Crafting a Chapter 13 Plan: Confirmed by Design!
Chapter 13 bankruptcy enables individuals with regular income to propose a plan to repay all or part of their debt, and the opportunity to catch up on delinquent mortgage and car payments.
If you are behind on your mortgage and facing foreclosure, or in arrears on car payments and dealing with repossession, you can stop creditors in their tracks by filing Chapter 13 bankruptcy and proposing a repayment plan.
If your monthly income is less than the state median income, your plan can propose three years to catch up. Debtors seeking longer repayment plans must show “good cause.” If your monthly income is higher than the state median income, the plan must be for five years.
For New Jersey residents who file bankruptcy after May 1, 2018, the median income for one-earner is $66,284. The amount increases to $81,054 for two people, $98,174 for three people, and $121,226 for four people.
In no case can the plan provide for a repayment plan of longer than five years. 11 U.S.C. §1322(d).
Another benefit of filing Chapter 13 bankruptcy is that debtors paying arrears on secured property can still discharge credit card obligations, medical bills, and other unsecured debts. If the debt is dischargeable in Chapter 7 bankruptcy, it may be dischargeable in Chapter 13.
Of course, there are obstacles along the way: Chapter 13 filers must remain current on post-petition obligations as they come due. That means they must pay the monthly amount proposed under the repayment plan and make their regular monthly mortgage and car payments. That’s difficult, and many Chapter 13 debtors find they cannot meet this dual obligation.
Also, the court must confirm all Chapter 13 repayment plans. Ideally, the Chapter 13 Trustee will recommend your repayment plan to the court for confirmation. If the Trustee does not approve your plan, you will likely have to revise it. This is because the court will give the Trustee’s recommendation great weight.
The Bankruptcy Code requirements for a repayment plan are found at 11 U.S.C. §1325(a). Generally, the plan must show “good faith,” as well as -
Meet the requirements for confirmation under the Bankruptcy Code.
Address any concerns raised by the Chapter 13 Trustee.
Overcome any objections to the plan by creditors.
Step 1: Determine the Length of Your Plan and Disposable Income
To prepare a plan, download the bankruptcy court’s “means test” worksheet. The forms are available here.
The Chapter 13 means test determines the structure of the repayment plan. The means test comprises two forms — Form 122C-1 used to calculate average monthly income and the length of the repayment plan, and Form 122C-2, used to calculate the disposable income available to pay back creditors.
Use the worksheet to determine the required commitment period. If your income is below the state median level, choose either a 60-month or 36-month repayment term. For debtors with income below the median level, a 60-month plan offers lower monthly payments. If your income is above the state median, a 60-month plan is required. Your attorney will help you complete the means test.
Step 2: Classify Your Debts
Under a Chapter 13 repayment plan, administrative claims, priority claims, and secured claims must be paid in full.
Administrative claims include the trustee’s commission, the court’s filing fee, and unpaid attorney’s fees. These claims are paid first.
Priority claims include taxes, alimony, child support, and wages due to your employees if any.
Secured claims include mortgages and car loans.
Unsecured claims include credit card debt, medical bills, and other types of debt not secured by collateral. Unsecured debt is paid pro-rata throughout the plan by applying disposable income you have to the unsecured claims. The plan must pay the unsecured creditors at least as much as they would have received in a Chapter 7 case. 11 U.S.C. §1325(a)(4). This is the Chapter 7 liquidation test.
Determining how to treat claims and calculating the required payments can be a complicated process that requires knowledge of the bankruptcy code and the local bankruptcy rules. Therefore, Chapter 13 debtors should retain experienced legal counsel.
Step 3: Determine Your Bankruptcy Code Exemptions
The federal bankruptcy code provides exemptions designed to protect specific property in Chapter 7 bankruptcy. The Bankruptcy Code exemptions are itemized at 11 U.S.C. §522. To learn more about the bankruptcy exemptions, click here.
The exemptions are also used to determine how much certain creditors will be paid through your Chapter 13 bankruptcy plan. In contrast to Chapter 7, where non-exempt assets can be liquidated to pay debts, Chapter 13 debtors keep all assets – both exempt and nonexempt. The exempt value of your property will not be available to pay creditors. Value over the exemption amount, however, must be included in the base amount paid to your unsecured creditors.
Step 4: Is Your Chapter 13 Fair?
Fairness is defined in two ways: Under the first, if the plan proposes to pay 100% of the general unsecured debt, it is presumed to be fair. The alternative is for the debtor to contribute 100% of his or her disposable income to the plan and thereby use his or her best efforts to pay unsecured creditors.
Step 5: Is Your Chapter 13 Feasible?
Finally, the plan must be feasible. The plan must satisfy the Chapter 7 liquidation test and the fairness test and still leave the debtor enough money to live. If all three requirements are met, the plan is considered feasible.
The Law Firm of Ernest G. Ianetti, Esq. has over 30 years of professional experience. If you are considering Chapter 13 Bankruptcy, we can help you create a repayment plan that will be confirmed. We’ll work with you, the trustee, and your creditors to ensure your Chapter 13 case is successful. To schedule a FREE Consultation, click here.
Ernest G. Ianetti, Esq., represents clients in Chapter 7, Chapter 13, and Chapter 11 Bankruptcy. Our office is conveniently located in the Rockaway Townesquare Mall complex. We represent clients from Morris County and surrounding areas, including Sussex County, Essex County, Union County, and Passaic County.
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