Chapter 13 is commonly known as reorganization bankruptcy and is only available to individuals and married couples. Corporations and other business entities (except a sole proprietor) cannot file Chapter 13.
There are two basic reasons a debtor would file Chapter 13. Firstly, if you are behind in secured debt payments, like a mortgage or a car payment, Chapter 13 affords debtors the opportunity to catch up on mortgage payments or restructure car payments under the protection of the bankruptcy court’s automatic stay. Secondly, if a debtor’s household disposable income is high enough to disqualify them from wiping out general unsecured debts in Chapter 7, Chapter 13 allows a debtor to pay only that which they can afford to pay toward these general unsecured debts for a period of time. If a debtor’s income is above the “median income” for a household of the same size, the plan length (known as the “commitment period”) is 60 months, but if it is below the median, the debtor can choose a plan length between 36 and 60 months, depending on the circumstances.
By filing for Chapter 13, you could be debt-free in three-to-five years and have the opportunity to keep your assets, including your house and car. If you think this option is the best for you, contact an attorney about a Jacksonville Chapter 13 bankruptcy repayment plan.
Before filing any consumer bankruptcy, including Chapter 13, you’ll have to attend a mandatory credit counseling class, and the certificate of completion is filed with your bankruptcy petition.
What is a Chapter 13 Plan of Reorganization?
Before you ever file your petition, your bankruptcy lawyer will analyze your income, expenses, debts, and assets. With this data, your attorney will construct a Plan of Reorganization which meets the necessary requirements of the bankruptcy code. Generally, every plan must accomplish the following:
- Pay 100% of Chapter 13 trustee administrative expenses, non-dischargeable priority claims like unpaid income taxes less than three years old, unpaid debtor attorney fees, arrearages owed on secured debts, and restructured secured debts.
- Pay general unsecured creditors the greater of: (a) the debtor’s disposable income or (b) the value of non-exempt assets unsecured creditors would have received had the debtor filed a liquidation (Chapter 7) bankruptcy – known as the Liquidation Analysis.
Debt Ceiling to Qualify for a Chapter 13 Repayment Plan
To quality for Chapter 13, your debt cannot be above a specific limit. The limit is adjusted every three years, based on the Consumer Price Index for All Urban Consumers (CPI-U), with the most recent change on April 1, 2019. The current Chapter 13 debt limits are $1,257,850 in secured debt and $419,275 in unsecured debt. These limits will Change again on April 1, 2022.
An individual or married couple who need to file bankruptcy but exceed the Chapter 13 debt limits, typically fall into one or more of these situations:
- High-income households who are current on all secured debt payments but do not pass the Chapter 7 means test.
- Households who are behind on secured debt payments with very high balances but wish to keep the collateral securing the debts.
- Households with a large amount of equity in non-exempt assets which would otherwise be lost to a Chapter 7 trustee.
The only other option for people falling into these categories is an individual Chapter 11 (including Subchapter V), which they would use as a “supersized Chapter 13.” Individual Chapter 11 bankruptcies are much more intricate than either Chapter 7 or Chapter 13, and they require the skill of a lawyer with specific experience in Chapter 11 cases. Most bankruptcy lawyers do NOT have that experience.
Steps before Repayment Plan Can be Finalized
The “Chapter 13 means test” determines whether a repayment plan will take three or five years. The type of debt owed determines a viable repayment plan.
Chapter 13 Means Test
The United States Courts administer the Chapter 13 means test under Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period, Form 122C-1. This form evaluates your monthly income and whether the repayment period (also known as the “commitment period”) will be three or five years. Form 122C-2 determines disposable income available to satisfy creditors.
Your income will be compared to Florida’s median income for a family of a similar size. A repayment plan will take three years if your income is below the state’s median and five years if it is higher. When it comes to plan length, the court is bound by Form 122C-1, but the Court does have discretion when determining a debtor’s disposable income. However, Courts rarely deviate from Form 122C-2.
Once a plan is in place, it is submitted to the courts for approval. Before it is approved, the trustee and creditors have an opportunity to challenge it. A local bankruptcy attorney can evaluate a Chapter 13 repayment plan before it is submitted to the courts to ensure that it is accurate and effective.
Categorizing Debt for Repayment Plan
The bankruptcy repayment plan categorizes debt by priority. Debts are either administrative, priority, secured, or unsecured. Some demand full payoff, while others may end up partially paid and discharged.
Administrative and (with rare exception) priority debts must be repaid in full. These include federal and state income taxes, and court-ordered spousal or child support payments. Student loans are often confused as “priority,” but they are nonpriority, unsecured debts, which are NOT discharged at the end of the case.
Secured debts, such as home mortgages and car loans, are secured because a creditor can seize the collateral if payments are not made. Under Chapter 13, debtors able to make timely payments on mortgages and car loans can keep secured property under a repayment plan. Debtors who wish to surrender certain secured debts may do so through the plan and avoid paying that creditor.
Unsecured debts are those with no collateral, such as medical bills and credit cards. Under a repayment plan, these creditors may only receive pennies on the dollar prior to discharge at the end of the bankruptcy. The amount received by this class of creditor is dependent upon disposable monthly income and the liquidation analysis discussed above.
The repayment plan is proposed early in the case, and monthly plan payments are made directly to the Chapter 13 trustee beginning about 30 days after filing. The trustee does not disburse any payments to creditors until the bankruptcy judge approves (“confirms”) your plan. Between the time your plan is filed and confirmed, your lawyer may be required to change it, based upon the actual claims submitted by creditors as well as the demands of the trustee. Once the court approves your Chapter 13 Plan of Reorganization, the trustee will begin dispersing creditor payments each month in accordance with the confirmed plan.
Three to five years is a long time, and a debtor’s financial circumstances often change. Chapter 13 plans can be amended over the commitment period, based upon decreases or increases in disposable monthly income.
A Jacksonville Bankruptcy Lawyer Can Help You Draft a Chapter 13 Repayment Plan
Bankruptcy laws are complex, and it may be wise to consult a Jacksonville bankruptcy attorney when creating your payment plan. To determine a possible repayment plan for your Chapter 13 bankruptcy, call our office today to speak to a qualified attorney.