Under Funding a Chapter 13 Bankruptcy Plan

A chapter 13 bankruptcy is for wage earners who make a reorganization plan of their existing disposable income to fund payments over a 3 or 5 years to pay off all or a part of their unsecured debts. Under funding in a chapter 13 bankruptcy plan is more common than one might think.

Creditor's Ledger, Holmes McDougall

Keeping Good Financial Records (Photo credit: edinburghcityofprint)

What is Under Funding a Chapter 13 Bankruptcy Plan?

Under funding a chapter 13 bankruptcy plan is failing to allow payments to one or more qualifying creditors that file a claim against you in the bankruptcy. This most often occurs when you leave a creditor out of your payment schedule or fail to allow enough payment to pay a creditor their fair share of your disposable income.

In a chapter 13 bankruptcy plan, creditors are paid by the bankruptcy court trustee according to what bankruptcy laws say is the priority in which they should be paid. If you are expecting to keep your secured debts, they are not treated as priority debts, but they do have their own special laws in how to deal with them during a chapter 13 bankruptcy plan.
Priority claims are unsecured claims that have priority to be paid in full over other unsecured debts. These types of debts are normally exempt from bankruptcy discharge. They can include: certain recent taxes; domestic support obligations such as alimony and child support; salaries, wages, or commissions you owe your employees; certain customs duties and penalties owed to a governmental unit; claims arising from death or injury caused by operation of a vehicle while intoxicated; and contributions to employee benefit plans.

If one of these priority claims are also due interest, penalties, and fees attached to their claim due to a default of payment, it is possible under funding may occur if you fail to provide those amounts in your plan. On the other hand, a normal non-priority unsecured claim cannot expect to receive any other payment in a chapter 13 plan other than up to 100% of the principal owed on the debt.

When You have Under Funding in a Chapter 13 Bankruptcy Plan

If you submit a plan that has under funding, most likely nothing will happen until after your creditor’s meeting and all creditors have filed a claim against your bankruptcy. If a creditor who has been underfunded brings the under funding to the attention of the bankruptcy court or the trustee notices it, the bankruptcy plan must be changed to accommodate the adjustment. Otherwise, you stand to have the bankruptcy dismissed by the bankruptcy court, and you will have to start all over if they permit it.

How You Might Avoid Under Funding in a Chapter 13 Bankruptcy Plan

Keeping meticulous financial records of what you owe to whom is helpful in devising a chapter 13 bankruptcy plan that will not have under funding in the Plan.

The best way to avoid under funding in a chapter 13 bankruptcy plan is to hire an experienced bankruptcy attorney in chapter 13 bankruptcy law that can help you devise your plan. An experienced attorney will be familiar with the local district bankruptcy court and its trustees, what they charge, and any nuances that may be peculiar to the court.

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