Before you decide to file a Chapter 13 case with a 3-to-5-year payment plan, be aware that plan can be changed if your situation changes.
The Chapter 13 Plan
Chapter 13 is all about the payment plan. The point of Chapter 13 usually is to radically reduce most debts so you can afford to pay special debts. The Chapter 13 payment plan describes the details of how this is to happen.
For example, in your Chapter 13 plan you’ll pay a bunch of recent income taxes that can’t be discharged (written off) in a Chapter 7 case, while paying very little to the rest of your debts.
The most important practical aspect of such a plan is how much you will be paying each month—your plan payment. That payment generally covers all of your debts, although sometimes you’ll continue paying a mortgage or other secured debt directly.
The other main part of the plan describes which debts get paid, how much, and maybe when. Some debts are referred to by name in your plan, others just by category of debt. For example, the plan specifically lays out payment amounts going to a “priority” debt like the income taxes. But “general unsecured” debts are not named individually; the plan just states the anticipated percent-of-debt this category will be paid.
Here is a sample Chapter 13 plan form.
The Usual Procedure
A lot goes into preparing and getting approval for your plan, and then making it work.
Basically, your Louisville bankruptcy lawyer prepares a proposed Chapter 13 plan based on the information you provide him or her. He or she reviews and explains it to you in detail, making whatever changes are appropriate. The creditors have an opportunity to review the plan and raise objections based on alleged noncompliance with legal requirements. Often no creditors object, or only one or two do, and usually any objections are resolved. The Chapter 13 trustee carefully reviews the plan for legal compliance, and raises any concerns. This is usually done at the so-called Meeting of Creditors about a month after you file your case. Again, any objections are usually worked out.
Then the plan goes before the bankruptcy judge at the “confirmation hearing,” usually around two months after filing your case. If there were no objections or they’ve been resolved by then, the judge virtually always approves the plan. If there is a lingering objection sometimes the judge resolves it at that hearing. Or the judge may give the parties more time to resolve things by the time of an “adjourned confirmation hearing.”
Once the judge approves the plan through an Order Confirming Plan, that plan is essentially the law of your case.
Important to Know that Your Plan Can Be Modified
It’s important to realize that a lot goes into putting together and getting a Chapter 13 plan approved. But it’s also important to understand that the plan can usually be changed, or “modified.”
Most Chapter 13 plans last 3 to 5 years. That’s a long time to be living under one particular budget. So it helps to know that you’re not stuck with your original plan terms throughout this time.
Candidly, some Chapter 13 plans are put together with some doubt about whether a certain intended goal can be achieved. For example, you believe you can find a better job and increase your income during your Chapter 13 case. So you tie keeping your home (and catching up on the mortgage) onto that belief within your Chapter 13 plan. You need to know that if that higher income does not materialize that you can modify your plan (although you may also need to modify your goals).
Sometimes the goals themselves change. In the example of the better job, that job may unexpectedly come requiring a move to a different state. So now you may want to sell your home but remain in your Chapter 13 case because of other debts. It’s good to know that Chapter 13 gives you the flexibility often to adjust to even major life changes.
Your Chapter 13 plan can stretch but that has limits. It’s good to get a feel of how much a plan can and cannot bend. We’ll explain this more in our next blog post or two.