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What are the basics of a Chapter 13 repayment plan?

On Behalf of | Jun 25, 2021 | Chapter 13

The main difference between Chapter 7 and Chapter 13 bankruptcy is that by filing for Chapter 13, you can avoid liquidating assets. Instead, you will come up with a repayment plan that will pay off most of your debts. If you complete the plan, your bankruptcy judge will discharge your remaining debts and allow you to exit bankruptcy.

If you have no experience with a Chapter 13 repayment plan, the basics are not hard to understand. While repayment plans will differ from person to person, there are certain characteristics common to almost every plan.

The plan will pay certain debts

As the U.S. Court website explains, you can expect your repayment plan to favor certain debts over others. Bankruptcy law will require you to pay priority debts in full unless your priority creditor allows for an alternative way to deal with your debt. Many taxes and family support obligations fall under this category.

You will likely have to pay your secured debts as well. These are debts backed by collateral. Home mortgages are a common example. You might work out a repayment plan to pay your outstanding amounts to your secured creditors provided you make up missed payments prior to your bankruptcy. However, your plan will probably not pay back in full unsecured debt like credit card debt.

The plan requires approval

Whatever plan you create will require approval by a bankruptcy judge. This will happen at a confirmation hearing. The judge will review the plan and confirm whether it meets the standards established by the Bankruptcy Code. Creditors may also object to the plan at this hearing.

As part of the bankruptcy process, you will have a trustee that oversees your bankruptcy plan. Even if the judge rejects the plan, your trustee may file a modified plan that could meet judicial approval.

You will pay your trustee

Keep in mind that you will pay your trustee, not your creditors. You will give your trustee regular payments, likely on a monthly or biweekly basis. Your trustee will then distribute the money to creditors as your plan has established. This should give you some peace of mind since you do not have to deal with your creditors directly as you repay them.

It is also possible to modify a plan after a judge has confirmed it. There may be a defect in the plan that requires addressing. Since most repayment plans last from three to five years, your bankruptcy should not take very long to complete.