Many people are not aware that bankruptcy relief comes in different shapes and sizes.
Most know about Chapter 7 bankruptcy: You know, the one where you just “get rid of all your debts” without having to pay anything.
Chapter 7 these days has a lot of eligibility requirements, and not everyone qualifies.
And, sometimes, those that do qualify would be better served by filing a different bankruptcy chapter.
See my review of the different bankruptcy chapters.
But there are repayment options available in bankruptcy which are usually superior to those outside bankruptcy.
The Chapter 13 Bankruptcy Payment Plan
Chapter 13 allows you to essentially force your creditors to accept payments over a period of usually 36-60 months, based on what your budget can afford.
There are several factors which determine how much you have to pay out in a Chapter 13 case:
- Your Budget
- Your Assets
- The Types Of Debts You Have
- The Length Of Your Plan
Your Bankruptcy Budget: The Ability To Pay
The budget is subject to approval by the bankruptcy court and trustee but it takes your net income and subtracts out necessary living expenses to arrive at a monthly payment amount.
Thus, it is possible to do a payment plan which pays anywhere from 0%-100% depending on the budget, and other factors described below.
Determining the budget is very tricky. Different judges and trustees allow different amounts for different expenses.
Consulting an experienced bankruptcy attorney is the best way to get some idea of what your correct budget will be.
The Liquidation Analysis
One of the requirements in a Chapter 13 case is that the total of the payments you are making (based on your budget) must be at least as much as your creditors would receive if your non-exempt assets were liquidated (i.e. sold) in a Chapter 7 case.
This sets a minimum amount that has to be paid through your plan regardless of what your budget shows.
Thus, the value of your assets (real estate, personal property, any rights to receive money, etc.) is another critical component in determining whether Chapter 13 makes sense in your case.
You get to keep all your assets in a Chapter 13 case, but the trade-off is that if there is non-exempt equity in any of them, you have to pay that much to your creditors.
Determining this really requires an experienced bankruptcy attorney as you will need to know which state or federal exemptions apply in your particular case.
See more on exemptions in bankruptcy.
Debts That Must Be Paid In Full
Here is another minimum payment-setting requirement: Certain debts must be provided for and paid 100% during the Chapter 13 plan term.
These are known as “Priority Claims” set forth in Section 507 of the Bankruptcy Code.
Some (but not all) of these include certain taxes (particularly those which came due within 3 years prior to filing the case), past due domestic support obligations, certain wages owed to employees, and a few other less common ones.
Additionally, Chapter 13 is often used to catch up on mortgage and other secured debt payments.
In such cases, the Plan must pay those arrearage amounts in full within the plan term of 36-60 months.
How You Can Discharge Your Debts And Pay Nothing To Unsecured Creditors
Those of you paying attention may have figured out how one can make payments in a Chapter 13 and pay zero percent to unsecured creditors.
It is a function of all the above criteria.
Let’s say you owe about $150,000 to various credit cards and other unsecured creditors.
Let’s then say your bankruptcy budget above shows you have $400 per month you can afford to pay to your creditors.
Let’s also say you do not have any non-exempt assets, so there’s no liquidation test issues.
Finally, let’s say you are behind by $20,000 on your mortgage payments and are using Chapter 13 to stop a foreclosure and catch up on those payments.
In this case, you can do a 60-month repayment plan to cure your mortgage arrears, and at the end you will be discharged from all your unsecured creditors without paying them anything!
($400 x 60=$24,000. This leaves $4,000 for the Trustee’s fees and possibly some of your attorney’s fees if paid through the Plan)
That’s a pretty good deal. Certainly better than you can do outside of bankruptcy.
The Chapter 11 Bankruptcy Payment Plan
Chapter 11 can also be used to structure a repayment plan to creditors.
However, it is much more involved and one big difference between Chapter 11 and Chapter 13 is that in Chapter 11 your creditors get to VOTE for, or against, the plan you propose.
On the other hand, Chapter 11 gives a bit more flexibility in terms of how long you can repay certain debts (like mortgage arrearages), as long as the creditors and court approve it.
People also use Chapter 11 when their debt amounts exceed the Chapter 13 debt limits.
Going through an analysis of Chapter 11 here would make this article too long, so I mention it here so you know it exists and is available.
Always Consider Other Bankruptcy Options
In summary, bankruptcy law provides many different options for dealing with your debts.
There is a lot of flexibility depending on your situation–what assets you have, your ability to make payments, and the types of debts with which you are dealing.
The only way to discover your options is to have a comprehensive consultation with an experienced bankruptcy attorney in your area.
Contact a bankruptcy attorney today to learn about your options.
Image courtesy of Holger Zscheyge