Chicago Bankruptcy Question: What is a Chapter 13 Plan?

Bankruptcy Question of the Day: What is a Chapter 13 plan?  Very basically, a Chapter 13 plan is the document that is filed with the bankruptcy court explaining how much money will be paid into the Trustee and how those funds will be distributed to your creditors by the Trustee.  In the Chicago area, the court has approved and posted a model plan to be used in all Chapter 13 cases filed.  This model plan can be found on the website for the Northern District of Illinois Bankruptcy Court under the local forms link.

A Chapter 13 plan has four major components: term, plan payments, distribution of funds and special provisions.  The term of the plan describes how long the plan payments will run for.  Under the U.S. Bankruptcy Code, a plan has to run for a minimum of three years (unless all creditors are paid in full in less time) and can only run for a maximum of five years barring significant extenuating circumstances.  The plan may be required to run for five years, depending on the income and household size of the debtor(s) under the Current Monthly Income test (the "means test").

The plan payments describes how much the debtor(s) will pay monthly to the Trustee AND any additional payments to that may be required.  It is quite common that, in addition to regular monthly payments, the debtor(s) is required to contribute some or all of their income tax refunds, bonus income, lawsuit proceeds, etc. throughout the life of the plan.  It is also quite common that the monthly plan payment will change at some point within the life of the case, such as when a 401(k) loan repayment ends or there is a scheduled increase in income.  The total amount to be paid into the plan from all sources is called the "pot".

The plan also dictates to the Trustee in the Chapter 13 bankruptcy how funds are to be distributed to the creditors through the life of the case.  Some creditors are entitled to receive fixed payments in a Chapter 13 plan while others will have to wait months, or even years, before they receive any payment.  Some creditors are entitled to receive interest on their claims while others will only be paid pennies on the dollar.  Some creditors may be specifically excluded from receiving any funds from the Trustee while others are paid in full. 

There are a variety of special provisions that can be included in a Chapter 13 plan of reorganization.  Unsecured junior mortgages and judgment liens can be removed from residences (known as "lien stripping"), financed vehicles and investment properties may have their liens modified to pay only the current value of the assets (known as a "cram-down"), co-signed debts can be completely excluded or paid in full within the plan, etc.

Formulating an affordable and effective plan of reorganization is one of the cornerstones of a good Chapter 13 case.  To do so properly requires the advice and expertise of an experienced Chicago bankruptcy attorney.  At Ledford & Wu, we pride ourselves on creating plans that are affordable for our clients, acceptable to the courts and trustees and effective in resolving our client's financial difficulties.  We are happy to offer a free consultation to determine what your Chapter 13 plan of reorganization would look like.

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