What Determines the Length of Your Chapter 13 Plan?
A Chapter 13 bankruptcy, otherwise known as a wage earner’s plan, allows you to discharge your debts by repaying a portion of them over time and on more favorable terms. When you have completed the plan, the court will eliminate most or all of your remaining unsecured debts.
Chapter 13 repayment plans last either three or five years. All debtors have the option of taking five years to complete it, but only some are given the option to choose a three-year schedule, which discharges debts faster. To know whether you qualify for a three-year schedule, you need to apply a formula similar to the means test used by debtors to determine if they qualify for a Chapter 7 bankruptcy. This is known as the “best efforts” test.
Here’s how the test works: A Chapter 13 plan must provide creditors with at least as much as they would receive if you filed for Chapter 7. It must also be based on your projected disposable income, which is the amount of your monthly income that you can devote to making payments under the plan. If your monthly income during the six months before you file for Chapter 13 bankruptcy is less than your state’s mean income for your family’s size, you qualify for a three-year plan. If your monthly income is equal to or more than the mean income, you may still qualify for a three-year plan by subtracting certain allowable expenses to calculate your disposable income. Otherwise, you must use a five-year plan.
Even if you qualify for a three-year plan, you might choose a five-year plan instead. Because the amount you pay is based on what you can afford to pay over three years, extending your payment schedule by two years will reduce your monthly payments. Conversely, even if you use a five-year plan, you can complete the plan sooner by increasing the size of your monthly payments.
There may be other factors that shorten or increase the length of your plan. If your financial circumstances render you unable to continue making payments through no fault of your own, the court might grant you a hardship discharge. On the other hand, if an amount of required debt payment is in dispute, you will likely have to continue paying off that amount until the dispute is resolved, even if you complete the repayment plan otherwise.
An experienced and knowledgeable Chapter 13 bankruptcy attorney can help you determine whether you have a choice of a three- or five-year plan and, if so, which is right for you.
The Law Offices of Michael Jay Berger in Beverly Hills, California will reliably advise you on your repayment plan and guide you through a Chapter 13 proceeding. Call 310-271-6223 or contact me online to schedule a free consultation.