Understanding the chapter 13 repayment plan in California

Through chapter 13 bankruptcy filings, people must establish plans to pay back all or a portion of their debts.

Including mortgage notes, Bloomberg reported in December of 2016 that the average total debt for households across the U.S. was $132,500. When some people in California fall behind on their debts, they may consider relief options, such as filing for chapter 13 bankruptcy, to regain control of their finances. Known as the "wage earner's plan", this option relies on the development and implementation of a debt repayment plan. In order to determine if filing for chapter 13 protection is right for them, it may help for people to understand how these plans work.

The plan

In chapter 13 bankruptcies, people must develop repayment plans to put all their projected disposable income toward paying down their debts. Details regarding how much filers will pay and to which creditors must be submitted with their petitions or within 14 days of their filings for court approval. With few exceptions, chapter 13 plans allow people to pay off all or a portion of their priority, secured and unsecured debts.

Priority claims

Bankruptcy law grants certain claims special status. Known as priority claims, these may include taxes, the costs of bankruptcy filings, alimony and child support payments. Unless they reach another arrangement with their creditors, people must pay back all of their priority debts in full through their chapter 13 repayment plans.

Secured claims

Secured claims are those that are safeguarded using collateral. Should they want to keep the collateral items, people must provide for payment of at least their value in their repayment plans. If not, their creditors may choose to collect against the property. To retain the items of collateral in some cases, such as when it comes to their home loans, chapter 13 filers must continue to make their regular payments and catch up on any arrears through their plans.

Unsecured claims

Provided their repayment plans stipulate they will pay all their disposable income toward their monthly installments, people may not be required to pay off all of their unsecured debts through chapter 13 bankruptcy repayment plans. However, they must pay as much toward these claims as their creditors would receive through chapter 7 bankruptcy liquidations. Upon completing all the necessary plan payments, filers may have the remainder of their unsecured debts discharged under certain circumstances.

The confirmation hearing

Before a chapter 13 repayment plan is put into effect, a confirmation hearing is held to ensure it is reasonable and meets the necessary standards. At this time, filers' creditors may raise objections to the proposed plan. Should the bankruptcy judge approve the plan, the trustee will begin distributing the plans. In other cases, people may be required to modify their plans or their cases may be dismissed altogether.

Seeking legal assistance

Navigating which debt relief option is right for their unique circumstances may be challenging for people in California and elsewhere. Therefore, those looking to achieve a fresh financial start may benefit from consulting with a legal representative. An attorney may help them determine how best to proceed given their situations and needs, as well as guide them through the associated legal processes.