In Chapter 13 bankruptcy you must propose and then stick with a repayment plan that repays some creditors in full and others in part (sometimes pennies on the dollar). Most Chapter 13 plans last between three and five years. The duration of your plan depends on two factors:
- your monthly income, and
- how much time you need to make required plan payments.
Below we discuss each of these factors in more detail so you can understand how long your Chapter 13 repayment plan is likely to last.
(For comprehensive information about Chapter 13 and the repayment plan, see our Chapter 13 bankruptcy topic area.)
Is Your Monthly Income Above or Below the State Median?
To file bankruptcy under Chapter 13, you must have regular income so you can make required plan payments. Regular income includes wages and commissions that you earn either in the ordinary course of a job or through self-employment.
The “commitment period,” or plan duration, is determined by comparing your monthly earnings to the median family income in the state where you live. (Learn how to find your state median income and then compare your monthly income to the state median.)
The commitment period is three years if you earn less than the median income in your state. The commitment period jumps to five years if you earn more than the median income in your state. Five years is the maximum length of any Chapter 13 plan.
You can reduce the commitment period for your Chapter 13 plan if you can pay all of your unsecured debt sooner. Most Chapter 13 debtors, however, earn too little and owe too much to make required plan payments in less than three to five years.
Time Needed to Make Required Plan Payments
Even if you qualify for a three-year plan, you might opt for a five-year plan instead. There are several reasons why debtors who could proceed under a 36-month plan would do this:
To Catch Up on Arrearages on Home and Car Loans
Often a Chapter 13 debtor’s primary assets are his or her home and motor vehicles. Many Chapter 13 debtors file bankruptcy after defaulting on home mortgages or motor vehicle loans. Defaults on home mortgage and motor vehicle loans can be cured in Chapter 13 through the payments that you make under your plan. (Learn more about how you can "cure" arrearages through Chapter 13 bankruptcy.)
However, many debtors owe too much in arrearages to bring them current in only 36 months. By stretching the payment period out up to five years, you can ensure that your plan is feasible. The bankruptcy court will not approve your plan unless it is feasible, or in other words, workable in light of your income and expenses.
To Pay Administrative Expenses
Administrative expenses are costs incurred in connection with administering a Chapter 13 case. Generally, the primary administrative expenses in a Chapter 13 case are legal fees owed to your attorney and trustee fees due to the United States Trustee. Administrative expenses have first priority under the Bankruptcy Code and must be fully covered by your plan payments. Many debtors are unable to pay all of their administrative expenses in only 36 months, especially when they have cure obligations on home or auto loans they have to meet as well.
“Best Interests of Creditors” Test
One of the advantages of Chapter 13 over Chapter 7 is that you can keep assets that otherwise would have to be turned over to a trustee. There is a price, however, that you must pay for avoiding liquidation: meeting the “best interests of creditors” test.
Under the best interests test, a Chapter 13 plan cannot be confirmed unless it pays unsecured creditors at least as much as they would have received in a Chapter 7 case. In most Chapter 7 cases, unsecured creditors are paid little or nothing. In some cases, however, debtors have enough assets for a trustee to realize a return for unsecured creditors through a Chapter 7 liquidation, even after taking into account homesteads and other exemptions. (Learn more about Chapter 13's best interests of creditors test.)
To retain property under a Chapter 13 plan, you have to meet the best interests test and pay your unsecured creditors at least as much as they would receive in a Chapter 7 liquidation. Meeting the best interests test is another reason you may need to increase the duration of your plan even if your income is low enough to qualify for a 36-month commitment period.
If Your Circumstances Change, Your Plan Length Could Change
Sometimes your circumstances change during your Chapter 13 case. This can affect the duration of your Chapter 13 plan as well.
Turning Over Collateral. In some cases, debtors decide to give up their homes or cars after they file Chapter 13 because they are unable to keep up with both loan and arrearage payments. Debtors who turn over collateral may be able to modify their plans to shorten the duration as long as they meet other bankruptcy law requirements. Plan modifications require bankruptcy court approval.
Short-Term Financial Problems. Debtors facing short-term financial hardships, such as temporary unemployment, can ask the bankruptcy court to approve a plan moratorium. A plan moratorium gives you a break, usually for no longer than 90 days, from having to make plan payments.
A moratorium by itself does not change the terms of your plan. A plan moratorium just gives you a temporary break until you can bounce back from a short-term financial problem. Regardless of the length of the moratorium, you must still complete all plan payments under your plan within five years of the date that you started making them.
Long-Term Financial Setbacks. You also can seek to modify your plan to deal with long-term financial issues, such as having to take a lower-paying job or pick up the cost of health insurance. One option, with court approval, is to modify your plan to stretch out payments to a full five years even if you initially proposed a shorter term. Stretching out the plan term can give you breathing room so you can continue to make loan and arrearage payments and keep assets like your home or cars.
(For more information on changing your plan payment and length, see Modifying a Chapter 13 Bankruptcy Plan.)