For those with crushing debt payments, bankruptcy can often bring immediate and meaningful financial and emotional relief. This is because of the legal mechanism called the “automatic stay.” The automatic stay prevents creditors from continuing to call or send letters or prosecute lawsuits or do anything else to continue attempting to collect debts.
Some debtors are eligible to file under Chapter 7 of the bankruptcy code, which results in discharge of qualified debts. Those individual debtors not eligible to file under Chapter 7 can file under Chapter 13 which requires the debtor to submit a repayment plan as part of their bankruptcy filing. The Chapter 13 payment plan is often confusing to debtors, so this article discusses some of the more important facts about the Chapter 13 payment plan. If you are considering a bankruptcy, you can discuss your options with proven and dedicated California debtors’ rights attorneys at Guardian Litigation Group. We also provide debt settlement services.
Like any other payment plan, a Chapter 13 payment plan involves monthly payments of a set amount for a given number of years (three-to-five years). The initial payment plan is drafted by you and your trusted California bankruptcy attorney. The initial plan is typically submitted along with your bankruptcy petition (but is required to be filed within 14 days after the petition is filed). The repayment plan must be approved by the court with the creditors being allowed to make comments or objections. If the court rejects the initial payment plan, then another must be submitted.
The first installment payment is due within 30 days of filing the Chapter 13 plan (even though the plan will not be approved yet). Failure to make the first installment and later installments can result in dismissal of your bankruptcy. That will allow your creditors to begin harassing you again to collect outstanding debts. The payments are made to the bankruptcy Trustee assigned to your case. The payments are “pass-through” in the sense that the debtor makes payment to the Trustee who then issues payments to individual creditors.
Calculating the monthly payment is complicated for several reasons. First, not all debts are treated the same. Some must be paid in full; others can be partially paid. Second, there is an income test involved, so debtors with higher income will be required to make higher payments. Third, there are legal methods of “splitting” debts owed to a given creditor into different categories, allowing the different “parts” to be treated differently under the plan. An example might be a tax bill which includes an amount for unpaid taxes and amounts for interest and penalties.
With respect to the debts, the bankruptcy rules divide debts into four categories:
- Administrative debts — these are fees that must be paid to the bankruptcy court including trustee fees
- Secured debts — these are debts where there is collateral securing the debt such as an automobile or a home
- Unsecured priority debts — these are debts which have no collateral supporting them, but are not generally dischargeable such as taxes and child support
- Unsecured non-priority debts — these are debts which have no collateral supporting them and are generally eligible for discharge such as credit cards, hospital bills, etc.
In simple terms, a Chapter 13 payment plan must pay — in full — the first three categories and provide some amount of payment for all creditors in the final category.
Taking a simple example, assume a hypothetical Chapter 13 payment plan of $2,000 as the monthly payment broken out as follows:
- $200 for administrative fees
- $500 for secured debts (car payment)
- $1000 for priority unsecured debts (child support)
- $300 for non-priority unsecured debts (about 10% due on several credit cards)
Assume also that the debtor has a personal residence with a mortgage. Here in California, the monthly mortgage can be paid directly. In our example, the debtor chooses to pay the mortgage directly and then writes one monthly check to the Trustee for $2,000. The Trustee retains various fees and forwards various amounts to creditors as per the court-approved Chapter 13 payment plan.
Contact an Experienced Debt Relief and Debtors’ Rights Attorney
For more information, contact the Debtors’ Rights attorneys at Guardian Litigation Group. We will fight for you. We can help with an individual creditor or a group. We can help if you need debt reorganization or debt discharge. We have the tools and experience you need. Our mission is to provide unparalleled legal services and support for those being crushed by their debts and harassed by their creditors. We can be reached via our contact page.