"How Much Are Chapter 13 Payments?"

“How Much Are Chapter 13 Payments?”

Thanks to Jean-Christopher André for this amazing photo, 

from Tiniteqilaaq, Greenland.

It’s critical to know the amount of your Chapter 13 payment each month, but that’s just the tip of the iceberg.  For your Chapter 13 case to be successful, you need to know why your Chapter 13 payment adds up to that amount ­— and what that amount does and does not cover.  Here are two frequently heard quotes that show how confusion can result from a lack of understanding:

1.

Debtor says to Lawyer: “My Chapter 13 payment is $500 per month.  Why is my payment so expensive?  My friend’s payment is only $200 per month!”

There is obvious confusion here about the different components that make up a plan payment.  Here are some common items that can affect the plan payment:

• Car payments.  If your plan is paying debt on one or more cars, this can easily add to the amount that you will be required to pay to the Trustee.  These claims are “secured” by the car as collateral, so the car creditor is entitled to receive interest, too. 
• Other collateral.  If you are paying to keep other items, those monthly payments are often dealt with in the Chapter 13 plan in the same way as car payments are commonly handled. 
• Arrears.  Chapter 13 is a reorganization, a chance to catch up missed house payments or other required payments over a period of three to five years.  That amount gets added to your Chapter 13 plan. 
• Tax and support claims.  If you owe tax debt, or if you are behind in child support or alimony payments, you can use Chapter 13 to pay these amounts over time.  Tax and support claims are two examples of “priority” claims, which normally need to be paid back in full as part of your bankruptcy plan. 
• Unsecured creditors.  If you have high income or equity in property, you may be required to pay an amount to “general unsecured creditors” (credit cards are an easy example), and that amount is added to the total that you will need to pay as part of your plan.  There will be times when you might have to pay back all of your creditors in full, either because you have so much income or equity, or to resolve other objections that the Trustee or a Creditor might otherwise have to your plan, possibly due to unnecessary property or expenses. 
• Unnecessary property.  If you want to continue to make payments on “unnecessary property,” such as a vacation home, extra vehicle or recreational vehicle, the Trustee might object that you are not making a maximum effort to repay creditors, and that the plan is proposed in bad faith.  The same goes for expenses that might not be necessary, such as private school tuition.  In that situation, in order to continue that lifestyle choice, you might have to agree to pay some additional amount to your other creditors.  This can obviously drive up the plan payment in a hurry.  Sometimes the wiser choice is to surrender the unnecessary property and avoid not only that expense the but the compensatory amount you would need to pay to satisfy the Trustee. 
• Attorney fees.  In many jurisdictions, your attorney’s fee can be paid in the Chapter 13 plan.
• Trustee fees.  Chapter 13 Trustees get paid by taking a percentage of each payment received.  Figure 10% for a quick calculation, but the percentage is less in some jurisdictions. 
• Length of plan.  Once you add up the different payments you are making, divide by the length of the plan.  Normally the plan will be either 36 or 60 months.  A plan cannot go longer than 60 months, and cannot be less than 36 months unless it pays back every creditor in full.  If you divide the total of your payments by the length of the plan, you should arrive at the monthly payment amount. 

If your payment is higher than someone else’s, you are probably paying different things, at different amounts.  If you think your payment is too high, it’s worth considering the claims you are paying in your case: Which can you control, and which ones are fixed?  If there is no dispute that you owe priority-level taxes, then, as the saying goes, that payment is going to be unavoidable.  The Trustee fee is not negotiable.  If you have a high payment and your plan term is 36 months, you have the option of extending the term to 60 months, which should reduce the monthly amount you have to pay.  Finally, look at the vehicles you are paying for and the amount of arrearage that you are trying to catch up on your home.  If the vehicles are expensive, or if you are deeply in arrears on a house with no equity, you could surrender that property and lower your Chapter 13 bankruptcy.  That’s often a very difficult decision, but that sacrifice may sometimes allow you to continue in a more affordable Chapter 13 case if you decide that goal is ultimately more important to you. 

2.

