Basics of a Chapter 13 Plan

The United States Bankruptcy Code details certain mandatory provisions for every chapter 13 plan and several permissive provisions that a debtor may include. First and most importantly is that a debtor must submit to the trustee all or a portion of future earnings or income necessary to execute the plan. Second, the plan must provide for the full payment of all priority claims, which is debt not dischargeable in bankruptcy, unless the creditor holding that claim expressly consents to less favorable treatment. Third, if the plan separately classifies claims, the plan must provide  equal treatment for each claim within a particular class.

Future Income and Earnings

Debtors often seek to pay certain secured claims “outside the plan” rather than through the trustee. The prevailing view is that Bankruptcy Code does not require that all debts be paid through the plan; rather, it merely requires that debtors furnish enough money from future earnings or income to “the supervision and control of the trustee” necessary to fund the plan.

Often, a debtor will continue making mortgage payments outside of the plan. As such, a debtor will continue to pay the mortgage as before while paying other bills through the trustee.

Nonetheless, debtors do not have unchecked discretion to pay creditors outside the plan. Bankruptcy Courts still have jurisdiction over those payments.

Full Payment of Priority Claims

Although creditors holding claims to non-dischargeable debt must be paid in full under a plan, this rule is not absolute. Interest that accumulated after the bankruptcy filing, or postpetition interest, need not be paid in full under the plan.

With that said, postpetition interest on priority claims will still accrue interest for non-dischargeable debt. After completion of the plan, those creditors can pursue the debtor for the accrued interest.

Classes of Claims

A debtor may classify certain debt in a Chapter 13 plan. Generally, the classes of debtors will be divided into priority claims, secured debt, and unsecured debt. Priority claims can be secured or unsecured.

Priority claims usually include:

• ·        child support
• ·        spousal support
• ·        certain income taxes
• ·        payroll taxes and sales taxes
• ·        money you owe for causing the personal injury or death of another person because of intoxication with drugs or alcohol
• ·        criminal fines, and
• ·        overpayment of government benefits.

Secured debt is debt backed by collateral, generally car loans and mortgages. Unsecured debt is not backed by collateral, usually credit cards, personal loans, and medical bills. All creditors in each class must be treated equally under the plan.

The Bankruptcy Code does not specify how to name the different classes; instead, the debtor submits a proposed plan to the court for approval. The classes can consist of creditors holding claims to various types of debt. Here is an example of a debtor who creates six separate classes:

1.      priority claims
2.      secured claims
3.      long-term debts
4.      debts with co-signors
5.      arrearages
6.      under-secured debts

When filing for Chapter 13 bankruptcy protection, a debtor is required to submit a plan for court approval. If you are considering bankruptcy, speak with the law firm of Melanie Tavare. She has the knowledge and experience to help you create a plan and get out of debt.