How do you know whether to file three or a five years in a Chapter 13 plan? This question comes up a lot on bankruptcy forum websites and the answers to the question can vary depending on your circumstances.
Bankruptcy Law is First Determination for Length of Chapter 13 Plan
Bankruptcy law only allows for either a three or five year plan in a Chapter 13. Depending on your disposable monthly income, you may be in a 100% or less payback plan. That means if you have enough disposable monthly income to payback all of your unsecured debts while maintaining your secured debts over a given period of time, then you are in a 100% payback plan. If your disposable monthly income is such that you can payback only a percentage of your unsecured debt, you are in a less than 100% plan, and the remainder of your debt not paid at the end of the payback period will be discharged.
To determine whether you are in a three or five year plan is first determined by bankruptcy law. You are required to fill out the means test when you file for a Chapter 13 bankruptcy. If your income is below the median for your area under IRS guidelines, you are required to have a three year plan. You may increase your plan to a five year plan if you lack disposable income to pay what you need to pay over three years and if the court grants you permission for the longer plan.
If your income on the means test is determined to be above the median income for a household your size, you may be required to file a five year plan. Your plan can be shorter if you test above the median income and you pay 100% to your unsecured creditors. Your plan can end early if you pay back 100% to your unsecured creditors in less than five years and you pay all of your secured and priority creditors also.
Exceptions to Bankruptcy Law in Payment Duration for a Chapter 13 Plan
Ideally in a Chapter 13 plan you want the quickest way to pay off your plan that bankruptcy law allows, but there are exceptions to this notion. Sometimes, it is beneficial to submit to a longer plan when your disposable monthly income is not sufficient to make a three year plan feasible.
Here are a few examples of ways you might make your plan longer:
If you have to pay arrears on secured debt. If you have gotten behind on your house payment, for example, you can build your arrears payments into a longer Chapter 13 plan.
If you have priority debt that must be paid. Bankruptcy courts place a priority on all debt with unsecured debt being at the bottom of the priority list. Debts like child support are considered priority debts and are paid up front in a Chapter 13 plan. Priority debts are normally debts that are exempted from bankruptcy discharge and are made a part of your payment plan. Many filers extend their plan when they have priority debts to pay.
If you plan on keeping certain non-exempt assets. Some assets that you are in debt on, whether secured or unsecured, can be non-exempt assets. If you want to keep them, you can increase your Chapter 13 plan in order to keep up the payments on the assets.
Most of you will need the help of a bankruptcy attorney to make the right Chapter 13 plan for you.
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