What Is a Chapter 13 Plan?

Wasson and ThornhillChapter 13

A Chapter 13 plan is a formal proposal indicating how much you’ll pay your creditors over the course of 3 to 5 years.  It is first proposed by you, then “confirmed” by the bankruptcy court.  At the end of that time period, most types of your remaining debt is discharged (legally written off).

 Your Chapter 13 plan outlines what you intend to do with your creditors during the three to five years that a Chapter 13 case takes to complete. It’s a detailed proposal you and your attorney present to the bankruptcy court, the Chapter 13 trustee, and your creditors about how much you intend to pay to the trustee each month, and which creditors are going to be paid out of that “plan payment,” how much, and when. The plan also says which collateral you intend to keep, sell, or surrender; which leases to continue or to end; and what will happen to judgment, tax and other kinds of liens. It can also state that you intend to sell or refinance your real estate or other assets, and can provide other information important to your case.

A Detailed Legal Document 

A Chapter 13 plan can be a little confusing to read. It is prepared on a mandatory, multi-page court form with decades of legal history behind it. Much of its language is “boilerplate,” the same for everybody. Although efforts have gone into making it understandable, many of the elements of the plan form are written in a sort of legal shorthand to avoid it from being even longer.  And it contains quite a few terms which have special meaning under Chapter 13.

Both the standard language and the details unique to your case are important to understand because your Chapter 13 plan will rule much of your financial life during your case. Plus you sign the plan before it is filed at the court, so of course you need to know what you are signing.  Be sure to review it very carefully with your attorney before you sign it, making sure that its terms are clear to you.

The Plan is Your Proposal, Approved by the Judge, Often After Some Adjustments

Your attorney puts together the plan based on your discussions with her about what you intend to do with various creditors, especially creditors secured by collateral or other kinds of liens, and special creditors whose debts are not “discharged” (legally written off) in bankruptcy. The completed plan is a culmination of a fair amount of calculations based on your budget and on a myriad of rules about how certain creditors can or must be paid, and when they can be paid less.

The trustee and your creditors have the opportunity to object to the terms of your proposed plan. When objections are raised, you’ll generally hear about it at the “meeting of creditors” (which you attend with your attorney, and happens about a month after your case is first filed) or before hand.

Chapter 13 law states in great detail what should be in a plan, how creditors can be treated and such. So there are only limited reasons for anyone to object. The trustee—in the role of a sort of gatekeeper and overseer of your case—or any creditor can object, but must do so based on one or more of the legitimate reasons for doing so.

In very straightforward cases, there often are no significant objections. In other more complicated cases, your attorney will usually be able to anticipate, and inform you about, the kinds of objections that may be raised. Usually objections can be successfully satisfied or overcome. Sometimes this is done by providing more information or justification to the trustee or creditor about what is being proposed in the plan, and sometimes by making minor or not so minor adjustments in the terms of the plan.

Your attorney’s goal will be to resolve any objections before the “confirmation hearing” so the plan gets “confirmed,” or approved, by the judge through the “order confirming plan,” either as you originally proposed it or as it was adjusted.

Getting to the Finish Line

One of the most important things you need to understand about a Chapter 13 plan is that some of its most important benefits do not happen unless and until you successfully complete the plan. Among other benefits is the discharge of whatever debts that aren’t paid and are eligible for discharge. Most Chapter 13 plans do not pay all their “general unsecured” debts in full, and many pay these debts only a small percentage or even nothing. Whatever is left owing after is only discharged if you complete the entire Chapter 13 plan.  If your case gets dismissed, you go back to wing your creditors their full amount, plus whatever interest they would have accrued in that time.

But if you DO get to end of your case by fulfilling the terms of your Chapter 13 plan, you will be (except possibly for one or two special debts like your home mortgage) completely debt-free!  It’s like a 3 to 5 year “get out of debt fast” plan.