Almost everyone who comes to my office with the hopes of using bankruptcy to eliminate debt, tells me, before hearing the facts about chapter 13, that they do not want to file for chapter 13. It is understandable that when a person has no income and is struggling to afford their meals or their home, they fear having to make a payment plan for three to five years.
The most common fear people have is that they will be required to pay all of their debt through the chapter 13 plan. For most people this fear is not out of an unwillingness to pay all debt, it is an actual inability or perceived inability (in a few cases) to pay their debt in its entirety. Most people are of the mind that if they were able to pay all of their debt, they would not need to file bankruptcy.
In the majority of chapter 13 cases, the debtor generally pays only a portion of the debt owed. A chapter 13 is meant to be a reorganization. The debtor is expected to disclose all of their income and all of their expenses. By subtracting income from expenses they can determine with some degree their disposable income.
There are a few restrictions on the expenses a debtor may incur while in bankruptcy but reasonableness of expenses can be determined on a case-by-case basis. Ultimately someone who files chapter 13 will be living on a pre-determined budget but for most, that budget is not nearly as restrictive as the budget they had when their credit card and other debt payments were consuming their entire income.
When in debt, many people forgo much needed medical and dental treatment because they barely have enough money to cover their regular monthly expenses and debt payments. In a chapter 13 a debtor can budget for expected out-of-pocket medical and dental expenses. They can budget for vehicle repairs and other expenses that are necessary for their health and well being. In most cases a debtor in chapter 13 bankruptcy whose circumstances change, can propose a modification to their plan if payments become too hard to make.
There are a few instances when a debtor may need to pay all of their debt through a chapter 13 plan. The primary reasons for such a plan are to protect non-exempt assets or as a result of very high income compared to expenses. A debtor may choose to avoid chapter 7 if they have assets that are non-exempt but their debt is out of control and they need to do something. If a debtor has non-exempt equity in their home and other assets that actually exceeds the amount of their debt then, if they want to use bankruptcy to eliminate debt and keep their assets, they should use a chapter 13.
Clients have asked me what is the benefit to chapter 13 if they must pay back all of their debt. The primary benefit is very low interest (and sometimes no interest). That means that every payment, in essence, goes to principal only. Another benefit is no late fees or other penalties when plan payments are made relatively close to the date they are due.
Another benefit is that the debt paid back is only paid to creditors who file valid claims in a timely manner. Often times creditors fail to file claims at all. A creditor who receives proper notice of a chapter 13 filing, and fails to file a proof of claim, will not receive money and the debt will be discharged when the plan is completed. In some cases all creditors file claims, however I have witnessed cases in which the debtor's largest creditor failed to file a claim, virtually reducing the amount of debt paid back to less than fifty percent.
Once a chapter 13 is explained to potential clients who are ineligible for chapter 7 and qualify for chapter 13, most fears are allayed. If you fear you are not eligible for chapter 7 bankruptcy, and have feared the concept of chapter 13, contact Greenwald & Hammond for a free consultation to learn how chapter 13 works and why it is not as scary as one may think.
Submitted by:
Mindy Greenwald, Esq.
Bankruptcy Attorney
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