Deciding on a 3-Year or 5-Year Chapter 13 Repayment Plan
In a Chapter 13 bankruptcy, debtors repay a portion their unsecured debts over a period of three or five years and then are granted a discharge of the remainder. All debtors have the option of taking five years to complete a repayment plan, but some may be able to select a three-year schedule, which has certain advantages. Understanding the determinants of plan length, as well as the advantages of each duration, can help your make an informed decision about your bankruptcy strategy.
Your ability to opt for a three-year Chapter 13 plan depends on your projected disposable income: the amount of monthly income that you can devote to making payments under the plan. If your disposable income is below the state median for a household of your size, you are eligible for a three-year plan. If your disposable income is equal to or above the state median, you may still qualify for a three-year plan by claiming certain allowable expenses. Otherwise, your plan will last five years.
A three-year plan offers these advantages:
- Faster debt relief — One of the most significant benefits of a three-year repayment plan is that you can receive a discharge sooner, exiting bankruptcy earlier. A shorter plan is preferable for those who wish to rebuild their credit and financial standing quickly,.
- Lower total payment — A shorter plan duration often results in a lower total amount paid to unsecured creditors because you are only required to commit your disposable income for three years. After the plan ends, any remaining unsecured debts are discharged.
- Shorter period of court supervision — Chapter 13 filers must submit to court supervision, including tracking of income and expenses, for the duration of their plan. A three-year plan limits this oversight to a shorter period, allowing you to resume financial autonomy sooner.
Even if you qualify for a three-year plan, you may find a five-year plan beneficial for these reasons:
- Lower monthly payments — A five-year plan spreads out payments over a longer period, resulting in lower payments and reducing the chances of default.
- Time to catch up on secured debts — If you have fallen behind on your mortgage or car loan, a five-year plan gives you more time to catch up on arrears, avoiding foreclosure or repossession.
- Time to address financial changes — A five-year plan gives you latitude to respond to any unforeseen financial challenges during the bankruptcy process. If your situation worsens, you may be able to modify the plan, reduce payments or even convert the case to a Chapter 7.
Ultimately, the optimal plan duration depends on a debtor’s specific financial circumstances and long-term goals. A knowledgeable Chapter 13 bankruptcy attorney can help you determine which length of plan is right for your situation.
The Law Offices of Michael Jay Berger in Beverly Hills, California has wide experience guiding wage earners through the Chapter 13 process. Call 310-271-6223 or contact us online to schedule a free consultation.
