Does the Bankruptcy Court Allow You to Pay Outside the Chapter 13 Plan?

by Tom Streissguth
In a Chapter 13 bankruptcy, a court-appointed trustee helps petitioners set up a repayment plan.

In a Chapter 13 bankruptcy, a court-appointed trustee helps petitioners set up a repayment plan.

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When you file a petition for bankruptcy protection, you are asking a federal court to protect you from creditors. The court issues an automatic stay of all collection actions, including lawsuits, and gives you time to reorganize your finances and prepare for a fresh start. In a Chapter 13 bankruptcy case, you set up a partial repayment schedule under the guidance of a court-appointed trustee, but you still may be able to handle some debts outside of the repayment plan.

Repayment Plan

In a Chapter 13 repayment plan, you agree to make a monthly lump-sum payment to the court trustee who disburses to each creditor a fixed amount. In a typical plan, the payments are spread over three to five years, and repayments amount to approximately 20 percent of the outstanding debt. After the plan terminates, the court discharges, or cancels, the remaining debts. Debts that do not get cancelled in bankruptcy include federal, state and local taxes; federally guaranteed student loans; and support payments arising from a divorce -- all of which you must continue to pay in full.

Mortgages

A bankruptcy petitioner with a mortgage may elect to make payments to the lender outside of the Chapter 13 plan. This allows you to keep your house and avoid the trustee fee applied to plan payments. If the home loan is in arrears, however, the bankruptcy court may require the debtor to bring the loan current before it will allow a "reaffirmation" of the mortgage. If during the repayment plan the debtor falls behind, the lender can ask the court for relief from the automatic stay that prevents collection actions or foreclosure.

Secured Loans

In the case of secured loans, the debtor can petition for payments outside the bankruptcy plan to other secured creditors, such as an auto finance company or a furniture store that has agreed to lend money on pledged collateral. If the court and the trustee agree to these outside payments, the debts will not be discharged at the end of the repayment plan. When the Chapter 13 case winds up, the debtor loses the protection of the automatic stay and again becomes liable for all secured and unsecured debts that the court did not discharge.

New Debts

The bankruptcy law restricts your ability to take on new debts and include them in the Chapter 13 repayment plan. You may become liable for new federal and state taxes, of course, if you generate taxable income, or have taxable property such as a home. Any other debts you agree to must be paid outside the plan and will not be discharged. If you are ultimately unable to live up to the terms of your Chapter 13 repayment plan, the court has the option to dismiss the case or force a conversion to a Chapter 7 bankruptcy case, in which a court trustee seizes your nonexempt assets to pay creditors.