Lawyer: “You filed your Chapter 13 case four months ago.  Have you been making your [$1,000 per month] mortgage payments since then?”

Debtor: “No, I thought my [$300 per month] Chapter 13 payment would cover that.”

It’s easy to laugh at someone for assuming a $300 bankruptcy payment will somehow cover a $1,000 monthly mortgage payment, but the bankruptcy process has so many steps and rules and forms that even a sophisticated person can be confused about who gets paid what, when.  It’s just as important to know what’s not included in your plan payment as knowing what is. 

By understanding why your plan payment needs to be the amount that it is, you will start to get a handle on what is covered.  The plan will usually specify items that are not being paid.  The practice as to what gets paid by whom will vary from jurisdiction to jurisdiction.  This summary is based on my experience as an attorney in the Southern District of Georgia. 

• Surrendered property. Certain items are being “surrendered,” which means you intend to give the collateral back to the creditor that has a “security interest” in the property.  If that’s the situation, your plan will rarely be paying any amount to this creditor (other than as an unsecured creditor, if there is a “deficiency” claim), and you certainly should not continue to make separate payments to the creditor either.
• Car payments.  If your car is a “long-term debt” (meaning the months remaining on the car note are more than the months in your plan), you will probably continue to make those payments in addition to your Chapter 13 plan payment (because the plan payment does not cover this amount).
• House payments.  A plan might catch up the payments you have missedbefore you filed the case.  In about half of U.S. jurisdictions, it’s expected that you will make ongoing mortgage payments directly to the creditor, and not through the Chapter 13 payment.  Other jurisdictions could require “conduit” payments, where your Chapter 13 plan payment will include your house payment.  Obviously, in that situation, the Chapter 13 payment will be at least the amount you would normally pay your mortgage lender. 
• Support payments.  Check whether your plan payments will cover your ongoing child support or alimony payments.  In many cases, the plan will not deal with payments due in the future and will only deal with payments you missed before you filed the bankruptcy case.
• New debts.  Debts that you incur after you filed your bankruptcy case are probably not contemplated at the time your plan was approved.  Bring these items to the attention of your attorney because they can impact your case.  Sometimes the debts can be included in your case, but this doesn’t happen automatically. 
• Credit cards and personal loans.  You almost certainly shouldn’t continue to pay credit cards and personal loans if they existed at the time you filed your bankruptcy case, unless the plan specifically noted this. 
• Utility bills.  Most ongoing electric, water, sewer and trash bills are not going to be covered by your Chapter 13 plan.  Unless you have specifically discussed something different with your attorney, plan on continuing to make those payments directly to the utility.
• Leases.  You can use your Chapter 13 plan to catch up on missed lease payments, but in many situations you’ll be expected to make upcoming payments directly to the landlord or leasing company.  Make sure you know what is expected of you, according to your plan.
• Student loans.  There are too many factors to consider here as to whether or not you should include student loan debt in your Chapter 13 payments.  Student loans cannot be discharged in Chapter 13 (except in very rare circumstances), but they are not “priority” debts like taxes and child support.  This means you don’t have to pay student loans while in Chapter 13, but there will be many circumstances where it would benefit you to do so.  For example, if you are currently in an income-based repayment program, continuing to make those payments will often be in your best interest.  The point of this blog entry is to make sure you know what you are supposed to be doing with respect to student loans.  A mistaken assumption could lead to bigger problems at the end of your case.       

The best general advice is to pause before you make a payment directly to a creditor.  Be certain you are still obligated to make the payment, and that it isn’t something covered in the Chapter 13 plan.  On the other hand, if you aren’t planning to make a house or car payment, and you intend to keep that property, make sure the Chapter 13 plan takes care of those items.  The same goes for lease and utility payments.  Support payments are usually required or enforceable by a state court, with dire consequences if you fall behind, so take extra care to make sure you are complying.  Always double check with your attorney, if you aren’t sure.    

The 7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit my website at narmorelawoffice.com.

Narmore Law Office LLC is a debt relief agency and helps people file for relief under the Bankruptcy Code.