The Chapter 13 Plan

Proceedings

Section 1321 requires a debtor to file a plan with the petition or within 15 days thereafter unless the court extends the time. The debtor is allowed to modify the plan before confirmation, which gives the debtor the opportunity to modify any mistakes made. A trustee is appointed after the petition is filed, the 341 meeting must commence between 20 and 50 days of filing of the petition. The debtor is then required to start making payments on the plan within 30 days of the plan approval. The payments must be made to the Trustee, unless there are any lease payments, mortgage payments, or purchase money security interests, which will be paid directly to the creditor holding the interest. Finally, the effect of the plan binds the debtor and all creditors. The plan, once approved, may only be revoked if there is a claim within 180 days of the plan and the claimant can show there was some type of fraudulent intention.

Prerequisites for Confirmation

Generally speaking, the plan has three components: (1) it states what income and assets will be used to fund the plan; (2) it proposes the treatment to be given to claims; and (3) it provides for various optional matters, such as the option to assume or reject executor contracts.

Confirmation Requirements

There are several plan confirmation requirements involved under a Chapter 13 Bankruptcy: (1) the plan must comply with Ch. 13 and all other provisions of the code; (2) all fees required prior to confirmation must have been received (3) debtor used good faith; (4) the distribution plan must pay the unsecured creditors at least what they would have received in a chapter 7 BK plus interest to present value; (5) unless a secured claimant accepts different terms, the plan must provide for the collateral to be surrendered to the claimant, or preserve the claimant’s lien and provide for full payment; and (6) the plan must be feasible based on the debtor’s income, which shows that the debtor will be able to make payments.

Debtor’s Obligation to make Payments

The debtor may liquidate some property to supplement the plan, or the debtor may surrender some property to be able to make the plan payments. Whatever the source of funding may be, the plan must outline the source of the income to be paid to the Trustee, so the court knows the source of it. Because the payments are the most integral part of a Chapter 13, the court must be satisfied that the debtor is going to be able to make payments.

Length of the Plan

The plan can last as short as three years or as long as five years. The determining factor in deciding how long a plan lasts is the amount of income the debtor is making. If the debtor is below the median income for the state he/she resides in, the plan will last three years. If the debtor‘s income is above the median income for the state, the plan must last five years.

No minimum period of payment is prescribed. Therefore, if a plan can accomplish the goals that the Trustee and creditors are looking for, a plan may in fact be shorter.

Treatment of Claims in Chapter 13

Secured Claims

The debtor has three alternatives for the treatment of secured claims: (1) consequential treatment; (2) payment of the claim and preservation of the lien while payment is pending; and (3) surrender of the collateral.

Furthermore, consequential treatment of a plan allows a debtor to handle the secured claim in a manner different than provided for in section 1325(a)(5)(B) or (C) if the holder of the claim accepts the plan. Acceptance is indicated most clearly by an affirmative act, but the claimant may be held to have accepted the plan if it fails to object. Section 1325(a)(5)(B) provides for the alternative of payment of the claim and preservation of the lien while payment is pending. The amount to be paid is the allowed amount of the secured claim, valued at replacement value, not the foreclosure value.

Section 1325(a)(5)(C) permits the debtor to surrender the collateral to the holder of the claim, which disposes of the secured claimant, frees the debtor from the obligation to pay it under the plan

Purchase Money Security interests in Automobiles

If a debtor buys a car from a dealer on a purchase money security interest for personal use, and then goes Bankrupt, the debtor will be responsible for a deficiency for the amount that exceeds the value of the collateral. For example, if a debtor buys a car worth $10,000 and they file BK within 910 days of purchasing the car, and the car’s value is now at $5,000 but the debtor still owes $9,000 on the note, the debtor will be responsible for the entire $9,000 through the BK. However, if the debtor surrenders the auto it wipes out all claims for a deficiency judgment.

Unsecured Claims

There is a minimum level of payment for unsecured claims and is known as the “best interest test” because it provides that the unsecured creditors receive an amount that is in the best interests of the creditors, which would be what they would have received in Chapter 7 BK.

The Best Interest Test

Requires that the amount paid on each allowed unsecured claim have value as of the effective date of the plan that is no lower that would have been received through chapter 7 liquidation. To determine present value we look to see if the value on the petition date, and add to that amount a market interest rate for the period of payments under the plan must be added.

Disposable Income Test

If the debtor’s income is above the median income level for the state in which they reside, the chapter 13 plan must last five years instead of three. Furthermore, to decide the debtor’s disposable income, you must take debtor’s living expenses subtracted from his/her income. Each state has their own boilerplate numbers for what a person should be spending on certain items. For example, if debtor has disposable income of $300 each month and has income over the state’s median income level, debtor must pay $300 x 60 months. However, if debtor has income under the state’s median level, the debtor must pay $300 x 36 months.

Step 1: calculate the debtor’s current monthly income. This is calculated by taking the debtor’s earnings from al sources for the six month period before BK, divided by six to get the average monthly income. Then multiply the monthly figure by 12 to compare the debtor’s income to the annual median income.

Step 2: determine the median family income for a household of the debtor’s size in the state where the debtor resides.

Step 3: If the debtor’s current annual income is less than the median family income, do the following:

(a) The disposable monthly income calculation:

(i) Calculate the debtor’s monthly income (excluding child support payments received.

(ii) Calculate the actual expenses reasonably necessary to support the debtor and any dependants, as well as post petition expenses for domestic support obligations, charitable contributions, and running a business.

(iii) Deduct the expenses from the income. This gives the debtor’s monthly disposable income.

(b) Determine disposable income for three years:

Multiply the debtor’s monthly disposable income by 36 months to determine the debtor’s projected disposable income for three years. This is the total amount that the debtor will have to contribute to the plan to satisfy the test. Do the same if the debtors income is for five years or more only times by 60.

Cure of Default

If the debtor has fallen into arrears in payments or has otherwise breached the contract, the right to cure enables her to reinstate the agreement by providing in the plan for payments or performance to remedy the breach. Furthermore, if the debtor struggles in making their plan payments, the default of plan payments may be “thrown” back into the plan to be cured. However, if the creditor has a “drop dead clause” in the contract, the debtor will default if the payments are not made, regardless of whether they defaulted payments may be incorporated into the plan payments.

This gives the debtor the opportunity to redeem collateral by installments, something that cannot be done through a chapter 7.

Modification of the Plan

A debtor may modify a plan any time during the plan. However, you may not modify a plan to reduce payments in the plan based on reduced value of the collateral. For example, if an automobile is incorporated into plan payments and is less in value after one year of the payments, the plan may not be modified based on the lesser value of the car. The payments will continue based on the value of the car at the start of the plan.