Creating a Feasible Chapter 13 Repayment Plan
A Chapter 13 repayment plan may help you catch up on overdue debts and protect important property, but can you realistically afford the payments for three to five years? A feasible plan must satisfy bankruptcy requirements while leaving enough income to cover reasonable living expenses. Otherwise, even a plan that looks manageable on paper could become difficult to maintain.
If you're considering Chapter 13 bankruptcy, The Law Office of Marc G. Alster in Hackensack, New Jersey, can help you assess your income, expenses, and repayment obligations to determine whether a proposed plan is financially realistic.
What Makes a Chapter 13 Repayment Plan Feasible?
Chapter 13 allows eligible individuals with regular income and debts below the applicable statutory limits to repay some or all of their debts over three to five years. Rather than paying each covered creditor separately, the debtor generally makes regular payments to a bankruptcy trustee, who distributes the money according to the court-approved plan.
Under Chapter 13 bankruptcy requirements, the bankruptcy court must determine whether the debtor can make all payments under the plan and comply with its terms. This is known as the feasibility requirement. In practice, the trustee generally reviews the debtor's income and expense schedules (Schedules I and J) to assess whether the household has enough income remaining to make the proposed plan payments.
Calculating Affordable Monthly Payments
Calculating affordable Chapter 13 payments requires evaluating reliable monthly income, necessary living expenses, and legally required creditor payments. Plan payments must also account for the trustee's percentage fee, which can be up to 10% of payments received.
Calculate Reliable Monthly Income
Income may include wages, self-employment earnings, retirement benefits, or other regular sources. The amount and consistency of that income matter over a multi-year plan.
For people with variable income, such as commissions or seasonal earnings, reviewing several months of financial records can help establish a realistic payment amount without relying on unusually strong months.
Account for Necessary Living Expenses
A workable budget should reflect actual household needs, including:
Housing payments, utilities, and essential home expenses
Groceries, transportation, and insurance
Medical expenses and dependent care
Taxes and other required payments
Reasonably anticipated changes in household expenses
For example, a person who budgets for a car payment but overlooks routine maintenance may struggle when the vehicle needs repairs.
Bankruptcy Forms 122C-1 and 122C-2 help determine income and allowable expenses. Above-median-income debtors generally must use IRS expense standards for certain deductions, so not every household expense necessarily counts toward the legal calculation of disposable income.
Which Debts Must the Chapter 13 Plan Address?
A Chapter 13 repayment plan must account for secured, priority, and unsecured debts.
Secured and Priority Debts
Secured debts are backed by collateral, such as a home or vehicle. Chapter 13 may allow homeowners to catch up on overdue mortgage payments through the plan, but they must also account for regular mortgage payments that continue during bankruptcy.
Certain vehicle loans may also be restructured through the plan. Depending on the loan terms and when the debt was incurred, the secured amount may sometimes be reduced to the vehicle's value.
Priority debts, including certain taxes and domestic support obligations, must often be paid in full through the plan unless an applicable legal exception applies, which can substantially affect the minimum payment needed to make the plan workable.
Unsecured Debts
Unsecured debts commonly include credit card balances, medical bills, and certain personal loans.
A Chapter 13 plan does not necessarily require full repayment of every unsecured debt. However, if the trustee or an allowed unsecured creditor objects to confirmation, the plan generally must commit all projected disposable income over the required repayment period unless unsecured creditors are paid in full.
Unsecured creditors must also receive at least as much as they would receive if the debtor's nonexempt assets were sold in a Chapter 7 bankruptcy.
Three-Year vs. Five-Year Repayment Plans
The required repayment period depends partly on the debtor's income compared with the applicable state median income for a household of the same size.
For debtors below the applicable median, the repayment period is generally three years unless the court approves a longer period for cause. For those above the median, the plan generally lasts five years.
A shorter period may be permitted if all allowed unsecured claims are paid in full. A Chapter 13 plan cannot extend beyond five years. A longer repayment period may reduce monthly payments.
How New Jersey Courts Evaluate Chapter 13 Plans
New Jersey bankruptcy courts evaluate Chapter 13 plans for compliance with federal bankruptcy requirements, including feasibility, good faith, and the required treatment of creditors.
Chapter 13 repayment plans are submitted to the United States Bankruptcy Court for the District of New Jersey. The court requires debtors to use its Chapter 13 Plan and Motions form, which identifies proposed payments and the treatment of creditors. Creditors may object, and the court determines whether the plan meets the requirements for confirmation.
Chapter 13 plan payments generally must begin within 30 days after the earlier of the filing of the plan or the order for relief, unless the court orders otherwise, even before the plan receives approval. This makes it essential to develop a realistic payment proposal early in the process.
What Happens if a Repayment Plan Becomes Unaffordable?
Job loss, reduced income, unexpected medical expenses, or increased household costs may interfere with scheduled Chapter 13 payments.
If Chapter 13 payments become unaffordable, the debtor may be able to request a plan modification, subject to court approval and applicable legal limits. However, missed payments can lead to dismissal, which generally ends the automatic stay and allows creditors to resume foreclosure, repossession, or other collection actions.
Depending on eligibility, converting to Chapter 7 may be another option. In limited circumstances, a hardship discharge may be available when circumstances beyond the debtor's control prevent completion of the plan and statutory requirements are met.
However, a hardship discharge is narrower than a standard Chapter 13 discharge, and certain debts that would otherwise be discharged may remain.
Debtors experiencing financial difficulty should therefore seek legal guidance promptly rather than assuming missed payments can be corrected later. The Law Office of Marc G. Alster offers Chapter 13 bankruptcy representation, which includes helping clients understand repayment obligations and evaluate available options when their financial circumstances change.
Create a Sustainable Chapter 13 Plan With The Law Office of Marc G. Alster
Attorney Marc G. Alster has more than 30 years of bankruptcy experience representing debtors and creditors. He handles Chapter 13 and Chapter 7 cases, as well as alternatives such as creditor workouts and mortgage loan modifications.
From Hackensack, New Jersey, The Law Office of Marc G. Alster serves clients in Passaic County, Bergen County, Hudson County, and Essex County, as well as in Southern New York, including Rockland County, Putnam County, Orange County, Queens County, and Bronx County
If you're considering filing Chapter 13 bankruptcy, call (201) 862-7078 and discuss your repayment options with the firm.