23 May Mechanics of Chapter 13-Part Two
In Part One, we discussed how a Chapter 13 plan is proposed. In this post, we’ll talk about what the Chapter 13 trustee does with the payments made under that plan.
When you file a Chapter 13 case, your first payment to the trustee is due 30 days after your case is filed. Since the debtor proposes the initial plan (and although that may change as time goes on), generally the first payment you make will be as provided in that proposed plan. In my district, the Chapter 13 trustee will also send new debtors a letter, providing them with information on when and where to send their payments. The normal practice may differ in your district, so check with your attorney.
Your Chapter 13 Plan will provide for payment of creditors of different classes in different ways. Secured creditors (those with collateral) and priority creditors (like taxes and child support) are generally paid first. Some secured and priority claims are also paid with interest. Once a plan has been approved by the court, the trustee will begin paying out the funds that you pay her, according to the provisions of your plan. Most plans provide for a minimum payment to certain creditors per month. If funds are available, the trustee can increase those payments so as to minimize the interest paid. Because of the tiers of priorities, most unsecured creditors do not receive any payment at all until all of the secured and priority claims have been paid in full. In some cases, that might mean that unsecured creditors wait until the very end of the plan, which can be almost five years, to receive any payment at all. That explains why some creditors sell the debt, or simply write it off, rather than file a claim and wait for payment.
In general, the trustee will accumulate the payments you make until a plan is confirmed. The Bankruptcy Code provides for “adequate protection” payments to secured creditors prior to plan confirmation unless the court orders otherwise. In some districts this means that you or the trustee will pay interest payments to secured creditors prior to confirmation, and subtract such payments from what you are paying to the trustee. In order to avoid that bookkeeping nightmare, the court here in South Carolina has “ordered otherwise” and provided alternate protections for secured creditors awaiting confirmation of Chapter 13 plans. Check with your attorney to be sure you understand what your obligations are.
Similarly, some districts require that your plan payment include your mortgage payment. In such districts, the trustee is the “conduit” for the mortgage payments. In other districts the general rule is that you will make your mortgage payments directly to the mortgage servicer. Again, check with your attorney to be sure how your payments are to be made.
In Part Three I’ll discuss how you know what the trustee has paid.
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