Five Year Chapter 13 Plan: Too Long?

The bankruptcy law changed in 2005 to require that people who make over their state median gross income pay five years of disposable income to their creditors in a Chapter 13 Plan. Prior to the law change, Chapter 13 debtors who had disposable income were required to pay as much as they could afford for a three year period. Now, only below median debtors can finish a Chapter 13 in three years.

In theory, having people make a substantial effort to repay their debt is a good idea, but the average person that I see in my office comes to me as a last resort and normally much further beyond the point that they should have sought legal help. By the time they meet with me, they have often put in several years trying to repay debt in an attempt to avoid bankruptcy.

Some have struggled with their debts for one, five, ten or even twenty years. Many have been in credit counseling debt management programs and paid in thousands of dollars, or they may have spent all their savings trying to solve their debt problems.

This means that many Chapter 13 debtors spend much longer than five years trying to pay their debts, and are years away from the fresh start promised by the bankruptcy laws.

Since people often wait until they are at wits end and exhausted, five years can seem like an eternity. The old requirement of three years at least allowed people to see the light at the end of the tunnel. In my opinion, five years on top of what people have already tried is too long for many people, and can seriously hamper their ability to get the fresh start sought under bankruptcy laws.

While it is important to repay debt, it is also important to allow people the ability live on a balanced budget and save for their future. During the time preceding bankruptcy, and also during Chapter 13, debtors can’t save for emergencies, retirement, or even home/car repair and replacement, or medical issues that most of us suspect will happen but can’t prove it to justify to the court the need to save.

The budget allowances that many courts accept for those categories don’t adequately cover anything large, and if something comes up the debtor is left unprepared financially. Debtors can sometimes convert to a Chapter 7, but it still leaves them without the means to pay for the event that came up.

I don’t believe that people should be able to walk away from debt easily, but at what cost do we make people put in additional efforts in bankruptcy? People filing for Chapter 13 will now likely spend closer to ten years trying to repay debt before they can resume a normal life, saving for emergencies, retirement, college for their kids, and other things many of us take for granted.

People who are able to save money will be able to take care of themselves if a problem comes up and they also have money to spend and put back into the economy. Who loses if we get people back to budgeting to save for purchases rather than financing them? Lenders. The same ones that are being paid back in Chapter 13 plans and the ones who lobbied for the 2005 bankruptcy law changes.