What are a Debtor's Obligations under Chapter 13?
Filing for Chapter 13 will allow a debtor keep their property and repay creditors over time in a three or five year repayment plan. If a debtor's current monthly income -- the debtor's average income six months before filing for bankruptcy -- exceeds their state's median income, the debtor must repay creditors in a five-year plan. If, on the other hand, a debtor's current monthly income is equal to or less than their state's median income, the bankruptcy court may allow the debtor to repay creditors in a three-year plan.
Chapter 13 Obligations: The Debtor Must File Forms and Documents
To petition for Chapter 13 bankruptcy, all debtors must file required forms and documents with the local bankruptcy court in their area. The debtor will provide the court with information about income from all sources, a list of creditors, real and personal property, and living expenses. The filer must also submit the following documents:
- A credit counseling certificate of completion, and if created, a copy of a repayment plan
- A copy or a transcript of the debtor's most recent tax return
- Proof of filing for taxes for the previous four years
- A Chapter 13 repayment plan
Chapter 13 Obligations: The Debtor Must Pay a Filing Fee
When filing for Chapter 13, the debtor must pay a filing fee of $235 and a $39 administrative fee. The debtor can pay the fees in up to four installments as long as the court receives the last installment within 120 days from the date that the debtor filed for bankruptcy or within 180 days from the date that the debtor filed for bankruptcy if the court grants an extension. Failing to pay the fees may result in the dismissal of the filer's case.
Chapter 13 Obligations: The Debtor Must Repay Creditors
A debtor must begin making payments according to the proposed three or five-year repayment plan within 30 days after filing for Chapter 13. The bankruptcy trustee, (an individual appointed person hired by the court to handle a debtor's bankruptcy) will hold the payments until the court either confirms or denies the debtor's plan. If the court denies the plan, the trustee will return the money, minus administrative costs, to the debtor. If the court confirms the plan, the trustee will distribute the money to creditors in accordance with the plan.
A plan will typically require the debtor to make regular payments on a monthly or bimonthly basis to the trustee or through a payroll deduction. The trustee will distribute the money to pay for administrative fees, priority debts (a claim not secured by collateral, but subject to repayment in full in Chapter 13), secured debt (a debt secured by property), and unsecured debt (a debt without the right to take specific property for an unpaid claim). The debtor's repayment plan must prioritize payments as follows:
The plan must pay administrative fees in full.
- A statutory trustee fee ranging from 3% to 10%
- Attorney fees
The plan must pay priority debts in full.
- Child support and alimony
- Wages, salaries, and commissions owed to employees
- Nondischargeable tax debt
- Contributions to employee benefit plans
Secured debts that survive bankruptcy must stay current. The debtor must pay overdue payments in full during the life of the plan.
- Home equity loans
- Loans for cars, boats, and motorcycles
- Personal loans
The plan must pay other secured debts in full.
- Tax liens
- Judicial liens
- Statutory liens
- Promissory notes securing personal property
The plan must pay unsecured creditors an amount equal to the debtor's nonexempt property. The debtor must use all disposable income -- current monthly income, minus allowed expenses -- to pay unsecured creditors over the life of the plan.
- Credit card charges
- Medical bills
- Union dues
- Health club dues
- Back rent
Chapter 13 Obligations: The Debtor Must Stick to the Plan
A bankruptcy court can dismiss a case at any time if the debtor fails to act in accordance to bankruptcy law and the plan. To keep a bankruptcy case from being involuntarily dismissed, the debtor must:
- Continue making child support and alimony payments
- Continue making payments to creditors through the plan
- Not incur new debt without consulting with the trustee
- Remain current on filing for taxes
- File annual income and expense reports
Sometimes it is necessary for a debtor to modify a plan after the bankruptcy court confirms it. Some reasons a debtor may ask for a modification include decreased income, the need to buy a car, or a missed payment.