The Chapter 13 Plan and Confirmation Hearing
Unless the court agrees to an extension, the debtor must absolutely file a repayment plan with the petition or inside 14 days after the petition is filed. A plan must be tendered for court approval and must provide for monthly payments of preset amounts to the trustee on a punctual basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.
There are three types of claims: priority, secured, and unsecured. Priority claims are those granted very special status by the bankruptcy law, such as most taxes and the fees of bankruptcy proceeding. Secured claims are those for which the creditor has the right take back particular property if the consumer does not honor the underlying liability. In contrast to secured claims, unsecured claims are typically those for which the creditor has no special rights to collect against certain property owned by the debtor.
The plan needs to pay priority claims in full unless a particular priority creditor agrees to different treatment of the claim or, in the case of a domestic support obligation, unless the debtor contributes all “disposable income” – looked at below – to a five-year plan.
If the consumer wants to protect the collateral securing a particular claim, the plan must provide that the owner of the secured claim obtain at least the value of the collateral. If the obligation underlying the secured claim was used to get the collateral, and the debt was acquired throughout specific time frames before the bankruptcy filing, the plan must provide for total payment of the debt, not just the value of the collateral (which may be less due to depreciation). Payments to certain secured creditors, may be made over the original loan repayment schedule (which may be longer than the plan) so long as any balance due is made up during the plan. The debtor should consult an attorney to ascertain the proper treatment of secured claims in the plan.
The plan need not pay unsecured claims in full as long it provides that the debtor definitely will pay all predicted “disposable income” over an “applicable commitment period,” and as long as unsecured creditors get at least as much under the plan as they would receive if the debtor’s assets were liquidated under chapter 7.
In chapter 13, “disposable income” is salary (other than child support payments obtained by the debtor) minus amounts reasonably necessary for the routine maintenance or support of the debtor or dependents and less charitable contributions up to 15 % of the debtor’s gross income. If the debtor runs a business, the meaning of disposable income don’t includes those amounts which are necessary for routine operating expenses.
The “applicable commitment period” depends on the debtor’s present monthly income. The applicable commitment period need to be three years if current monthly income is less than the state median for a family of the same size – and five years if the current monthly income is greater than a family of the same size.
The plan may be less than the applicable commitment period (three or five years) only if unsecured debt is paid in full over a reduced period.
Within 30 days following filing the bankruptcy case, even if the plan has not yet been endorsed by the court, the debtor must get under way making plan payments to the trustee.
If any secured loan payments or lease payments come due before the debtor’s plan is approved (typically property and vehicle payments), the debtor needses to make adequate protection payments straight to the secured lender or lessor – subtracting the amount paid from the amount that would otherwise be paid to the trustee. Id.
No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is practical and meets the standards for confirmation set forth in the Bankruptcy Code.
Creditors will receive 28 days’ notification of the hearing and may object to confirmation.
While an assortment of rejections may be made, the most frequent ones are that payments offered under the plan are less than creditors would acquire if the debtor’s assets were liquidated or that the debtor’s plan does not offer all of the debtor’s projected disposable income for the three or five year relevant commitment period.
If the court affirms the plan, the chapter 13 trustee will distribute funds procured under the plan “as soon as is practicable.”
If the court declines to confirm the plan, the debtor may file a modified plan.
The debtor may also switch over the case to a liquidation case under chapter 7. If the court declines to confirm the plan or the modified plan and instead dismisses the case, the court may sanction the trustee to keep some funds for costs, but the trustee must return all remaining funds to the debtor (other than funds already paid out or due to creditors).
Sometimes, a change in circumstances may compromise the debtor’s ability to make plan payments. For example, a financial institution may object or threaten to object to a plan, or the debtor may inadvertently have failed to list all creditors. In such instances, the plan may be modified either before or after confirmation.
Modification after confirmation is not limited to an initiative by the debtor, but may be at the request of the trustee or an unsecured creditor.