Five Year Chapter 13 Plan: Too Long?

by Susanne Robicsek, North Carolina Bankruptcy Attorney

November 21, 2007

RobicsekThe 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.

3 years was fair

Prior to the law change, Chapter 13 debtors who had disposable income were required to pay as much as they could afford for a 3 three year period.  Now, only below median debtors can finish a Chapter 13 in three years.

People who make more than the median income in their state must make payments for 5 five years.

In theory, having people make a substantial effort to repay their debt is a good idea.  If you owe money, you shouldn’t be able to walk away at the first sign of trouble.

However, the average person I see, comes to me to discuss bankruptcy as a last resort  – because they have tried everything else and spent months or years avoiding this option.

Normally they come 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.

3 years was fair.  5 years is often not. 

Some have struggled with their debts for one, five, ten or even twenty years. Many have been in Non-Bankruptcy Alternatives for Debts such as credit counseling debt management programs.  They may already have paid in thousands of dollars, or they may have spent all their savings trying to solve their debt problems in vain.

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 wit’s end and exhausted.   These are  good people who deserve help. To them, five [more] 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.

Who loses if people are forced to repay more of their debts?

All of us since people who are able to save money with a balanced budget can also take care of themselves if a problem comes up instead of needed handouts.  They also have money to spend and put back into the economy which helps businesses and creates jobs.

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 bankruptcy law changes in the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005.

Related Posts Plugin for WordPress, Blogger...
The following two tabs change content below.
Concentrating in Consumer Bankruptcy Law since 1988; Wake Forest Law School JD 1987 Law Office of Susanne M. Robicsek since 1993, Law Clerk to Judge Rufus Reynolds, US Bankruptcy Judge for Middle District of NC; Burns Price & Arneke, PA, David Badger and Associates, PA.

Latest posts by Susanne Robicsek, North Carolina Bankruptcy Attorney (see all)

Last modified: February 14, 2013