Does Chapter 13 Mean Paying All Creditors Back? It Could Be Zero to Unsecured Claims

18 Jun Does Chapter 13 Mean Paying All Creditors Back? It Could Be Zero to Unsecured Claims

A 13 bankruptcy repayment plan does not necessarily mean that you must repay your debts in full.

Don’t be scared off by a chapter 13 bankruptcy payment plan. It does not mean you have to pay everyone back in full with interest.

After all, if you could afford to pay everyone back, you would not be thinking about filing a bankruptcy.

It may mean you pay NOTHING to your general creditors, the ones without priority status or collateral.

So, just how much do you have to pay back in chapter 13?

The formula is simple, really.

You must pay the higher of these four tests to your unsecured claims:

  1. administrative claims
  2. priority claims
  3. best efforts test
  4. best interest of creditors test

Administrative claims

Administrative claims include the filing fee, trustees fee, and attorneys fees for your lawyer. Pay 100%. 11 USC 1322(a)(2).

Priority claims

Priority claims include back child support and alimony and most federal and state taxes. Pay 100%. [11 USC 1325(a)(8) and 11 USC 1322(a)(2).]

Best efforts tests

The best efforts test is your “disposable income” for the “applicable commitment period”. This sounds scary, but it is the means test result for 36 or 60 months. It is based upon your income and expense allowances. Your bankruptcy attorney will calculate the bankruptcy means test formulas and figure this amount out for you. It could be 0% to 100%.[11 USC 1325(b)(1)(B).]

Best interest of creditors test

Best interest of creditors test. Your creditors must receive as much as they would receive if you filed a chapter 7 bankruptcy. This includes your equity in non-exempt property and the money the trustee can recover for payments you made preferring certain creditors and improper transfers of property minus the cost of liquidation and the trustee fees and expenses. Often, the result of this test is zero. [11 USC 1325(a)(4).]

Optional plan provisions

You also may pay a home mortgage arrearage, a car lender or other secured claims in your chapter 13 plan to keep your property. You may also pay co-signed debts or special classes of creditors.

Your plan payment must be feasible. The math must work. Plan funding must be practical and affordable. That means you have to pay in enough money to pay what you must pay to unsecured creditors and you have to pay in enough money to pay the creditors you may pay.

See Cathy Moran‘s post on calculating your chapter 13 plan. Doug Jacobs writes Understand the Chapter 13 Plan Payment.

Chapter 13 may be less than 100% repayment

Your bankruptcy attorney knows the rules for getting a chapter 13 plan approved in your locale. Do not let the myth that chapter 13 means paying back all your debts stop you from considering chapter 13. It is not true.

Chapter 13 can be an powerful tool to manage and resolve your financial problems. You may be surprised to find out that your chapter 13 payment may be affordable and dramatically less that your payments were before bankruptcy. Your attorney can analyze your situation and tell you exactly how much you have to pay in chapter 13.

Kansas Bankruptcy SpecialistJill Michaux is a Kansas bankruptcy attorney. She can often be found on Google+ where she shares information about consumer bankruptcy law issues.


Photo Credit: Creative Commons LicenseAttributionSome rights reservedbyAlan Cleaver

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Jill Michaux has helped Kansas consumers with debt problems for three decades. She and her partner, Mark Neis, are Topeka's only bankruptcy specialists, board certified in consumer bankruptcy law by the American Board of Certification. She help start the National Association of Consumer Bankruptcy Attorneys.
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