Payment Plan and Confirmation Hearing
Generally, the federal rules of bankruptcy require a debtor must file a payment plan at the time of filing or within 15 days of the filing. The repayment of debt occurs according to the type of debt in the following sequence of priority: priority debts, secured debts, and unsecured debts. The rules regarding the categorization of debt is complex, and you should consult us to discuss priorities your debt would be paid.
Except for very peculiar circumstances, priority debts must be paid in full during the five year repayment plan. Secured debts must be repaid or brought current during the five year period if the loan was taken out within the prior 910 days before filing. For secured loans that were more than 910 days old, except for first mortgages on a primary residence, must be repaid to the value of the collateral. A reduction in the amount owed in a loan is commonly referred to as a "cram down."
Many Chapter 13 clients who have loans over 910 days old can receive major reductions in the principal owed, the interest rates charged, all while being able to keep the collateral of the loan. This is a unique property of Chapter 13 that is not allowed under a Chapter 7. The court can reduce the amount paid on the loan to the "fair value" of the item, which might be the "Blue Book" value for a vehicle or the wiping out of a second or third mortgage on homes that have no equity in their second or third mortgage. Again, these are complex subjects and should be discussed with an attorney.
The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected "disposable income" over an "applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor's assets were liquidated under chapter 7. 11 U.S.C. § 1325.
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.
Items that are not dischargeable
Generally, child support obligations, taxes that have been assessed within the last three years, and student loans cannot be discharged under a Chapter 13 or a Chapter 7. If your primary objective in filing for bankruptcy is to get relief for back taxes, there are ways to get the IRS to reduce your tax burden. Please contact us to consult reducing your taxes with the State or with the IRS.
Beginning the Payment Plan
Within the first 30 days a debtor must start making payments under the payment plan even if there is no agreement with the Trustee or the court about the terms of the payment plan. No later
Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, the debtor must start making plan payments to the trustee. 11 U.S.C. § 1326(a)(1). If any secured loan payments or lease payments come due before the debtor's plan is confirmed (typically home and automobile payments), the debtor must make adequate protection payments directly to the secured lender or lessor - deducting the amount paid from the amount that would otherwise be paid to the trustee. Id.
Often times monies that are owed to the Trustee under a payment plan are taken directly from your paycheck from your employer, or they can be deducted from your bank account.
Confirmation Plan
No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. 11 U.S.C. §§ 1324, 1325. Creditors will receive 25 days' notice of the hearing and may object to confirmation. Fed. R. Bankr. P. 2002(b). While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if the debtor's assets were liquidated or that the debtor's plan does not commit all of the debtor's projected disposable income for the three or five year applicable commitment period.
If the court confirms the plan, the chapter 13 trustee will distribute funds received under the plan "as soon as is practicable." 11 U.S.C. § 1326(a)(2). If the court declines to confirm the plan, the debtor may file a modified plan. 11 U.S.C. § 1323. The debtor may also convert the case to a liquidation case under chapter 7. (4) 11 U.S.C. § 1307(a). If the court declines to confirm the plan or the modified plan and instead dismisses the case, the court may authorize the trustee to keep some funds for costs, but the trustee must return all remaining funds to the debtor (other than funds already disbursed or due to creditors). 11 U.S.C. § 1326(a)(2).
Occasionally, a change in circumstances may compromise the debtor's ability to make plan payments. For example, a creditor 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. 11 U.S.C. §§ 1323, 1329. 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. 11 U.S.C. § 1329(a).
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