When do creditor payments begin in a Chapter 13 bankruptcy?
Chapter 13 creditor payments start soon after case is filed
Chapter 13 bankruptcies revolve around a court-ordered payment plan that enables debtors to keep their property while paying back creditors over three to five years.
The monthly installments that are made for secured debts - those attached to tangible assets - and unsecured bills begin almost immediately after an individual files in U.S. Bankruptcy Court. The court trustee starts collection within 30 days after the plan is filed and awaiting confirmation.
"Payments begin before the first meeting of creditors and continue even while objections to confirmation are pending," states Arizona bankruptcy attorney Diane Drain.
These early installments, called "adequate protection payments," allow creditors to receive money on a monthly basis so their interest in secured property is not reduced, according to the National Association of Chapter 13 Trustees. The court views this money as compensation to creditors for property that could potentially be lowered in value while the debt is being paid off under the plan.
The creditor of a secured debt may also independently file a court motion requesting payments. In some court districts, the debtor is expected to pay creditors directly rather than through the trustee assigned to the case.
In addition, debtors and creditors may strike an agreement outside the bankruptcy plan that determines how payments will be made on some properties.
Part of bankruptcy reform
Adequate protection payments made prior to a repayment plan's approval are the result of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a series of reforms made to the U.S. Bankruptcy Code in 2005.
"In particular, under pre-BAPCPA law, if the plan was not confirmed and the case was dismissed, payments made to the trustee would generally be returned to the debtor," states the American Banking Institute. "Thus, a car lender would receive no payments for what could be several [post-filing] months preceding dismissal and therefore receive no adequate protection for the depreciation of the vehicle."
Once a plan is confirmed by the court, adequate protection payments stop and monthly installments are made through the trustee, according to the provisions agreed upon in the repayment plan.
As with installments that include extra money to cover back payments on a property, adequate protection is credited to the debtor during the course of the Chapter 13 case. Once the plan is completed, the individual's remaining unsecured debts - such as credit card or medical bills - are discharged by the court.