatment of Secured Claims in the Chapter 13 Plan

A Chapter 13 Plan must “treat” every secured claim. Treating a claim simply means that you address it in the plan and explain what you’re doing with it. There are a number of ways you can treat a secured claim:

  1. Cure default on arrears
  2. Maintain payments (make direct payments to creditors)
  3. Pay the claim through the plan under modified terms
  4. Pay the claim through the plan in full
  5. Avoid a lien
  6. Surrender the collateral

We’ll address each of these below. Treating a claim does not mean you intend to pay it. Many times, we don’t pay secured debts. We simply need to explain exactly what is going to happen to the claim.

Maintenance of payments and cure of default

Sometimes we use Chapter 13 bankruptcy to catch up on missed payments on a mortgage or on a car loan. You can “cure a default” through the Plan. Even if the mortgage company may have refused payments prior to the bankruptcy, a cure provision in a Chapter 13 Plan forces them to accept your payments again. There’s a lot of power in a Chapter 13!

You also have the ability to “maintain payments” or make “direct payments”. That simply means that you are going to continue to pay the creditors under the same terms you had prior to the bankruptcy.

If you wanted to save your house from foreclosure we would “cure and maintain”. We would cure the default and then maintain payments to the mortgage company.

Payment of secured claims using modified terms

Some of the biggest magic in a Chapter 13 comes in the form of modifying the terms of secured claims. In many cases, we have the ability to save you money by modifying terms of your secured debts. Here are some of the common things we can do:

  • If you’re first mortgage balance exceeds the value of your house, we can “strip” (remove) a number of liens such as second mortgages, homeowner’s association liens, condo association liens, etc. Stripping the lien causes the debt to become a general unsecured debt.
  • If you purchased a car more than 910 days prior to filing the Chapter 13 petition, we can “cram down” the loan. That means we can pay the value of the car rather than the full balance of the loan. We can also modify the interest rate.
  • We can also cram down cross-collateralized loans. This normally occurs when you obtain loans through a credit union.

Unfortunately, you can’t modify a first mortgage in Chapter 13 (but you can modify a first mortgage in a Chapter 12 bankruptcy!).

Payment of secured claims in full through the Chapter 13 Plan

If you’d like, you can elect to pay secured claims in full through the plan. There are many reasons you may want to do this. For example, we can modify interest rates and payment schedules even if we can’t “cram down” a lien.

So even if you purchased a car loan within 910 days, we can spread the payment out over the life of the plan at a lower interest rate. In many cases, this reduces your car payment!

Another major reason you would want to pay secured claims through the plan is simplicity. We can take several loan payments and consolidate them into one plan payment. This makes your life easier and makes accounting easier. In some districts, you can even elect to pay your mortgage through the plan! This is called a “conduit payment”.

Lien Avoidance

Sometimes lawsuits (such as credit card suits) can result in a “judgment lien”. This is a lien that attaches to all property you own. You can use a Chapter 13 Plan to “avoid” (remove) the lien. Avoiding the lien in the Chapter 13 Plan causes the secured debt to become an unsecured debt. After your Chapter 13 discharge, the lien would be removed and the debt discharged.

Surrender of Collateral

Sometimes you may not want the property securing the debt. We see this in cases where a house becomes unaffordable. We also see it in cases with divorcing spouses. Maybe your spouse is keeping the house and there is no reason for you to keep paying the mortgage. You can walk away from the house (surrender) through the Chapter 13 plan.

We also see this in cases with broken down cars. Sometimes our clients get a “lemon”. The transmission breaks and it would cost thousands to fix it. If you decide the car isn’t worth fixing or isn’t worth paying anymore, you can surrender it through the Chapter 13 Plan.

Treatment of Priority Claims in the Chapter 13 Plan

Priority claims must be paid in full through the Chapter 13 Plan. Most plans ask that you specifically identify priority claims to be paid. Priority claims include your bankruptcy attorney’s fees, certain taxes, and domestic support obligations such as child support.

