How Are Chapter 13 Bankruptcy Payment Plans Determined?
When determining a Chapter 13 payment plan, the debtor’s income, cost-of-living expenses, total debts, types of debts, and value of owned properties are considered. The plan must also include expected bonuses, pay increases, or reductions in pay because of seasonal work. This allows the creation of a plan where the payment amount may increase or decrease each year, every six months, or every month.
Creating a Chapter 13 Payment Plan
A payment plan must be created and filed with the court within 14 days of filing for a Chapter 13 bankruptcy. The judge and the debtor’s creditors will review and could possibly challenge the plan if they consider the payment amount too low.
When detailing debts on a payment plan, they are split into three categories:
- Priority debts, which are debts that must be paid off while the plan is in effect and can include back taxes, child support, alimony, and the costs for filing for bankruptcy
- Secured debts, which are those that are backed with collateral such as a home mortgage or car loan that may require full payment of the debt or payment of the value of collateral by the end of the plan
- Unsecured Debt, which is debt from medical bills, unsecured personal loans, and credit cards that may or may not be paid in full before the payment plan ends and could be discharged, instead.
Understanding the Chapter 13 Means Test
Debtors need to undergo a means test to determine what the Chapter 13 payment will be. This is done using two forms, Form 122C-1 for determining average monthly income and length of plan, and Form 122C-2 that determines how much disposable income is available to pay back creditors.
If the debtor’s average monthly income is under the state median, then the repayment plan will be spread over three years. If the income is equal or greater to the state average, the plan could cover up to five years.
Consequences for Not Following Approved Payment Plans
When debtors miss or stop making payments, they jeopardize the protections provided in their Chapter 13 bankruptcies. The court could move to dismiss the bankruptcy case. Meanwhile, automatic stays can be lifted, and creditors can actively begin to move forward with collection attempts on owed debts, including foreclosures, repossessions, liens, and wage garnishments.