12 Tips to Understanding Your Chapter 13 Plan

Here in the Western District of Pennsylvania, we have “conduit” Chapter 13 plans, which mean that all of your secured loan payments are made inside the Chapter 13 plan. As I’ve written before, don’t draw conclusions about the way that the Chapter 13 process is handled from State to State (or even within your State).

It helps to first recall that there are 3 types of debts in bankruptcy law: (1) secured debts, such as mortgages and car loans and real estate taxes; (2) priority debts, such as delinquent income taxes, and (3) general unsecured debts, such as credit cards, personal loans and medical bills.

So, here goes. Here are my 12 tips to help you understand how the Chapter 13 plan process works here in Western Pennsylvania.

1) Secured debts get paid first along with administrative fees. This means that your monthly mortgage and car loan payments will be made soon after your case is filed and your plan has been confirmed on an interim basis. By administrative fees, I’m referring mainly to attorney fees, which are paid at the same time as monthly secured claims;

2) Over the course of a 60 month plan, the Trustee will make 62 payments to your mortgage company. The Trustee wants your mortgage loan to be paid ahead at the time your case is concluded. Most people appreciate that;

3) If you have mortgage arrears, then those arrears will start being repaid through the plan in perhaps the 2nd or 3rd year of your case depending on how your payments have been going. At the end of your case, the Trustee will file with the Court a “Notice of Cure” which is a declaration that your mortgage is fully current and that there are no pre-petition arrears;

4) Unsecured debts get paid near the bottom of the order. So, your credit card claims might not get paid until the 3rd, 4th or 5th year of your case. It’s usually never a problem though. The creditors understand this, and they can’t charge interest in a Chapter 13 case anyway;

5) The Judges in the Western District have a rule that a payroll deduction is required of all wage earners in Chapter 13 cases. This is one reason that we have a relatively high rate of completion with Chapter 13 cases. Moreover, if you get paid every 2 weeks (26 times a year), the payroll deduction will be set up for each pay period throughout the year. For example, if your Chapter 13 plan payment is $1,000 monthly, then your payment will be $461.53 every two weeks (and not $500 every two weeks);

6) Yes, the Chapter 13 Trustee has a fee. Currently, that fee is 3 per cent of all payments. In other States, the fee is up to 10 per cent, because their plans are different. The fee however is calculated into your Chapter 13 plan, and the fee is paid periodically throughout the course of the plan;

7) One quirk of our District is that certain utility companies can file “administrative claims” to be paid for post-petition utility bills. Duquesne Light used to file such claims, but it discontinued that practice approximately 3 years ago. Now, just Equitable Gas files such claims. If you stay up to date with your electric and gas bills, you should be fine though;

8) If a Chapter 13 plan appears viable, then the Trustee will recommend that it be confirmed (approved) on an interim basis when you appear at your Meeting of Creditors. This is the Trustee meeting conducted approximately 45 days after your case is filed. The creditors are given a deadline to file “proofs of claim” with the Court. The deadline is usually 5 months after your case has been filed. Generally, you will not be required to appear at the 2nd meeting with the Trustee. This is called the “conciliation conference” or “plan confirmation hearing”. If your plan is viable and you’ve been making regular payments, then the Trustee will recommend that your plan be approved on a final basis;

9) If your financial circumstances change dramatically (e.g., you change employers, or you lose your job or you get a significant payraise), then you should contact your attorney immediately. Your attorney may need to file a “Modification to Confirmed Plan” which might change your Chapter 13 plan in some way, perhaps to reduce the dividend to your unsecured creditors, for example;

10) Mortgage companies are required to file “Notices of Postpetition Mortgage Payment Changes” whenever they readjust their interest rates or escrow payments. Your attorney generally has 15 days to review this Notice and to file a response indicating whether he or she objects to the payment change. Obviously, people rarely object if their mortgage payment is decreased, however if an objection is filed, then the Court will schedule a hearing and require the mortgage company to provide proof;

11) If you miss a Chapter 13 payment, then you’ve got to make up that payment at some point. And if you miss too many payments, then the Trustee will seek to dismiss your case. Chapter 13 plans can only be extended to 60 months, and that’s it! If your having financial problems, my advice is to pay as much as possible to the Trustee. Send in the most that you can possibly afford until you get back on your feet fully;

12) It’s good to understand the concept of the Chapter 13 Plan Base. This is the total of all of your plan payments for the entirety of your case. If you have a 48 month plan and your payment is $1,000 monthly, then your plan base is $48,000. So, if you fall behind on payments, you will want to catch up on those missed payments in an effort to regain your progress in satisfying your plan base.

