Confirming a Chapter 13 Plan: Steps to Approval

Planning your budget—including your monthly living expenses and classifying unsecured debts like medical and legal bills—is essential. Proper planning ensures the court approves your Chapter 13 plan and that it remains affordable for you.

Qualification and Attorney Fees

While over 97% of people qualify for Chapter 7 if they choose it, some attorneys might intentionally overlook expenses or use unreasonably low expense figures to push clients toward Chapter 13. Attorney fees for a simple Chapter 7 are about $1,400, but they can triple to at least $4,000 for a simple Chapter 13. Sometimes, the office staff who prepare petitions earn bonuses for converting cases into Chapter 13 filings.

Making the Plan Feasible

Imagine you must file Chapter 13 bankruptcy to pay back taxes. Your car has 230,000 miles on it, and you need a replacement. You need the new car before the court requires you to pay all your disposable income for the next five years in Chapter 13.

Financing a new car with a five-year loan adds an expense to your budget. This new expense might help you qualify for Chapter 7, or it can lower what you must pay back to unsecured creditors in a Chapter 13. Your car loan payment either becomes part of the Chapter 13 plan or becomes one of your monthly budgeted expenses.

The same strategy applies to necessary home maintenance expenses. If you need a new roof, furnace, or windows, financing them just before filing raises your household expenses. You pay for these necessary repairs during your Chapter 13 plan, which means you pay less back to unsecured creditors. Planning for these costs prevents you from having to pay for major expenses suddenly during the plan with no budget for it.

Planning for Reasonable and Necessary Expenses

An ethical attorney cannot tell you to go out and unreasonably charge up expenses just before filing. However, they must point out necessary expenses, such as needing a reliable car to get to work or a new furnace for your home before you file Chapter 13.

You must earn enough income to repay secured and priority debts. Furthermore, a Chapter 13 plan needs to include enough reasonable expenses. If it doesn’t, you will overpay the unsecured debt. If you fail to budget for necessary costs, like medical and legal bills, you risk overpaying unsecured debt, and your Chapter 13 plan will likely fail. If you don’t budget for medical costs, you will not have the money, you will miss monthly payments, and the repayment plan will fail.

You must get the judge’s permission to borrow money during the five-year plan. It may be smarter to acquire necessary items before filing. Planning lets you increase expenses, decrease income, or spend down assets like cash. Increasing your expenses and reducing excess assets makes your plan payment lower, helping to make the plan affordable and feasible.

Is Borrowing Before Filing Fraudulent?

Generally, borrowing before filing is not fraudulent if you intend to repay the creditor even if you know you are in financial trouble. Filing for bankruptcy does not automatically mean you avoid repaying every creditor. If you fully intend to repay a car loan, and you do repay the creditor, there is generally no fraudulent intent.

Avoiding Fraud in Chapter 13

The rules about running up debt apply mainly to credit cards and help establish a presumption of fraud. 11 USC Section 523(a)(2) outlines what judges consider.

The Major Red Flags Judges Look For (Statutory Limits Updated for 2022 Adjustments):

Non-essential consumer debt (luxury goods or services) owed to a single creditor and totaling more than $800 incurred within 90 days of filing.
Credit card cash advances totaling more than $1,100 obtained within 70 days of filing.

Note: Buying a replacement for a worn-out car, refrigerator, or stove is not considered fraudulent. Paying for taxes, business debts, or items reasonably necessary for support and maintenance is also not fraudulent.

This fraud presumption rule applies only to credit cards and only means you might have to repay that specific debt. In practice, a credit card company rarely files an adversary complaint in court just to try and recover a small cash advance. Similarly, if your Chapter 13 plan pays a recent car purchase in full with interest, the lender will likely not complain.

The rule aims to catch people who borrow without ever planning to repay for an unnecessary item. It is not meant to stop you from replacing or maintaining a car, appliance, home, or getting medical treatment that you need and are actively repaying. Including reasonable and necessary items like legal bills in your budget makes payments to unsecured creditors lower and helps make Chapter 13 feasible and affordable.

Qualifying Expenses, Debts, and Income

Years ago, 90% of Chapter 13 filers failed to finish their five-year plan. Many had to convert to Chapter 7 because they prepared their budgets under pressure. They failed to plan for expenses they would need over the next five years. Without budgeting for necessary and reasonable expenses—like child support, medical, and legal bills—your Chapter 13 plan will fail. This is why you need an experienced Chapter 13 attorney to plan and account for these costs. Review a Schedule J for ordinary expenses and research often-overlooked expenses that may not appear on a standard Schedule J.

Factors Judges Use to Determine Fraud:

Whether the debtor misrepresented facts.
Whether the creditor was damaged by relying on a misrepresentation.
The time between filing and the charges.
The debtor’s financial condition and ability to repay the debt.
Sudden or unexpected changes in the debtor’s ability to repay.
Whether the items were reasonable and necessary, or luxuries.

If you are filing bankruptcy, plan your budget carefully, and ensure your income tax filings are up to date. In Chapter 7, you should show no remaining money available to repay debts. In Chapter 13, your home and auto must be in good shape. Chapter 13 requires you to survive for five years, so your car and home must be reliable and affordable throughout the plan.

Confirmation Hearing and Best Efforts

When planning Chapter 13, the Bankruptcy Code requires a confirmation hearing and your best effort to repay creditors. You must have enough income to fund the plan and bring priority and secured debts current within five years. The plan must account for mortgages, car loans, and income taxes less than three years old.

You must show sufficient disposable income to fund the plan and enough income to pay for necessities; otherwise, the plan is not feasible. You must disclose secured debt, and the plan must show how you will pay them. You can sell property or surrender the secured debt property as a way to manage repayment, but the plan must always show how you will handle priority and secured debt.

Chapter 13 bankruptcy can eliminate unsecured debts like credit card debt and medical bills, paying them as little as 0% if that is all you can afford. Priority secured debts, such as mortgages and car loans, often continue after the plan ends. A repayment plan is not required to pay off a 30-year mortgage in five years, but you must catch up on all delinquent payments and avoid falling further behind.

Federal and State Income Tax Returns

A Chapter 13 repayment plan often receives partial funding from tax refunds because they are not considered regular household income. Disposable income includes regular monthly sources like your salary, Social Security, disability, unemployment, welfare payments, and child support.

However, your federal income tax refund is not regular monthly income. While regular wages and income fund the plan, windfalls like non-exempt inheritances, non-exempt personal injury awards, and tax refunds often apply to the total debt in a wage earner’s plan. The bankruptcy trustee will need to know the percentage that credit card and unsecured debts will receive. These debts are eligible for repayment but are rarely paid 100% unless you have significant income or non-exempt equity that requires it.

Contact: If you are considering filing for bankruptcy, do not delay—timing is critical. I am here to help. Contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.