Understanding Chapter 13 Bankruptcy Payment Plans

What Exactly is a Chapter 13 Payment Plan?

When you file for a Chapter 13 bankruptcy, you’re making plan to maintain ownership of your assets while paying off your debt to creditors over time. But not all debt is the same…and what if you can’t make your payments on time? We decided to answer some common Chapter 13 questions that our clients often have in this post.

The Payment Plan

When you enter Chapter 13 bankruptcy, you are paying creditors out of your income in order to keep your assets. To do this, you and your bankruptcy attorney will submit a plan to the court explaining how much you can pay and how you will make payments. Think of this as an outline of how you plan to get out of debt. The payment plan is usually created in monthly installments over 3-5 years. While some plans require  100% repayment of debt to your creditors, it is possible that your plan will cover far less than what you owe, and without the painfully high interest rates. Once the payment plan is completed, you are discharged and free from the burden of crippling debt.

Common Types of Debt in Chapter 13

One thing you will find out when you begin the bankruptcy process is that not all debt is created equal. The bankruptcy code puts different levels of emphasis on different types of debt. This will in turn affect your Chapter 13 bankruptcy payment plan. The major classifications are secured debts, unsecured priority debts, and general unsecured debts.

Secured debts are backed up by collateral – a.k.a your assets – and if you cannot pay them the creditor can reclaim that collateral and sell it to get their money. Some good examples of secured debt include home mortgages and car loans (for more information on secured debt in relation to Chapter 13 bankruptcy, read our earlier post on this topic).

Unsecured priority debts are not backed by collateral, but the bankruptcy code has given them priority over other unsecured debts. This usually means that the court will want you to pay these debts in full during your Chapter 13 repayment plan. Unsecured priority debts can include overdue child support and alimony, and income tax debt.

General unsecured debts are not collateralized, and they are not prioritized. These debts are low on the list of importance, and can include credit car debt and medical bills. This kind of debt is the most flexible, as creditors will work with you to secure your best percentage of payment.

Missing Chapter 13 Payments

If you cannot make payments as defined by your Chapter 13 payment plan, your bankruptcy case may be involuntarily dismissed. However, the court is not out to get you – if you act properly you may be able to modify your repayment plan and stay on the path to getting your debt discharged. They understand that life is full of challenges and changes like illness or unexpected job changes. You can ask to modify your payment plan after it is filed and before it is confirmed by the court (confirmation can take several months). If your plan has been confirmed and you find that you cannot make the payments, you can also work with your bankruptcy attorney to file a motion to modify the plan. You will most likely need to explain your reasoning for the changes and provide proof that circumstances have changed. If the court is satisfied your plan can be changed to something more manageable.

Every case is unique, and it is best to work closely with your attorney to see if a payment plan modification is possible. If you have questions about Chapter 13 bankruptcy and how it can help you, call the Law Offices of Bruce Feinstein, Esq. today for a Free Consultation.