I hope this has been helpful. Let me know if you have questions or comments!

13 Comments on “12 Tips to Understanding Your Chapter 13 Plan”

  1. Shawn, 
    Please include in your explanation of Plan treatment and procedure something about student loans. 

  2. David, good idea. I’ll post something soon. Student loan treatment is a big issue here (as it is all over the country). Shawn Wright

  3. This is some really good information about bankruptcy. My brother is having a hard time financially at the time. I liked that you explained that your secure loans would be settled first.

    1. Ivy, thanks for your comment. Yes, secured loans are paid first and the arrears on any secured loans, such as car loans and mortgages, are then paid. When the Trustee has gotten ahead on those, then the Trustee will begin to disburse payments to priority debts such as IRS income taxes. Thanks.

  4. It’s interesting that credit cards are considered unsecured debts, so they get paid off last when filing for Chapter 13 bankruptcy. My uncle is terrible with money, so he may be filing for bankruptcy in the future. These tips may be able to help him file for Chapter 13 bankruptcy, so thanks for sharing them.

    1. Taylor, yes they are unsecured due to the fact that they are secured to property like a car loan or mortgage would be. There are two nice features that Chapter 13 bankruptcy offers as it applies to unsecured debts: (1) there is no interest that accrues to the unsecured debts while in the Chapter 13, and (2) the person in bankruptcy is often permitted to pay the unsecured creditors pool on a percentage basis according to his financial ability to pay. In other words, if someone doesn’t have substantial assets and they have somewhat limited income, then they may only pay a small percentage or even 0 per cent to the unsecured creditors pool. Take care, Shawn Wright

    1. Sorry but I didn’t see your question previously. Well, if you have paid 100 per cent of the claims of your unsecured creditors early, then you can petition the Trustee and the Court to complete your case early. If you are required to have a 60 month plan however, then if you pay the plan base early, then you have to continue until for the full 60 months, and then the additional plan payments would further fund your unsecured creditor pool.

    1. Carmella, when you have a “liquidation” issue, it means that you have property (either real estate or personal property) that you are unable to exempt in your bankruptcy. Exemptions are the laws that we use to protect someone’s property in a bankruptcy case. For example, let’s say that John owns a house worth $100,000 and his mortgage balance is $60,000. He can “exempt” around $25,000 using the existing exemption laws, so therefore he has a liquidation amount of $15,000. With real estate, it’s a bit tricky, because we all know that it costs money to sell real estate (you have to hire a realtor and also you also have to pay real estate transfer taxes, etc). In a Chapter 13 case however, you have the ability to pay the Chapter 13 Trustee in your bankruptcy plan that amount of $15,000 over the 5 years of your case. So, in that scenario, the Trustee wouldn’t seek to sell John’s house, but would want John to repay an extra $15,000 over time in order to pay that to his unsecured creditors. I hope this answers your question.

  5. I am currently under a chapter 13 bankruptcy. I noticed they are paying my unsecured creditors and when I asked why I was told by the trustees office that I am under a base plan and that I have to pay at least $78,000 into the plan. I was not aware of this and would have elected to do a chapter 7 I had known the unsecured would be paid along with the secure. My hope was that the amount I pay biweekly would pay off the twu cars I have and my furniture bill and my case would be discharged but that’s not the case. Is it possible to get from under the base case? I feel the extra they are paying to the unsecured you be used to pay off my secured first..

    1. Hi Regina, It’s hard to say exactly why your payment plan was set up this way. Do you have an attorney representing you? Generally, there are two reasons why someone has to pay a significantly amount of unsecured debt. First, it could be that if they were to file a Chapter 7 case, then they wouldn’t be able to protect all of their property. We do something called the “liquidation alternative” test to determine if someone has property that they cannot protect using the available bankruptcy laws called “exemptions”. So, let’s say if you had property you couldn’t protect worth $20,000, then the Chapter 13 plan would be designed so that you would repay approximately $20k through the plan to pay the unsecured creditors over the 5 year period.

      Second, if you have sufficient disposable income available (after the payment of your reasonable monthly living expenses), then you would have to use some of your disposable income to devote to the Chapter 13 plan as well.

      My bet is that your Chapter 13 plan is very likely paying off your two car loans as well as the furniture loan, but that when your case was filed you either had an issue with the liquidation alternative test or you had significant income at the time.

      If neither of those two conditions was present, then you can file an amended plan to reduce the dividend to the unsecured creditors however. Thanks and good luck.

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