Under Chapter 13, the debtor’s assets are not liquidated. Instead, the debtor files a plan with the Bankruptcy Court that proposes to repay creditors over a period of between three to five years. This chapter of the Bankruptcy Code is an alternative for those individuals whose income is too high to qualify for filing under Chapter 7 or who need to protect nonexempt assets.

For debtors with income that is below the median income for a family of the same size, for the state in which they live, the Chapter 13 repayment period is three years. However, the court may, for cause, approve a longer repayment period of up to five years. If the debtor’s income exceeds the state’s median income, the repayment period is generally five years. However, the time period can never exceed five years. The plan may be less than the applicable time period if the debtor’s unsecured debts will be paid in full over a shorter period of time.

The following is the median income in New York State, based on family size, according to the U.S. Census Bureau, as of May 15, 2024:

• One Person in Household   $69,135

• Two People in Household    $87,550

• Three People in Household  $105,435

• Four People in Household    $131,389

• For households exceeding four people, add $9,900 for each individual in excess of four 

Usually, the Chapter 13 plan is filed at the same time as the bankruptcy petition. However, if not filed with the petition, it must be filed with the bankruptcy court within 14 days of the filing of the bankruptcy petition, unless the court extends the time for cause.

The debtor must commence payments to the Chapter 13 trustee no later than 30 days from the date that the bankruptcy petition is filed. If secured loan payments, such as car loan payments or mortgage payments, become due after the bankruptcy case is filed, the debtor must continue making these payments directly to the creditor.

Between 20 and 45 days after the meeting of creditors, a confirmation hearing is held to determine if the plan is feasible and meets the standards under the Bankruptcy Code. Creditors and the Chapter 13 trustee are permitted to object to the plan for a number of reasons. The most common reasons for objecting to the plan are either that the payments are less than what the creditor would receive if the debtor’s assets were liquidated, or that all of the debtor’s projected disposable income is not being used to pay unsecured creditors during the specified repayment period. If no objection is made, the bankruptcy court will normally confirm, i.e. approve the plan.

If the plan is confirmed, the trustee will then distribute funds according to the provisions in the plan. Claims are paid in the order provided for in the Bankruptcy Code, depending on the type of debt. The different types of debts consist of priority, secured and unsecured debts. If the plan is not approved, the debtor may be able to file a modified plan in order to address objections that were raised.

Priority Creditor Claims Under the Chapter 13 Plan

Priority claims are granted special status under bankruptcy law. Priority claims include certain types of taxes; child support or other domestic support obligations; and the administrative expenses of the bankruptcy proceeding. These types of debts must be paid in full unless a particular creditor agrees to different terms for the claim.

Secured Creditor Claims Under the Chapter 13 Plan

Secured claims are debts that have some kind of collateral attached to the debt. Collateral is property that has been pledged to secure a debt, meaning that the creditor can repossess or foreclose on the property if the borrower defaults on repayment of the debt.

Secured claims can be treated in different ways in Chapter 13. Usually, the debtor continues to make payments directly to secured creditors outside of the Chapter 13 plan. For instance, the debtor will continue making monthly payments for a car loan or mortgage directly to the lender (i.e. the payments are not made through the Chapter 13 plan). Note that this is the usual practice in the Eastern District and Southern District of New York and may differ in other bankruptcy court districts.

Arrears on secured debts, however, are paid through the Chapter 13 plan. This is probably the most common reason for filing for Chapter 13 bankruptcy. Under state law, mortgage lenders are not obligated to accept payments for mortgage arrears. However, under the Bankruptcy Code, lenders must accept arrears payments made through a Chapter 13 plan. A Chapter 13 bankruptcy may be the only way to save a home from a foreclosure sale. However, keep in mind that in addition to the arrears payments, the debtor must also make the regular monthly mortgage payments that come due after the filing of the bankruptcy petition.

What is the Chapter 13 Cramdown?

Secured claims, other than those secured only by a security interest in the debtor’s principal residence, can be modified in Chapter 13. However, if the final payment on a mortgage secured by the debtor’s principal residence will come due during the pendency of the plan, (e.g. a balloon payment), then the claim can be modified.

Modification generally means that the secured creditor will be paid less than the remaining balance due. Unless the secured creditor agrees to the modification, the plan must propose to repay at least the value of the collateral plus interest. The interest rate to be paid is based on the Supreme Court decision in Till v. SCS Credit Corp. – calculated by adding a risk factor to the prime rate of interest. The risk factor is usually between 1% and 3%.

The cramdown is most commonly used with motor vehicle loans. However, the cramdown may not be used if the vehicle was purchased within the 910 days prior to the filing of the bankruptcy petition and was purchased for the personal use of the debtor. Also, the cramdown is not available for any secured property for which the debt was incurred within one year preceding the bankruptcy filing.

If the debtor is successful in cramming down the lien on the vehicle or other property, then the balance of the loan above the value of the property is considered unsecured debt and will be treated in the same manner as other unsecured debts under the debtor’s Chapter 13 plan.

Treatment Of Subordinate Mortgages in Chapter 13

The Chapter 13 cramdown may not be used for claims secured only by a security interest in the debtor’s principal residence. However, in Chapter 13, the debtor can void junior mortgage liens (i.e. second mortgages or home equity loans) on the debtor’s primary residence, if the value of the property is less than the balance due on the first mortgage. This is commonly known as a “lien strip” and can only be done when no equity attaches to the junior mortgage ( i.e. it is “wholly unsecured”). The reason why this can be done is that when the balance owed on the first mortgage is greater than the value of the property, there is no equity left for the second mortgage to attach to. Of critical importance is the value of the property. If there is even one dollar in equity above the first mortgage, then the second lien cannot be voided.

In order to have the bankruptcy court void a subordinate mortgage, the debtor must file a motion in the bankruptcy case to determine the value of the real property. An appraisal of the property will be necessary.

If the debtor is successful in showing that the value of the property is less than the balance due on the first mortgage, then any subordinate mortgage liens will be classified as unsecured debts and will be treated in the same manner as other unsecured debts under the debtor’s Chapter 13 plan. Upon the debtor’s successful completion of the Chapter 13 plan, the junior mortgage lien will be voided, and the debtor will no longer be required to make payments on the junior mortgage.