Seeking to lower your plan payments makes sense when your financial situation has changed but you still have “disposable income” – in other words, money left over after you deduct your reasonable, necessary expenses from whatever you earn. Lowering your plan payments requires you to modify your Chapter 13 plan, because you are changing one of its key terms.
Bankruptcy law imposes essentially the same requirements to modify a Chapter 13 plan as it does to confirm a plan in the first place.
Among other things, the modification must conform with the following:
To be confirmed, a Chapter 13 plan must provide for full payment of all priority claims (unless their holders agree to take less). A modified plan likewise must cover all priority claims, including child and spousal support, fees owed to your counsel and the Chapter 13 trustee, and subject to specified time limits, back taxes.
In most Chapter 13 cases, the primary secured claims are home mortgages and automobile loans. A plan modification generally does not excuse you from making monthly payments on home and auto loans. You also must continue to pay arrearages and other defaults that you promised to cure under your original plan so you could keep your home or car.
The bankruptcy court will not confirm a Chapter 13 plan – or let you modify it – unless you meet the “best interests of creditors” test. The “best interests of creditors” test requires debtors to pay holders of general unsecured claims at least as much as they would receive in a Chapter 7 liquidation. In most liquidations, unsecured creditors receive little or nothing, so you can usually reduce your plan payments without violating the “best interests” test.
Your plan, as modified, must be feasible – or in other words, workable. You must show that you have dealt with your financial problems and can make the new, lower monthly payments through the balance of your plan term.
Your options in bankruptcy court depend upon the circumstances. If you can turn the situation around within a few months, you can seek a temporary moratorium on plan payments.
If you are dealing with a long-term change but still have”disposable income,” you can ask the bankruptcy court to allow you to modify your plan and lower your monthly payments on a permanent basis.
How Long Will Your Chapter 13 Repayment Plan Last?
In general, unless you are paying back all of your debts (including nonpriority unsecured claims) in a shorter amount of time, your Chapter 13 plan must be at least 36 months (three years) long. But it can’t exceed 60 months (five years). Whether you can propose a three-year plan or if you must be in Chapter 13 bankruptcy for five years depends on whether your average income for the six-month period preceding your bankruptcy is above or below your state’s median income for a similar household.
If your income is below median, your plan can usually be anywhere from 36 to 60 months long. Keep in mind that proposing a 60-month plan can reduce your monthly payment amount by stretching your payments over a longer period of time. If you have above median income, you typically have to be in a 60-month plan (but some courts allow above median debtors to propose a shorter plan if they have no disposable income).
You can find the median income in your state on the U.S. Trustee’s website at www.justice.gov/ust (Choose “Means Testing Information,” choose the correct date range, and then choose “Median Family Income Based on State/Territory and Family Size.”)
Figuring Out Your Minimum Monthly Payment
Certain debts must be paid back in full through your repayment plan. This means that you must propose a plan that pays off all of these debts within 60 months regardless of your income and expenses. These debts include:
Congress has decided that certain obligations, called priority debts, are too important to be discharged in bankruptcy. Common examples of priority debts include back child support, alimony, and certain taxes. If you file for Chapter 13 bankruptcy, you must pay off these debts in full through your repayment plan. Enter the amount of all your priority debts in the calculator where indicated.
If you are behind on your mortgage and you want to keep your house, you must pay off all your arrears (existing at the time of your filing) through your repayment plan. Enter all applicable mortgage arrears in the calculator where indicated.
If you plan to surrender your house, you don’t have to pay back the arrears in your bankruptcy. In addition, if you are only behind on your second mortgage (or other junior lien) and you intend to eliminate that lien in your Chapter 13 through lien stripping, don’t include those arrears in your payment calculation.
Be aware that certain jurisdictions require you to make your regular mortgage payment through your Chapter 13 bankruptcy. In these jurisdictions, your plan payment may be very large but you would not have to make a separate mortgage payment directly to the lender.
Car Loans or Other Secured Debts You Want to Pay Off Through Your Plan
In most jurisdictions, if you are behind on your car loan (or another secured debt other than your mortgage) and want to catch up on your missed payments, you typically have to pay off the entire loan (not just the arrears) through your plan. Keep in mind that in certain jurisdictions, you may be required to pay off your car loans through your Chapter 13 plan regardless of whether you are behind on your payments or not.
Unless you intend to surrender the property or pay off these secured debts outside of bankruptcy (and your jurisdiction allows you to do so), enter the amount of your car loans and other secured debts in the calculator where indicated.
If you qualify to cram down your car loan or other secured debt, you only need to pay the lender the replacement value of the property through your repayment plan (not the entire loan balance). So include only the value of the vehicle (or other property) in your calculation for all secured debts you intend to cram down.
Administrative Fees and Interest Charges
Chapter 13 trustees get paid by taking a percentage of all amounts they distribute to creditors through your repayment plan. This percentage varies depending on where you live but can be up to 10%. In addition, you typically have to pay interest on secured claims you are paying off through your plan. The required interest rate can vary depending on the type of claim and the rules in your jurisdiction. But in general, you can expect to pay the national prime rate plus 1% to 3%.
