Frequently-asked questions about Chapter 13

What are the advantages of a Chapter 13 filing?

  • You can retain all property so long as you fulfill the terms of your plan
  • If you have an unincorporated business, you may continue to operate your business but include the business’ debts in your Chapter 13 plan
  • Some types of secured claims can be modified.  For example, if you owe $12,000 on a car now worth $9,000, you can reduce the amount owed $9,000 and pay it off over the life of the plan . . . so long as the car was purchased more than 2-1/2 years before your bankruptcy filing)
  • If you have multiple mortgages and your home is worth less than your first mortgage, you can use Chapter 13 to convert the additional mortgages to unsecured debts which don’t have to be repaid in full
  • Cosigners are protected by your automatic stay

The disadvantages?

  • You must pay a trustee’s commission of roughly 10% of the plan disbursements over the 3 or 5-year life of the plan
  • Attorney’s fees are higher for Chapter 13 than for Chapter 7
  • For the life of your reorganization plan, the bankruptcy court will review your financial life
  • If your income or assets increase during the life of your plan, creditors can seek increased payments
  • If you fail to make a payment, the trustee and creditors can seek to dismiss your case and thus block your discharge
  • Your plan must propose payments to your non-priority, unsecured creditors (credit cards, medical bills, lawsuit judgments, etc.) that are at least equal to the value of your nonexempt property.

What debts must be repaid in Chapter 13?

Priority claims are unsecured debts that must be repaid first in Chapter 13. Back taxes incurred in the last three years and child support arrearages owed to a child or ex (not a government agency) are the most common priority debts that must be paid in full.

Your Chapter 13 repayment plan must also provide that you will stay current on your secured debts that will last longer than your plan (e.g., mortgage). During the life of the plan you must also pay off any arrearages you owe.

All other secured debt must be paid in full under the plan. Examples are tax liens and car loans.

If you are incapable of paying these mandatory debts during your plan, you may have to give up some secured property on which you are making payments. Alternatively, you will need to reduce your living expenses.

What are the most common objections to repayment plans?

  • Your plan was not proposed in good faith
  • Your plan is not feasible
  • Your plan does not commit all your projected disposable income
  • You do not pay your creditors as much as they would receive in a Chapter 7 liquidation
  • Your plan does not properly treat creditors’ claims according to their priority

Secured creditors might also make minor objections to your plan: your proposed interest rate is too low, the schedule takes too long to pay your arrearage, or, if you are proposing a cramdown, that the value you assigned the collateral is wrong.

What is considered a reasonable expense during the life of a repayment plan?

The answer varies from debtor to debtor and court to court, but in general luxury items or services are not reasonable. For example, gardening services will be considered a luxury and thus not allowed. Loan payments for a luxury car will be reduced to the level of a standard car. Voluntary contributions to a retirement plan are generally not allowed unless you are approaching retirement age.