Understanding the Chapter 13 Bankruptcy Process and What Happens When Your Plan is Denied 

A Chapter 13 bankruptcy allows individuals to restructure debts while keeping their property. This process is called a wage earner’s plan, which requires payments to be paid over the course of three to five years. Your Chapter 13 plan is based on various factors, including disposable income, secured debts, priority debts, and assets. The calculation of your required payment can be complex.

The Chapter 13 process is very fact specific. Your situation will dictate a lot about how the case proceeds.

Step 1: Filing the Bankruptcy Petition

The Chapter 13 process starts with filing a petition at the bankruptcy court. Where you file is typically where you live or where your biggest asset is located. In Virginia, we have two districts where you would file a Chapter 13 bankruptcy, which are the Eastern District of Virginia or Western District of Virginia.  In your petition, you must submit schedules detailing your:

• Assets and debts
• Income and expenses
• Recent tax returns

Once filed, the automatic stay takes effect, temporarily halting most collection efforts, including foreclosure, garnishment, and repossession.

Step 2: Proposing Your Chapter 13 Repayment Plan

Within 14 days of filing your petition (or at the same time), you must submit a proposed repayment plan. Key components of the plan include:

• Paying priority debts (e.g., taxes, domestic support obligations) in full
• Catching up on secured debt arrearages (e.g., mortgage or car loan defaults)
• Distributing any remaining disposable income to unsecured creditors

You must begin making payments to the Chapter 13 trustee within 30 days of filing, even before the plan is confirmed. However, these early payments are often based on estimates since creditors have months to file claims.

Claims Deadlines and Plan Adjustments

In Virginia, as in all federal bankruptcy courts, creditors have deadlines to file proofs of claim:

• General Creditors: 70 days after the 341 meeting
• Government Entities (e.g., IRS): 180 days after the petition is filed

Early in the case, your plan relies on estimated debt amounts. Once creditors file claims, your plan may require adjustments, such as:

• Example: A Virginia homeowner estimated owing $10,000 in property taxes but later discovered the county filed a claim for $15,000. To avoid dismissal, the plan had to be amended, increasing monthly payments.

These changes are common and highlight the importance of regular plan reviews.

Step 3: Meeting of Creditors (341 Meeting)

About 21 to 50 days after filing, you’ll attend a 341 meeting, which is usually held virtually. During this meeting, the trustee and creditors may ask questions about your finances and proposed plan. While creditors rarely appear, the trustee may raise objections, requiring you to revise the plan.

Step 4: Meeting the Liquidation Test (Best Interest of Creditors Test)

A critical component of your Chapter 13 plan is the liquidation test, also known as the best interest of creditors test. This test ensures that unsecured creditors will receive at least as much under your Chapter 13 plan as they would if you filed for Chapter 7 and your non-exempt assets were liquidated.

1. Calculate Non-Exempt Equity:
   In Virginia, you can protect certain assets with state exemptions, including:
   • Primary Residence: Up to $50,000.00 in equity per owner through the homestead exemption
   • Car Equity: Up to $10,000 in equity for a personal vehicle
   • Wildcard Exemption: Up to $5,000 in property of your choice, with additional amounts for disabled veterans and those over 65

   Example: A debtor in Alexandria owns a home worth $400,000 with a mortgage of $340,000. They have $60,000 in equity (before cost of sale), exceeding the homestead exemption by $10,000. This $10,000 in non-exempt equity must be paid to unsecured creditors over the life of the plan.

2. Compare to Chapter 7 Outcome:
   The trustee will evaluate whether your plan offers a better outcome for creditors than a Chapter 7 liquidation. If not, your plan may be denied or require modification.Example: A debtor in Loudoun County has a car worth $15,000 with a $3,000 loan balance. After applying the $10,000 car exemption, there is $2,000 in non-exempt equity. If the debtor files Chapter 7, creditors would potentially receive $2,000 from the sale of the car. In Chapter 13, the plan must pay at least $2,000 to unsecured creditors to meet the liquidation test.

Step 5: Plan Confirmation Hearing

The confirmation hearing is typically held 45 days after the 341 meeting. At this stage, the court will determine if the plan:

• Complies with the Bankruptcy Code
• Provides sufficient funding to pay secured and priority debts
• Meets the liquidation test
• Accurately calculates distributions to unsecured creditors

If confirmed, the debtor continues making plan payments. If denied, you have the opportunity to revise and resubmit the plan. Typically a debtor will have up to 21 days to file a new plan. If you fail to file a new plan, then your case is dismissed. Occasionally, the court can deny a plan without leave to amend (and file a new plan), if there is lack of good faith in the case or it is not possible for the Debtor to file a confirmable plan.

Tip: Do not worry if you get an objection to confirmation or a notice of Chapter 13 Plan denial. You typically will just need to work with your attorney to get something new submitted. Often there are easy fixes, like changed a few words in the plan or adjusting the calculations slightly.

Common Reasons for a Bankruptcy Plan Denial

Common reasons why Chapter 13 plans are denied and how to resolve them:

1. Insufficient Plan Funding:
   • Issue: The plan does not allocate enough funds to pay secured or priority claims.
   • Virginia Example: A debtor in Fairfax County was behind on mortgage payments but underestimated arrearages owed to their lender. The trustee objected, and the debtor had to increase payments to cover the full amount.
2. Incorrect Calculations:
   • Issue: The plan’s payment projections are lower than the actual calculations.
   • Resolution: Work with your attorney to ensure all math is correct. For example, if your plan proposes a 50% payout to unsecured creditors, make sure that percentage is supported by accurate numbers. If the calculations show an actual 40% payout to creditors, you would need a new plan that puts creditors on notice about the correct funding.
3. Failure to Address Necessary Claims:
   • Issue: Key claims, such as taxes or domestic support obligations, are omitted or misclassified.
   • Example: In a case from Loudoun County, a debtor did not account for priority tax debts filed by the Virginia Department of Taxation, leading to plan denial.

Chapter 13 Plan denials are not bad. It is very normal for a debtor to be required to submit two to five plans prior to confirmation, since plans are filed based only on estimates until the claims deadline passes. Denial of a bankruptcy plan is normal and should not cause any concern.

Step 6: Plan Execution and Completion

Once confirmed, your plan enters the execution phase. You continue making monthly payments to the trustee, who distributes funds to creditors. If your financial situation changes—such as a significant increase or decrease in income—you may need to modify the plan.

Upon completion, eligible debts are discharged. However, some debts, like recent taxes and child support, remain non-dischargeable.

Step 7: What Happens If Your Case Is Dismissed or Converted

If repeated plan denials or non-payment occur, the court may dismiss your case. Dismissal reinstates creditors’ rights to pursue collection. Alternatively, you may choose to convert the case to Chapter 7, which involves liquidating non-exempt assets.

Finding Help with the Chapter 13 Plan and Chapter 13 Bankruptcy Process 

Chapter 13 bankruptcy offers valuable benefits, but it requires careful planning and attention to detail. In Virginia, local rules, exemptions, and the liquidation test play a crucial role in whether your plan is approved. If your plan is denied, most debtors succeed after modifying their plan with an attorney’s help.

At Ashley F. Morgan Law, PC, we have guided countless Virginia residents through the Chapter 13 process, from filing to plan confirmation. Contact us today for a free consultation and take the first step toward financial stability.