In Chapter 13 bankruptcy, individuals with regular income create a payment plan to pay back creditors named within the plan, instead of having all of their debts discharged right away. Here are some of the obligations and restrictions involved in a Chapter 13 repayment plan.
How the repayment plan starts
In a Chapter 13, the bankruptcy court appoints a trustee, who will hold your initial payment and fees until the court approves or denies your repayment plan. If the plan is denied, the trustee will return this money to you (minus the fees). If the plan is approved, the trustee will distribute these funds to your creditors according to your plan.
Once approved, you will make payments monthly or bimonthly to the trustee directly or through a payroll deduction for three to five years depending on the details of your plan. Generally you will begin making payments 30 days after you file Chapter 13.
What debts are included in the plan?
The plan should include the following:
- Administrative fees such as filing fees, trustee fees, and attorney fees
- Priority debts, which are debts not secured by collateral like child support or alimony arrears, back tax debt, overdue student loan payments, etc. These debts must be paid in full by the end of the plan.
- Arrears on secured debts such as mortgages, home equity loans, personal loans, car or boat loans, liens, etc. By the end of the plan, these debts must again be “current” or up to date for you to keep the property in question.
- Unsecured debts like credit card debt, medical debt, union dues, back rent, etc. which are paid out of your monthly disposable income minus expenses
What happens if I don’t make the payments?
The trustee can take action to have the bankruptcy dismissed if you miss your Chapter 13 payments. To avoid dismissal of your bankruptcy, you must continue to make payments according to the plan, avoid incurring new debt without first consulting the trustee, remain current in filing your taxes, and file annual income and expense reports.
If the court dismisses your case, creditors may once again resume attempts to collect the debt as well as any interest that has accrued.
How Chapter 13 helps
Chapter 13 bankruptcy prevents creditors from directly attempting to collect debts and charging interest on unpaid debts. It gives you a regular and consistent payment plan so you can repay some of your debts and begin to establish a good financial and credit record. A skilled bankruptcy lawyer can help you determine whether a Chapter 13 bankruptcy will help you get your finances back under control.