A chapter 13 bankruptcy repayment plan is not designed to be easy but it is almost always worth the effort. This is due to the fact that a person who files a chapter 13 bankruptcy case (aka the debtor) gets to keep all of their property, is protected from the direct collection efforts of their creditors (absent limited circumstances), and usually pays back only a fraction of their debt before receiving a discharge of any remaining debt at the end of the plan.
A chapter 13 bankruptcy case is often an advantage to file over a chapter 7 case in that it allows the debtor to pay back, and get caught up on, certain debts such as past-due taxes, alimony, child support, car payments, and mortgage payments. Accordingly, a chapter 13 bankruptcy can enable the debtor to avoid a home foreclosure or car repossession by allowing the debtor to get caught up on car and home payments during the course of their repayment plan. Furthermore, a chapter 13 bankruptcy allows debtors to discharge certain debts that they would not be able to discharge in a chapter 7, such as civil fines/penalties, marital property settlements and debts, and willful and malicious damage to another’s property, for example.
But, is a chapter 13 plan affordable, and how financially restrictive is it? Debtors who earn over the Minnesota State median income (based on household size) must commit to a 60 month (5 year) repayment plan. Debtors who earn under the State median income are permitted to be in a plan lasting for as little as 36 months, and for no longer than 60 months. Often times, under-median debtors elect to be in repayment plans exceeding 36 months to ensure that all debts that need to be fully-paid in the plan (i.e. past due taxes and mortgage payments) are covered. Debtors must agree to contribute all of their disposable income into their chapter 13 repayment plan. A debtor’s disposable income is the income that they have left, each month, after paying their normal monthly expenses. Essentially, this requirement ensures that the debtor makes their “best effort” to pay all of the money they can afford into their repayment plan. So, for example, if a debtor’s take home pay, after deductions is $1,800, per month, and their regular monthly expenses total $1,500, per month, their disposable income is $300, which will be their monthly payment during the life of the chapter 13 plan.
The debtor lists all of their income, including income deductions, in Schedule I of their bankruptcy Petition. The debtor must list all of their regular monthly expenses in Schedule J of the same Petition. After they file their Petition, which commences their bankruptcy case, the trustee will review the debtor’s Petition and accompanying Schedules to ensure that the debtor’s income is correctly calculated and that their expenses are reasonable. If the trustee thinks that the debtor underestimated their income or thinks any of their expenses are unreasonably high, the trustee will likely request that the debtor amend their Petition and Schedules accordingly, and the Debtor may have to pay a bit more into the plan. For example, if a debtor, who is a single father with only one dependent child, claims a monthly food expense of $1,200 per month, the trustee will likely say that this expense is a few hundred dollars too high for two people, and may demand that the debtor amend to reduce that expense to allow for more money to pay to the debtor’s creditors instead. Drafting a chapter 13 plan accurately calculating income and appropriately listing reasonable expenses can be challenging, which is a good reason to seek the assistance of an experienced bankruptcy attorney when filing a chapter 13 bankruptcy case.
Most of the expenses listed in Schedule J are regular expenses, such as food, mortgage rent/payments, car payments, child care expenses, insurance payments, out-of-pocket medical expenses, and etc. that are necessary for the debtor’s basic needs and maintenance. This does not mean that you are not allowed to spend any money on “fun stuff.” There is a place in Schedule J for “entertainment” expenses. Generally, trustees don’t like this amount to be more than a few hundred dollars, but it is understood, that the debtor has the right to purchases some items, which are not essential, and engage in recreational activities, in moderation (i.e. buying nosebleed tickets for you and your buddy to the St. Paul Saints game for his birthday). Once the trustee agrees to your plan, it will subsequently be confirmed, or approved, by the bankruptcy court. Thereafter, so long as you continue to make your monthly bankruptcy payments, and remain frugal with your money, you can splurge a bit on the fun stuff, here and there, without causing any issues in your chapter 13 bankruptcy case. It is, however, a good idea for a debtor to save up any extra money they can just in case they need it in the future to avoid falling behind on bankruptcy payments.
Before the repayment plan is approved by the trustee, and confirmed by the court, the trustee will often request additional documents such as paystubs, bank account statements, receipts, and etc., to verify your income and expenses. After the court confirms the plan, there are usually very few requests from the trustee for further documentation. As stated, the debtor is generally allowed to do as they please with little, to no, supervision/intervention by the court or trustee so long as the debtor continues to make their payments. The court and trustee handle far too many cases to afford the time to continually scrutinize and micromanage your ongoing spending habits. Again, this does not mean that it is wise to spend recklessly after one’s bankruptcy plan is confirmed, even if you think you will still be able to make the monthly payments. A little savings goes a long way and one never knows when it will come in handy, as unforeseen expenses can always arise, which may jeopardize your ability to stay caught up on your bankruptcy payments. A debtor who falls behind on bankruptcy re-payments, particularly if it’s habitually, is at risk for having their case dismissed by the court, and must file all over again to regain the protection of the bankruptcy court from creditors.
It is also notable that, contrary to popular belief, debtors are allowed to take out debt and obtain ordinary consumer financing even while in their chapter 13 case. The Courts have specifically stated that this is true and have held that debtor’s do not need permission from the court or trustee to obtain financing for personal loans, car loans, credit cards, and etc. However, despite this freedom, it is wise for a debtor to speak with their bankruptcy attorney before incurring large debts during their chapter 13 bankruptcy case, such as for a mortgage or large car loan, to ensure they can afford to make the monthly re-payments and continue to simultaneously make their monthly bankruptcy payments. Debts incurred after the debtor files their case remain the responsibility of the debtor and are not included in the debtor’s bankruptcy discharge. Sometimes, when the debtor takes on new debt, their repayment plan may require a modification of their plan payments in order for them to also continue to afford to pay their newly-acquired debt. In these circumstances, the debtor must specifically request permission from the court to modify the plan payments. If the expenses necessitating modification are reasonable, such as for a reliable new car, the modification will be usually approved by the trustee and the court.
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There are numerous legal requirements that must be met before a debtor’s chapter 13 repayment plan can be confirmed by the bankruptcy court. Additionally, drafting a plan in a manner that meets these requirements while also remaining affordable to the debtor can be a bit difficult and complex. For these reasons, a person considering filing for a chapter 13 bankruptcy should first consult with an experienced bankruptcy attorney. See us at LifeBackLaw.com!