Understanding your Chapter 13 bankruptcy repayment plan

Three people sitting at a table and looking at documentsImage: Three people sitting at a table and looking at documents

In a Nutshell

In a Chapter 13 bankruptcy, you and your lawyer submit a repayment plan for the court’s approval laying out how you intend to repay your debts over a period of three to five years. The plan is largely calculated based on your household income, deductions for various expenses like food and utilities, and other expenses like taxes and healthcare needs. If a bankruptcy court approves the plan and you make regular payments, most or all of any remaining debts at the end of the three-to-five-year period may be discharged.
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If you’re filing for Chapter 13 bankruptcy, a Chapter 13 repayment plan could be the legal tool that puts you on a clear path toward getting out of debt

The repayment plan is like a personalized road map for paying off some or all of your debts in a Chapter 13 bankruptcy, and it works somewhat like a short-term consolidation loan. The plan helps you to restructure your debts for one bimonthly or monthly payment based on a number of factors, including the total sum of your eligible debts, your household income and various potential deductions for items like cost-of-living expenses and required tax payments.

The plan is then submitted to the bankruptcy court for approval, at which time the judge and your creditors will have the chance to challenge it.

If your plan is approved and you make three to five years of regular payments according to the plan, some or all of your remaining debts may be discharged, and your debt picture could be much brighter.

Read on for more info on how a Chapter 13 repayment plan works, how to work through the forms and how to maximize your chances of following the plan during the repayment period.

What is a Chapter 13 repayment plan?

Bankruptcy can help you get out from under considerable debt, but not all forms of bankruptcy allow you to keep many of your most important assets along the way. Those with regular income can file a Chapter 13 bankruptcy to help keep key assets like a home or car. In Chapter 13, debts are restructured over a three- or five-year period. If you make regular payments over that time, then some or all of your debts may be discharged.

The Chapter 13 repayment plan is the legal document that lays out how you’ll pay back your creditors. It must be drawn up and filed with the bankruptcy court within 14 days of filing the bankruptcy petition (unless you get an extension), after which the judge and your creditors will have a chance to assess and possibly challenge the plan. If the court ultimately OKs your plan, you’ll then follow through to pay back your eligible debts.

It’s possible to DIY your own Chapter 13 plan, but the process can be complicated and detail-heavy. That’s why it’s best to work with a bankruptcy lawyer, who can help make sure your repayment plan meets all requirements for approval.

The debts you’ll pay off

Not all of your debts are treated equally under Chapter 13 bankruptcy — some might not even have to be paid in full. Generally, your debts will be split into three different categories in your Chapter 13 repayment plan.

Priority debts

Priority debts are those that must be paid off during the course of your plan, with certain exceptions. These are debts like back taxes you owe, the cost of filing for bankruptcy, and child- and spousal-support payments that need to be brought current.

Secured debts

Secured debts are those that are backed by collateral — a home mortgage or auto loan, for example. Depending on the specifics of the secured loan, you can be required to pay back the value of the collateral or the full payment of the debt. We recommend reaching out to an attorney to learn more about the proper treatment of secured claims in the plan.

Unsecured debts

Last are unsecured debts, like those from credit cards, unsecured personal loans and medical bills. These debts get the last slice of the pie, which means that it’s totally possible for your unsecured creditors not to be paid in full by the end of your Chapter 13 repayment plan. If that happens, those debts may eventually be discharged.

How to approach the creation of your repayment plan

The calculation of the Chapter 13 repayment plan can be a complicated process full of uncertainty.

For this reason, we strongly suggest working with a lawyer to determine your eligibility and to draw up the particulars of your repayment plan. These legal proceedings are not an area where you want to make any avoidable mistakes that could lead to more difficulties piled on top of a bankruptcy’s usual stresses.

Still, it’s still worth knowing the basics of the process before meeting with your lawyer so that you can be a fully engaged participant in those discussions. The beginning calculation process features two primary stages — the Chapter 13 means test and the creation of the plan itself.

The Chapter 13 means test

In simple terms, the Chapter 13 means test determines the basic structure of the repayment plan. It is divided into two forms — Form 122C-1, which determines your average monthly income and the length of the repayment plan, and Form 122C-2, which determines the disposable income you’re able to use to pay back your creditors.

Form 122C-1 requires the filer to add up all sources of household income. That figure is then compared to your state’s median income based on the number of people in your household and your marital status.

If your average monthly income falls below the state median, then your repayment plan can cover three years. If it’s equal to or higher than the state average, then your plan can cover five years. The length will ultimately be determined by the court, but this form sets a starting point as you work on the initial version of your repayment plan.

Form 122C-2 then uses your average monthly income as a baseline for determining the disposable income that can be used to pay back creditors. The filer can claim numerous deductions on everything from the cost of food to health insurance in order to determine disposable income, but the restrictions on how much can be claimed in each category are often strictly tied to IRS standards.

If you fudge the numbers or simply take your best guess at what you can claim under each category, you’re going to run into problems when the court assesses your case.

Creating and filing the repayment plan

Once the means test is complete, you can start to work on drafting the repayment plan itself. The details of the plan will depend on your unique debts and the disposable income you calculated during the means test, so we strongly advise that you work on it with a trained expert like a bankruptcy lawyer. Not all Chapter 13 filers need the same advice for creating a repayment plan.

After you create your repayment plan, you’ll need to file it with the bankruptcy court no later than 14 days after filing. The court will assess the plan and hold a hearing to give your creditors a chance to make any objections. If all goes well, the plan will be approved. Keep in mind that although approval may not happen until roughly three months after filing, you’ll still have to start making payments on the plan within 30 days after you file.

How to follow the repayment plan

Once your plan is approved, most of your payment interactions should take place with your bankruptcy trustee. This individual is appointed shortly after the initial bankruptcy filing and essentially acts as a go-between for you, the bankruptcy court and your creditors.

Your payment goes to the trustee on the approved schedule (usually bimonthly or monthly), and they are responsible for dividing it among your creditors as detailed in the repayment plan.

Not following through on the plan could complicate your bankruptcy case. Missing or stopping payments could lead to the court dismissing your bankruptcy — essentially canceling it. In that case you could end up back where you started, or your bankruptcy could be converted into a Chapter 7 bankruptcy that doesn’t allow you to keep certain assets.

To avoid that result, it’s probably a good idea to put your monthly plan payments on autopay or even a payroll deduction to make sure they’re all made on time.

If you make all payments according to the plan, you will be on the road to repaying your debts by the end of the repayment plan, which can help your chances of earning a bankruptcy discharge.

About the author: Lindsay VanSomeren is a freelance writer living in Kirkland, Washington. She has been a professional dogsled racer, a wildlife researcher, and a participant in the National Spelling Bee. She writes for websites such a… Read more.