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Who sets the terms of a Chapter 13 bankruptcy repayment plan?

On Behalf of | Sep 7, 2023 | Chapter 13 Bankruptcy

Every type of bankruptcy features different benefits and drawbacks. Chapter 13 bankruptcy is accessible even for successful professionals who have temporarily fallen on hard times and want to protect their assets, whereas Chapter 7 bankruptcy can be a better option for those with few resources and overall lower income.

Part of what separates a Chapter 13 bankruptcy from a Chapter 7 bankruptcy is the timeline between when someone files and when the courts discharge their debts. A Chapter 7 bankruptcy can go from the initial paperwork phase to a discharge in a matter of months. A Chapter 13 bankruptcy takes much longer because the courts require that someone makes payments to their unsecured creditors for at least three years (and sometimes as long as five years) before issuing a discharge.

That repayment plan will diminish the total debt remaining at the time of discharge and take some of the sting out of the bankruptcy process for the creditors affected. Who determines the details of that repayment plan?

The person who files must propose a plan

A repayment plan is the cornerstone of the Chapter 13 bankruptcy process, so its creation should be a priority as someone prepares to file. The filer usually needs to submit a proposed plan to the courts shortly after filing their initial paperwork. Most people require support when creating a repayment plan if they hope to convince creditors to approve their proposal.

When someone files for bankruptcy, the courts appoint a trustee to oversee the proceedings. In a Chapter 13 filing, there will be a meeting to discuss the repayment plan. The creditors with an interest in the bankruptcy case will review the financial disclosures provided by the party filing and ask questions. They can challenge the proposed plan and the filer or the attorney representing them can then negotiate with the creditors based on the amount of the debt and their priority during the bankruptcy process to finalize the repayment plan. The filer will then commit almost all of their disposable income each month toward those payments to convince creditors to approve the plan.

Provided that someone is able to make all of the necessary payments, at the end of the process, they can potentially discharge whatever balances remain on their unsecured lines of credit. They may also benefit from modified terms for existing secured lines of credit if they negotiate with their lenders during bankruptcy. Learning more about how the repayment plan functions can help people choose the right type of bankruptcy when struggling with financial challenges.