14 May Mechanics of Chapter 13-Part One
In this series of posts, I will try to address some of the most common questions my clients ask me about what will happen while they are in a Chapter 13 bankruptcy, and beyond. In this post I’ll discuss the mechanics of drafting a Chapter 13 plan.
A brief reminder: A Chapter 13 is a bankruptcy that sets up a repayment plan for consumers, or those operating small businesses. A Chapter 13 works much like a debt consolidation. The debtor makes a monthly payment to a Chapter 13 trustee, who in turn distributes that money to your creditors. Usually that payment covers most of your debts with the exception of long-term mortgage debt.
The primary concern most people have about Chapter 13 is how much they will have to pay, so let’s start with that. A Chapter 13 plan is proposed by the debtor, and approved (or disapproved) by the bankruptcy court with the input of the trustee. You and your attorney will spend some time gathering information (particularly budget information) that will help come up with that proposed plan. There are a number of factors that go into determining how much your payment will be in a Chapter 13. Unlike other kinds of debt consolidation or debt settlement plans, though, Chapter 13 payments are generally based on what you can afford to pay, not how much your creditors are willing to accept. Depending on where you live, your Chapter 13 plan may pay your unsecured creditors nothing at all, or a minimal payment of 1%, if that is all you can afford.
In order to propose a plan, your attorney will gather information about your income-I ask for seven months of paystubs or some similar documentation. Your attorney will also need a monthly budget from you, as well as information about your debts and how your payments are structured. For some categories of expenses, your attorney will use your actual expenses; for others IRS guidelines will apply. This information will allow your attorney to estimate the minimum amount that you will be required to pay-or at least make a start in that direction. Other factors can also come into play, such as the amount of equity you have in property, or the amount of certain debts, such as tax debts and those for alimony and child support, that you may be required to pay in full.
At the time your Chapter 13 case is filed, your attorney will file a proposed Chapter 13 plan, and a copy of that plan will go to all your creditors. The creditors and the trustee will have the opportunity to object to the plan, but your creditors cannot opt out of the plan. If there are objections, the court will set a time to hear those objections, and determine whether the plan is fair and meets the requirements of the Bankruptcy Code. Often such objections are resolved between the parties, either by providing more information, or by modifying the plan in some way. Once the court decides that the plan is fair, the creditors are bound by the plan as if it were a new contract.
In my practice, it is not unusual for the trustee to request additional information, or to object to a proposed plan. Her job is to make sure creditors are treated fairly, but my job is to get the best deal possible for my client, and frankly, if the trustee didn’t want a little more I would question whether I was doing my job. Normally, however, the trustee and I resolve those questions without having to litigate them, with the exception of new issues that come up from time to time. So, when I file the proposed plan at the beginning of the case, it is with the knowledge that it is an the nature of an initial offer, and may change. A plan can also change because circumstances change, even after the court approves an initial plan. If your income drops, or expenses increase, or if there is some other change in your financial status, your plan may be modified to accommodate those changes.
In my next post, I’ll discuss what the Chapter 13 trustee does with all those payments you make.
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