Whether you MUST pay for 3 years or 5 depends mostly on your income. Exactly how long your Chapter 13 lasts depends on the many moving parts of your case.
In our previous blog posts we often refer to “the 3-to-5-year Chapter 13 case.” Almost all successful cases last within that timeframe. Some are put together to last 3 years, some for 5 years, and some for somewhere in between. What decides all this?
Believe It or Not, Longer Can Sometimes Be Better
Let’s first settle something very important when considering the length of a Chapter 13 “adjustment of debts” case: often one of the main benefits of this tool is its length. Longer can be better.
Naturally, you want to solve your financial problems as quickly as possible, so that you can get on with your life. And if your situation is relatively straightforward, a Chapter 7 “straight bankruptcy” may be able to get you there in a matter of just a few months.
But Chapter 13 comes with a whole bunch of powerful benefits not available under Chapter 7, benefits that are designed for special kinds of debts. Some of those benefits involve getting more time to pay a debt that you want to or must pay, and getting ongoing peace from your creditors while doing so.
For example, Chapter 13 enables you to pay recent income taxes that you can’t discharge (legally write off) in a Chapter 7 case, and usually do so without any ongoing interest and penalties. Having a longer time to pay such taxes means that the monthly payment is less, and the lack of accruing interest and penalties means stretching out the payment period doesn’t cost more. And you don’t have to worry about the IRS and/or state tax authority taking any collection action against you throughout this time.
A similar situation happens when using Chapter 13 to catch up on a child or spousal support arrearage (where Chapter 7 does not help at all), or a home mortgage or vehicle loan arrearage.
So if you can finish your Chapter 13 case quicker, that’s great. But having more time can make your monthly plan payment more reasonable, potentially making the difference between reaching your goals and not being able to.
The 3-Year vs. the 5-Year Chapter 13 Plan
Whether the minimum length of your plan is 3 years or 5 years depends on your “current monthly income.” If yours is below your state’s published median income for a family of your size, your plan does not have to last more than 3 years. If your “current monthly income” is at or above that amount, then you are obligated to have a plan that lasts 5 years.
This term, “current monthly income,” is not what you might think. It includes virtually all your income and sources of money coming to you from virtually all sources, taxable or not. And it’s based not on the most recent month, or on an average of the last 12 months or the previous calendar year. Rather it’s based on the income of the 6 most recent full calendar months before the filing of your Chapter 13 case.
There’s a very important consequence of this very specific way of calculating this “current monthly income” amount. If your income goes up or down during the months before your Chapter 13 case is filed, when exactly you file your case can potentially determine whether your plan is a 3-year one or a 5-year one, a huge difference in both time and money.
Plans That Last in Between 3 and 5 Years
First, a case that CAN last only 3 years based on your “current monthly income” MAY be scheduled to last longer because your budget may not allow you to pay all that you must or want to pay (home mortgage arrearage, taxes, etc.) within 3 years. So you can stretch out the payments over a longer period of time in order to lower your monthly Chapter 13 plan payment but still pay all that you need to pay. This is quite common. In these situations you’re not paying more; you just have longer to pay the same amount.
Second, and much, much less common, in a case in which your “current monthly income” indicates that your case is to last either 3 or 5 years, it can actually finish sooner if your budget enables you to pay 100% of your debts (sometimes with the help of the sale of an asset) earlier.
Plans Can Get Shorter or Longer
We’ve been talking about how long Chapter 13 plans are SCHEDULED to last at the beginning when they are first calculated. But many assumptions go into these plans—especially about future income and expenses, and about how much is owed to certain key creditors. Income and expenses can change, and there can be confusion or disputes about debt amounts.
The changes are sometimes small enough so that the plan does not have to be formally amended—such as if creditor debts amounts are different than expected but not significantly so. But if income and expenses change significantly, requiring a change in the monthly plan amount, the plan must be amended, with a new scheduled length of the remaining case.
5 Years is the Maximum
In any event, Chapter 13 plans cannot be approved by the bankruptcy court if they are scheduled to take longer than 5 years. Even amended plans are not allowed to last beyond the original 5 years.
When a plan is scheduled to complete within the 5-year limit but for whatever reason takes somewhat longer, whether such a case will be permitted to complete successfully depends on the aggressiveness of the Chapter 13 trustee in enforcing that limit. By law Chapter 13 cases are not allowed to go beyond 5 years, so trying to do so is very dangerous because your case could be dismissed, or thrown out, without the final discharge of the unpaid debts. Avoid that at all costs—you don’t want to go that far in a Chapter 13 case only to miss out on one of its most important benefits.