What Goes In the Plan?
(a) Length of Plan – A plan that proposes to pay less than 100% to unsecured creditors must be a minimum of 36 months. Any plan that proposes to pay unsecured creditors in full can be as short as the debtor wants. The maximum plan length is 60 months. The shorter the plan period, the larger the monthly payments. The longer the plan period, the smaller the monthly payments. The ideal plan length is the shortest plan with the monthly payment the debtor is absolutely certain he can afford. Don’t bite off more than you can chew!
(b) Administrative Expense – An administrative expense is money owed by the debtor to a non-creditor for the administration of the bankruptcy case. These obligations are paid first.
(i) 5% Trustee’s Expense – Douglas Neway’s office is paid 5% of every plan payment before disbursing money to creditors. That means in calculating the actual plan payment, your attorney will add in the trustee’s fee on top of the creditor payments. Over the course of the plan, the trustee’s administrative expense is usually greater than your attorney’s fee.
(ii) Your Attorney’s Fee – Most of the quoted attorney’s fee is usually paid though the plan. So, while Parker & DuFresne, P.A. charges $3,500 to file a Chapter 13 bankruptcy, most of that fee is paid through the plan, adding $30 to $50 per month to the plan payment.
(c) Creditor Proof of Claims – In order to receive payment, or other treatment, in the plan, a creditor must file a Proof of Claim. The debtor then has the opportunity to file an objection to that Proof of Claim, and if the creditor does not respond to the objection in writing within 30 days, the claim is stricken or modified in accordance with the objection. If the creditor does respond, the objection is scheduled for a hearing in front of the judge, and the claim is considered valid until the debtor proves that it is not.
(i) Priority Creditors – The plan must pay all priority creditors in full, unless there is a written agreement or court order that allows the debtor to pay the obligation over a longer period of time. Priority creditors do not have a security interest in any of the debtor’s property.
- 1. I.R.S. – Typically, since there is no state income tax in Florida, the I.R.S. is the only taxing authority that is given priority status. Keep in mind that if the debtor owes property taxes to the county tax collector, that debt is secured by real estate and is included in the plan as a secured claim.
- Support Arrearages – This is a potential problem lurking out there for some debtors. Claims filed by or on behalf of support creditors (i.e. alimony or child support) are priority claims and must be paid in full. However, if there is already an order in place that establishes the repayment of support arrears over a period of time longer than the plan length, then that lower monthly payment can be paid through the plan.
(ii) Secured Creditors – A secured creditor is a creditor that holds a perfected security interest in something owned by the debtor known as collateral. The most obvious examples are a house or a car. A Chapter 13 plan must either surrender the collateral back to the secured creditor, or it can repay the secured debt over the life of the plan.
- Long Term – Typically the debtor’s house – If the remaining term under the secured note is longer than the plan period, the debtor typically chooses to pay the regular monthly payment. This means that the debt will not be paid in full at the end of the plan. This also means that the debtor cannot modify the interest rate. This is typically what happens with house payments. Any past-due balance on the mortgage, known as the arrearage, is spread over the life of the plan.
- Short Term – Typically the debtor’s car – If the remaining term under the secured note is shorter than the plan period, the debtor must pay the entire obligation in the plan. The really good news is that the debtor can usually reduce the contracted rate of interest and spread the payments over the entire plan period. The monthly payment to automotive finance companies is usually reduced so much that it can offset the arrearage owed on the debtor’s home. The net effect is that the plan payment is sometimes no greater than the original monthly payments on the house and car, even though the mortgage arrearage is being paid in the plan as well. Sounds confusing? It really isn’t.
(iii) Unsecured Creditors – The unsecured creditors are those creditors who don’t have a perfected security interest in the debtor’s property. Examples of general unsecured creditors are credit cards and medical bills. This type of debt is paid from a remaining pool of money after paying everyone else. Actually, it’s more like a small puddle than a pool. This small left-over sum is spread evenly across the unsecured creditors. This is known as a pro-rata payment. Unsecured creditors are rarely paid in full over the life of the plan, and are often paid as little as 5% of the balance due. Upon completion of the plan, the remaining balances are wiped out or discharged.