If you have significant amounts of unpaid taxes, we will first need to determine if those taxes are dischargeable in Chapter 13. If they are non-dischargeable, they are treated as priority debts and must be paid within the Chapter 13 Plan. In those cases, we would consider whether settling with the IRS prior to filing the bankruptcy makes sense. The IRS settles debts through an Offer in Compromise. If we’re able to settle your tax debt prior to filing the Chapter 13 bankruptcy, your Chapter 13 Plan payment may be lower.

Treatment of Unsecured Claims in the Chapter 13 Plan

There are a number of ways we can treat unsecured claims in a Chapter 13 Plan.

First we have to determine whether all claims will be treated the same or whether certain types of claims should be paid. For instance, some of our clients wish to pay on co-signed unsecured loans so that the co-signer is not held liable. In those cases, we treat the co-signed loans differently than other unsecured debt.

Next, we have to determine whether unsecured debts need to be paid. There are two things that determine this. The first is your income. If you are under median income, you do not need to pay any unsecured debts. If you are over median income and have no disposable income, you do not need to pay any unsecured debts. But if you have disposable income, you must pay your disposable income to unsecured creditors.

The second thing that determines whether you have to pay unsecured creditors is your non-exempt assets. If you have non-exempt assets, you may need to pay unsecured creditors at least in part. Typically, you would only have to pay money equal to the amount of non-exempt assets. Most Chapter 13 debtors do not have non-exempt assets so this is normally not an issue.

Treatment of Executory Contracts and Unexpired Leases in the Chapter 13 Plan

Executory contracts are contracts that haven’t been completely performed. Unexpired leases are leases in which you still have time left. You can elect how you wish to treat these contracts and leases. You can either assume them (which means keep them) or reject them. This allows you flexibility with regard to property leases or vehicle leases. If you want to turn in your car lease or break your residential lease, you can. If you want to keep them, you can. We just need to specify this in the Plan.

Vesting of Property of the Estate

You must specify in the Plan when “property of the estate” vests in the debtor. This is very complicated language which essentially tells when you get control over your property. Most of the time, the property vests upon confirmation of the Plan. That means that after the Plan confirmation. That’s why Plan confirmation is such a major step in the Chapter 13 process.

Sometimes, if you have non-exempt assets such as real estate, the Chapter 13 trustee may request that the property vest only upon discharge. This is an added level of protection for your creditors.

Order of Payments in a Chapter 13 Plan

Who gets paid first in a Chapter 13 Plan? You get to decide! You can specify within your Plan the order of payment! Generally, we pay in the following order since this is normally in the client’s best interest:

  • Level 1: Adequate protection payments.
  • Level 2: Debtor’s attorney’s fees.
  • Level 3: Domestic Support Obligations.
  • Level 4: Priority claims, pro rata.
  • Level 5: Secured claims, pro rata.
  • Level 6: Specially classified unsecured claims.
  • Level 7: Timely filed general unsecured claims.
  • Level 8: Untimely filed general unsecured claims to which the Debtor has not objected.

This allows for important debts such as Domestic Support Obligations and tax debts to be paid closer to the beginning and leaves less important (dischargeable) debts like your credit card debts at the end. That way, if for some reason you have to convert to a Chapter 7 bankruptcy, your non-dischargeable debts were paid first!

But if for some reason we need a different order, we can do that. For example, we’ve had cases in which the client needed us to have a car loan paid first so that he can get the title quickly. We’ve had cases in which clients needed the mortgage arrears paid first so that we can resolve a mortgage dispute. That’s why the payment order can be customized.

Nonstandard Plan Provisions

Chapter 13 plans are completely customizable. As long as you are not violating any provisions of the Bankruptcy Code, you can put custom language in your Chapter 13 Plan. We’ve used these provisions to do a number of things.