Making Regular Monthly Payments on Loans
Keep in mind that if you want to keep your home, car, or other secured debts, you’ll have to keep making your regular monthly payments during your plan period (unless the court requires you to pay off the entire balance through your plan). As mentioned above, some courts might require you to make these monthly payments through your plan.
When Your Plan Payment Will Be Higher: Disposable Income and Nonexempt Property
So far we have only discussed debts you are required to pay off in your repayment plan regardless of your income, expenses, and nonexempt property. The debts discussed above are used in calculating your minimum Chapter 13 plan payment.
However, if you have disposable income or nonexempt assets, you will also have to pay back some or all of your nonpriority unsecured debts such as credit cards and medical bills. Depending on how much you have to pay your nonpriority unsecured creditors, your monthly plan payment can be significantly higher than the minimum payment calculated above.
How to Calculate Your Disposable Income
As part of your Chapter 13 paperwork, you must complete Form 22C — Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income. This form is also referred to as the Chapter 13 means test and is used to determine how long your plan will last (discussed above) and how much you must pay nonpriority unsecured creditors in your bankruptcy. Visit the U.S. Court’s website at www.uscourts.gov to find the most recent version of Form 22C.
If your average income for the six months preceding your bankruptcy is less than the median income for a similar household in your state, you are not required to fill out the entire form and will typically pay little or nothing to nonpriority unsecured creditors in your plan. However, if your income is above median, you must follow the instructions on the form to determine whether you have enough disposable income to pay back some of your nonpriority unsecured debts.
After completing the Chapter 13 means test, if you end up with a positive monthly disposable income figure, add that to your minimum plan payment calculated above because you must pay this amount towards your nonpriority unsecured debts each month.
What Happens If You Have Nonexempt Property?
Chapter 13 bankruptcy requires you to pay your nonpriority unsecured creditors at least as much as they would have received if you had filed a Chapter 7 bankruptcy. This essentially means that you must pay an amount equal to the value of your nonexempt property. If you can’t exempt all of your property, divide the value of the nonexempt portion by the number of months in your repayment plan and add it to the minimum monthly payment calculated above.
HOW THEN CAN THE PAYMENTS BE LOWERED?
Let me Repeat this Again Here as I had said earlier under “Feasibility” Above.
“Your options in bankruptcy court depend upon the circumstances. If you can turn the situation around within a few months, you can seek a temporary moratorium on plan payments”
“If you are dealing with a long-term change but still have”disposable income,” you can ask the bankruptcy court to allow you to modify your plan and lower your monthly payments on a permanent basis”.
A Plan Moratorium: Temporary Relief From Having to Make Plan Payments
A plan moratorium gives you a break, usually for no longer than 90 days, from having to make monthly payments to the Chapter 13 trustee. The bankruptcy court may allow a plan moratorium, for example, if you face:
- a short-term gap in employment
- a temporary injury or disability, or
- significant, unanticipated expenses that keep you from being able to make one or more plan payments.
Moratoriums Don’t Change Plan Terms
A moratorium does not change the terms of your plan. A plan moratorium just gives you a temporary break until you can bounce back from a short-term financial problem. Once the moratorium ends, you have to pick up from wherever you left off and resume making plan payments on a monthly basis. If you had 24 payments due under your plan when your moratorium began, for example, you still have 24 payments to make until your moratorium ends.
You Must Complete Payment Within Five Years
Regardless of the length of the moratorium, you must complete all payments under your plan within five years of the date that you started making them. Generally, you have to start making plan payments within 30 days of filing bankruptcy. This means that in most cases, you have about 61 months from the date that you filed bankruptcy to make up any plan payments deferred during a moratorium. If you can’t make up your missed installments within the five-year period, you must obtain court approval for other relief, such as modifying your plan to lower your required payments.
Modifying Your Plan to Lower Required Payments: Permanent Changes
To lower monthly payments over the long term, you have to ask the bankruptcy court to modify your plan. Cause for modifying your plan to lower your monthly payments includes:
- having to take a lower-paying job
- for self-employed debtors, losing key customers or incurring unanticipated business expenses
- suffering a serious injury or disability that permanently interferes with your ability to work, and
- having to pay health insurance premiums for yourself or your dependents that were previously covered by your employer.
How to Ask for a Moratorium or Modification
To obtain a plan moratorium or modification, you must file a motion, either on your own or through counsel, with the bankruptcy court. You also must give notice of the motion to the Chapter 13 trustee, creditors, and other parties in interest in accordance with the local rules for the district where you live. Depending on the local rules and practice in your district, the court may set a hearing when you file the motion, or only if a creditor or the trustee objects to it.
As the moving party, you have the burden of proof and must demonstrate to the bankruptcy court why your motion should be granted. If the court agrees, it will grant your motion in an order approving your requested plan moratorium or modification.
You Can Also Convert to Chapter 7
In some cases, it may be best to convert your bankruptcy to a Chapter 7 and eliminate the monthly payments altogether.
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