Not everyone must be repaid in Chapter 13
In most cases, individuals who wish to file bankruptcy have a choice between Chapter 7 and Chapter 13. Many wish to avail themselves of the advantages of Chapter 13, but are hesitant when they hear that it is a repayment plan. What this often brings to mind is that Chapter 13 filers must repay every cent that they owe, which seems to conflict with the reason to file bankruptcy in the first place.
However, in reality, most of those who file for Chapter 13 do not have to pay back all of their debts under the payment plan. For certain types of debts, the law only requires a fraction to be repaid. Understanding how Chapter 13 works with regard to different types of debt can help you evaluate whether it is the right type of bankruptcy for you.
Chapter 13 and debt
In order for the payment plan under Chapter 13 to become effective, a court must first approve it. What does it take for the court to approve the plan? First of all, a court will not approve a repayment plan unless it pays all priority claims and administrative expenses in full. Priority claims include debts such as alimony, child support and taxes. Administrative expenses encompass the costs of bringing the bankruptcy such as filing fees, court costs and your attorney’s fees.
In addition to the priority claims and administrative expenses, the repayment plan must pass the “best interests of the creditors” test before it can be approved. Under this test, your repayment plan must give your unsecured creditors-debts to creditors that are not secured by collateral (e.g. credit card debt or medical bills)-at least the amount that they would have received if you had filed for Chapter 7 bankruptcy.
Although this sounds like a significant amount of money, in reality it is not. Under the Chapter 7 bankruptcy laws, unsecured creditors are entitled to nothing in the majority of cases. Therefore, the requirements of this test can be met even if your Chapter 13 repayment plan does not pay any of your unsecured debts.
If an unsecured creditor objects to the repayment plan, another test must be passed: the “disposable income” test. In this test, the court analyzes your disposable income and your ability to make payments towards your unsecured claims over the length of the repayment plan. If there is sufficient disposable income available, the court may require that it be used towards your unsecured claims. However, this does not necessarily mean that the unsecured claims must be paid in full during the course of the bankruptcy.
Chapter 13 bankruptcy offers filers the option to tailor their plans to catch up on outstanding secured debt (e.g. mortgages and car loans), which allows them to stop foreclosures and car repossessions. For many Chapter 13 filers, there is little money left over once secured, priority and administrative claims are taken care of, so unsecured creditors receive little or nothing under most bankruptcy repayment plans.
Consult an attorney
Chapter 13 bankruptcy offers many advantages, but is not for everyone. An experienced attorney can determine whether it would fit your situation. In addition, an attorney’s advice is invaluable when formulating your repayment plan, as any missteps can have a significant impact on its success.