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Why are some Chapter 13 bankruptcy payment plans rejected?

Why are some Chapter 13 bankruptcy payment plans rejected?

Creditor interest matters in acceptance of a Chapter 13 payment plan

The best interest of the creditors is often cited as the reason why a debtor's Chapter 13 payment plan is rejected by the U.S. Bankruptcy Court.

In this type of personal bankruptcy, debtors must agree to repay their creditors in a court-approved plan that lasts at least three years. Debts are prioritized and those who are owed money are given a share of the monthly payments. When the plan is completed, remaining balances are discharged by the court.

However, debtors must convince the court that the payments are not only in line with what they can afford, but are also fair to the creditors. To make this determination, the trustee overseeing the case considers what would be earned through the sale of non-exempt property if it was liquidated in a Chapter 7 action. That amount is what debtors would be expected to pay back to creditors when they file under Chapter 13.

If the amounts don't equate, the debtor's plan will not be confirmed by the court until the minimum that would be recovered in Chapter 7 is provided in one of two ways. Either the monthly payment will have to be increased or more time could be added to the length of the payment period.

More reasons for rejection

There are other reasons why the bankruptcy court may reject a Chapter 13 filing, reports DailyFinance. Frequently, people who are in financial trouble do not file tax returns. Before the 2005 reform of the federal bankruptcy code, tax records were not required from debtors. Now, tax returns for the four years prior to filing are mandatory for a payment plan to be confirmed.

If the court trustee isn't convinced that debtors are able to afford the payments outlined in their case, a rejection is also possible. Sometimes when the individual's earnings are weighed against expenses, the disposable income that is left will not cover the required payments in the timeframe set by the court. Under these circumstance, debtors may choose to convert their case to a Chapter 7 bankruptcy.

In addition, while those who file their bankruptcy under Chapter 13 may have more resources than those who are forced to file a Chapter 7 case, they must meet the same court requirements. In both types of court actions, debtors must submit similar documents, they must attend a meeting with the trustee and creditors and they are required to take two credit counseling courses. Without meeting those commitments, either type of bankruptcy will be dismissed by the court.

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