What Must a Chapter 13 Plan Do?

When a debtor cannot file for bankruptcy under Chapter 7, either because he cannot pass the means test, because of a too recent prior bankruptcy, or other reason, he usually will file for protection under Chapter 13 of the Bankruptcy code.

Chapter 13 is somewhat like Chapter 7 in that the filing of the petition results in the imposition of an automatic stay and the property of the estate is used to pay creditors.  However, there are several significant differences between Chapter 7 and Chapter 13.

First, the property of the bankruptcy estate includes not only the debtor’s assets but also all earnings of the debtor for the duration of the case or until it is converted to a case under a different chapter.  Second, the debtor must propose a plan, similar to a plan of reorganization under Chapter 11. 

This plan, which must be confirmed by the Court at a hearing, must contain several elements:

It must:

• Pay all priority claims in full unless the claimant agrees to a different treatment.  Priority claims include such things as administrative expenses of the case, trustee fees, filing fees, domestic support obligations, recent tax obligations, and allowed claims for death or personal injury occasioned by the debtor’s operation of a motor vehicle while under the influence.  For a full list of “priority claims”, see 11 USC 507;
• As to secured claims, provide either that the debtor surrender the collateral, or the secured claim is paid in full and the creditor retains the security interest until then or until discharge;
•  Provide for payments on unsecured claims that equal or exceed what each creditor would receive if the bankruptcy had proceeded under Chapter 7; and
•  Be proposed “in good faith”.

In addition, the debtor must demonstrate he can make all payments required under the plan, has paid all domestic support obligations since filing for bankruptcy, and has filed all tax returns that are due.

Finally, if the Chapter 13 trustee or an unsecured creditor objects to confirmation of the plan, the Court may only confirm the plan if the unsecured claim is paid in full, or the debtor devotes all disposable income during the life of the plan to paying unsecured creditors’ claims.  “Projected disposable income” is generally described as all of the debtor’s income less amounts reasonably necessary for the maintenance and support of the debtor and his dependents or household.  If the debtor’s household income exceeds the median in that state, the calculation of what is “reasonably necessary for the maintenance and support” is calculated by a special “means test” formula created in 2005 by Congress.

The length of the plan can be less than three years if it pays all unsecured claims before then, or is three years if the debtor’s household income is less than the median income for households of that size in the state where the debtor lives, or five years if the debtor’s income is greater than the median income in that state for a household that size.

These myriad requirements often result in a debtor’s first proposed plan being objected to or not confirmable.