What is the Chapter 13 Plan itself? Very simply, it is list of debts to be paid in a certain order, according to a certain timeline, and, in the case of the unsecured creditors at the bottom of the priority order, to a certain percentage of what was originally owed to them—anywhere from 0% to 100%.
The priority order of debts to be paid is fixed by the Bankruptcy Code:
- “Administrative” Costs: These are the Trustee’s percentage earned of the total paid into the plan by the debtor (currently around 8% in the Eastern District of Michigan), as well as the balance of Attorney’s fees not paid prior to filing. Unlike in a Chapter 7 bankruptcy, the majority of Attorney’s fees are paid through the Plan rather than up-front, and these fees are highly scrutinized by the Bankruptcy Court.
- “Secured” Debts, such as home loans and car loans, come next.
- Arrearages on secured debts are the next priority payment. Arrearages may be made up in a Chapter 13 plan and must be paid in full by the end of the Plan payment period. This is one of the advantages of a Chapter 13 bankruptcy over a Chapter 7, and it is one of the mechanisms through which a filing debtor may save a home or other property through bankruptcy.
- “Priority” unsecured debts, such as child-support and IRS tax debt are paid next in line.
- Non-Priority unsecured debt, such as credit-card and medical bill debt, are paid last. Unsecured creditors received a disbursement only upon completion of the Chapter 13 Plan, and they only receive what is left after the other creditors are all paid their necessary amounts.
The amount of the monthly Plan payment is simple: it is the entire net income of the entire household of the filing debtor—regardless of whether one earning member of the household is not also filing for bankruptcy. So, for example, if a debtor, together with a non-filing spouse, earn a net income of $5000 per month between them, and they share monthly household expenses of $2500, then the remaining $2500 is what is paid into the plan each month.
Plan payments are typically automatically deducted from the filing debtor’s pay-check. If the debtor does not earn a regular paycheck, lives on Social Security or other non-traditional income, or earns cash income from tips, etc., an ACH draw each month on the individual’s bank account by the Trustee is the alternative.
Plan payments are made directly to the Trustee assigned to the case.
If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or email@example.com to schedule a free, initial consultation.