Cash Flow and Chapter 13 Filing

Many chapter 13 bankruptcy plans take over payments on debts that the debtor beforehand was paying directly. Mortgage payments and car payments are the most common examples. Therefore, there is a transition between the last direct payment to the lender and the filing of the case and commencement of payments to the chapter 13 trustee. Careful timing of this transition can make coming up with the cash for the first month's chapter 13 payment more manageable.

When is the first chapter 13 payment due?

Payments in chapter 13 begin almost immediate, and don't wait for plan confirmation, the meeting of creditors, or other such events. Under statute, 11 USC 1326(a), payments start no less 30 days after filing, unless ordered otherwise. Here in the Raleigh area (North Carolina Eastern District), local rule sets the first of the month in the month following the filing of the bankruptcy as the due date for the first payment (LBR 4002-1(g)(2)). So, every case filed in June has its first payment due on July 1; every case filed in July due on August 1; and so forth. Other districts have their own practices.

Where does the problem occur?

The cash-flow problem occurs the most often when a individual living paycheck-to-paycheck has necessary payments on secured debts, then makes those payments in the first part of the month, and then files chapter 13 bankruptcy before the end of the month. At this point, the individual has no cash left on hand to make the chapter 13 payment at the first of the next month. This results in a scramble to catch-up the payments during the early months of the chapter 13 case.

How can planning prevent the problem?

Two solutions to this problem present themselves. Both require careful consideration of the bankruptcy attorney as to how they relate to other factors in a case.

First, in some cases it makes sense not pay the creditor immediately before filing bankruptcy. If there is already a default under the loan agreement (or default doesn't matter in a given plan), and there is no risk of loss of the collateral, it might be possible to simply defer payment until the chapter 13 kicks in. Depending on how the debt is to be treated in chapter 13, non-payment might be best option.

Second, if the case can be filed in the same month as a necessary loan payment, but earlier in the month, then the bankruptcy will stay the loan payment, and the debtor can set the funds aside to apply towards the chapter 13 payment. In essence, if one files at the beginning of the month, the next chapter 13 payment covers the rest of the filing month. If one files at the end of the month, the next payment is pre-payment for the next month. This is a simplification and omits some important details about how secured claims are paid in chapter 13, but is representative of how payment cash flow impacts a the debtor in this district.