Kentucky Bankruptcy Law

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Chapter 13 Plan: What’s in, what’s out?

In a Chapter 13 bankruptcy, everything is driven by the Debtor’s proposed plan. The plan determines payment amount, treatment of secured debts and the assets to which they attach, and a number of other items. You may hear your bankruptcy attorney use the phrases, “pay inside the plan” and “pay outside the plan”. To pay inside the plan means that part of your payment to the Trustee is distributed to that creditor or class of creditors by the trustee. To pay outside the plan simply means that you, the Debtor, must continue to make payments directly to the creditor for that specific debt in addition to your plan payment.

The reason why it may be valuable to you to pay some debts outside the plan is that the Chapter 13 Trustee earns their money by receiving a commission from your payments. This percentage is different from State to State or District to District. In the Eastern District of Kentucky, the Chapter 13 receives around 5.4 or 5.5 percent of each payment. So, the lower your payment, the less you pay in Trustee’s commissions. Likewise, the Trustee has some motivation to get the highest plan payment possible within the structure of the bankruptcy. It is also beneficial, though, to the Chapter 13 to have a successful Chapter 13 – one which the Debtor is able to see through.

Generally speaking, it is in the discretion of the Chapter 13 Trustee what can be paid outside the plan because they are the gatekeeper that recommends approval or rejection of the plan (confirmation or not). In the Eastern District of Kentucky, it is routine for secured debts that will mature (need to be paid in full) later than the end of the plan to be paid outside of the plan. So, ongoing house payments are best paid outside the plan.

Some attorneys prefer to have car payments made outside of the plan even though they will be paid in full before the close of the Chapter 13. This results, though, in having to do a “step-up” of payment amounts when the car is paid off. My recommendation is to pay all car payments inside of the plan. Usually this draws out the payments, allows for a lower interest rate, and possibly a reduction in the principal (this depends on when the debt was incurred). I often find the plan payment actually ends up being really close to what the ongoing car payment was and sometimes even less.

If the interest rate on the car loan is below 4.25%, and the car was purchased within 910 days of the filing date, then paying it outside the plan would be best, even if a step-up payment has to be built into the plan. The step-up payment basically takes whatever that car payment is and adds it to the plan payment the month after the car loan is paid in full.

It is very important that Debtors the importance of remaining current on payments to be made outside of the plan. Failing to make a few payments to a creditor outside the plan can probably be remedied, but the Debtor needs to quickly advise their attorney of the circumstance. Eventually, though, if missed payments are chronic, it will go beyond the point of remedy within the Chapter 13 and the lender will take steps to foreclose. That usually results in changing the Chapter 13 to a Chapter 7 or it means modifying the plan to surrender the house.

November 28, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Conversion, Foreclosure, Plan, Security interests | , , , , , , , , , , , , , , , | 2 Comments