Is it Better to Take on a Three-Year or a Five-Year Chapter 13 Plan?

Chapter 13 is a form of bankruptcy meant for people who, despite being in financial straits, have the resources to repay at least a portion of their outstanding debts over time. Those debts are discharged only after the debtor completes a court-approved repayment plan that lasts three or five years. Which time period applies depends on numerous factors, and there are benefits and drawbacks to each.

A Chapter 13 plan must be feasible. That is, it must be structured in a way that gives the debtor a realistic chance to complete it successfully. This means analyzing your financial resources and the portion of them that can be devoted to repaying debt. This is known as your disposable income. The amount of debt you have and the time needed to make required payments also influence the length of the plan.

A key determinant is your average monthly income in the six months prior to filing for Chapter 13. If your income is less than the Georgia median income for a household of your size, you can propose a three-year repayment plan. If your income is above the state median, you may still qualify for a three-year plan by deducting certain allowable expenses to calculate your disposable income. Otherwise, you typically must take a five-year plan.

Even if you’re eligible for a three-year plan, you may need a longer plan to pay the total required amount. If you filed for Chapter 13 bankruptcy to catch up on an obligation that you can’t eliminate in Chapter 7 bankruptcy — such as mortgage arrears or other priority debts — you might need a longer plan.

There are pros and cons of each of these repayment plans. With a three-year plan, the monthly payments are higher, but the overall debt paid back is less. Also, the higher monthly payments might be difficult to shoulder. With a five-year plan, the monthly payments are lower because they are spread over a longer period. This can allow you to devote resources to paying back more of your priority and secured debts, such as your mortgage. However, more of your unsecured debt has to be paid back.

An experienced Chapter 13 bankruptcy attorney can propose a plan that best serves your financial situation.

Some debtors with five-year plans choose to complete them early. This frees up the use of disposable income and allows faster rebuilding of credit. The downside is that early plan completion can mean having to repay all of the debt owed instead of the reduced amount required by the plan. Furthermore, early repayment will not change the fact that a Chapter 13 bankruptcy remains on one’s record for seven years from the date it is filed.

Jeff Field & Associates helps consumers throughout Georgia discharge eligible debt through Chapter 13 bankruptcy. We have offices in Scottdale, Gainesville, Marietta, Lawrenceville, Douglasville and Athens. To schedule a personal consultation, call 404-381-1278 or contact us online.