How do I make a Chapter 13 plan that succeeds?
That’s important because a successful Chapter 13 lets you
keep your assets,
keep control of your income, and
discharge more debts than any other form of bankruptcy.
Yet a distressing number of Chapter 13’s fail before they reach the finish line.
Debtor writes the plan
One powerful characteristic of Chapter 13 is that the debtor writes the payment plan.
Not the judge, not the trustee, not some anonymous “they”. You.
The court must confirm it, but creditors don’t have to like it or support it for it to become the order of the court.
The plan sets out how much money you will pay in every month, and tells the trustee whom to pay with that money.
So, how do you craft a plan that you can follow and will get you to your goals? What plan elements increase the odds of success?
1. Don’t overreach
Biting off too much to chew (or really, to pay) dooms more Chapter 13 plans than anything else in the debtor’s control.
And that usually comes down to trying to save a house with a loan badly in arrears. Or, keeping a vehicle with a huge unpaid balance.
Bankruptcy allows you to choose whether to continue paying on debts secured by things you own. Chapter 13 differs from Chapter 7 in that it provides you protection from creditors and a space to catch up on secured debts that are delinquent.
But some other debts must, by law, be paid in Chapter 13. Child support and recent taxes are the two most frequent examples. Those debts have a priority under the law, and must be paid in full through the plan.
Since secured debts are usually paid first by the Chapter 13 trustee, the first dollars into your plan pay for those secured debts you choose to pay.
If later you are unable to fund the plan, you can find yourself tossed out of bankruptcy, still behind on house and car, AND owing the feds and your ex.
Sometimes, the most valuable thing a bankruptcy provides is a chance to walk away from deals you can’t afford any longer.
2. Be real about the cost of living
Bankruptcy is unlike many kinds of legal representation where you can hand the problem to a lawyer and go on about your life.
Not in Chapter 13.
Chapter 13 requires that you help your lawyer present a budget for the life of your plan that is realistic. Nothing good comes of estimating that you can feed a family of four on $200/month, or that you can operate an older car for just the price of gas.
Make unrealistic assumptions about ongoing living expenses, so that the plan appears to work, just pushes the next crisis a bit down the road.
Think about the real cost of running your house and nurturing your family. Make provisions in the projected budget for those expenses that come around but not on a monthly schedule.
3. Opt for automatic payments
Have your Chapter 13 payment automatically deducted from your paycheck, or your bank account, and you stand a far better chance of completing your plan.
It’s simply easier to look at what’s in the account and spend what’s available than it is to spend such that enough is left to make the Chapter 13 payment.
4. Cling to a capable lawyer
Your bankruptcy lawyer is yours for the duration of the plan. Stay in touch.
Before there’s a crisis, or even a change that cramps your ability to make plan payments, pick up the phone. Tell your lawyer what you’re facing.
Be proactive in solving problems before those problems prompt the Chapter 13 trustee to dismiss your case.
You may be eligible to reduce your payments, to surrender the collateral for some debt, or to suspend payments for a while.
If not, your choices may include converting to Chapter 7, asking for a hardship discharge, or simply voluntarily dismissing your case.
Your lawyer can help you figure out which of the options works best for you.
Most problems in Chapter 13 are solved more effectively and more cheaply when you are proactive in facing those problems early.
Don’t be a stranger to your lawyer.