What Constitutes Arrearage in a Chapter 13 Plan?
- The ultimate function of a Chapter 13 bankruptcy is to develop a plan through which the debtor will pay off most, if not all, of her creditors. Rather than having debts discharged or liquidated--which is the manner in which a Chapter 7 bankruptcy operates--the goal of a Chapter 13 bankruptcy is not to be relieved of debt but to eliminate it over time through court supervised payments.
- Under the terms of a Chapter 13 plan, the debtor pays to the bankruptcy court trustee a set amount each month. A Chapter 13 plan typically runs for a period of time from two to five years, depending on the total amount of debt and the available income. A debtor is required to make monthly payments by order of the court.
- The U.S. Bankruptcy Code takes a narrow view of what constitutes arrearage in a Chapter 13 plan. The failure to make a monthly payment results in an immediate arrearage in the amount of what should have been paid by the debtor. Provided that this single arrearage is addressed and paid off in a timely manner--within 30 to 45 days--the debtor likely will face no complications. However, if the debtor fails to deal with the arrearage or fails to pay additional monthly payments required by the plan, the bankruptcy trustee or court will take action.
- There are penalties the bankruptcy trustee or the court may take to address an arrearage. Either may permanently increase the amount the debtor needs to pay on the plan each month. Another is requiring the debtor to pay any costs incurred by the court in addressing the missed payment or payments. The ultimate penalty is a dismissal of the case with a prohibition preventing the debtor from filing a new bankruptcy action within a designated period of time, which often is between six months to two years.
- A debtor who ends up in arrearage on his case amounting to three or more months of payments needs to appreciate that the situation is serious. The prospect of a dismissal of the case coupled with a prohibition against filing a new action in the immediate future carries with it significantly negative consequences. Retaining an attorney to assist in resolving the arrearage issue with the trustee and the court is a wise course to ensure that a debtor's interests are protected.