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Chapter 13 Bankruptcy and Why Should Be Thrilled At Having to Pay Your Creditors in Full!

The title sounds preposterous right? Why would a bankruptcy attorney tell you that a chapter 13 bankruptcy that “forces you” to pay back your debt in full to all of your creditors (commonly referred to as a 100% chapter 13 Plan) is still a sweetheart deal? And better yet, why would the bankruptcy court expect you to pay all of your unsecured creditors (credit cards and medical bills) in full?

Allow me to quickly address the second question: Why will the bankruptcy court expect you to pay all of the debt owed to your creditors? Short answer is that according to Congress, and to a lesser extent the bankruptcy court, you simply make way too much money to deserve a “discount” when it comes to determining how much your unsecured creditors are entitled to get paid. The basic premise of a chapter 13 bankruptcy filing is that the more disposable income you have, the more the bankruptcy court is going to expect you to pay. The folks who benefit most from a chapter 13 bankruptcy filing are those who were close to beating the means test and qualifying for a chapter 7 bankruptcy, but had just a bit too much income. Say for instance the single guy making $57,000 per year who lives in Fairfax County, Virginia. But, that same single guy making $92,000 per year, there will be no “discount” allowed for him. He will be expected to pay 100% of his total unsecured debt. So, what’s so great about that? Why would anyone want to go into bankruptcy if they have to pay all of their debt? Here is why:

1. In real estate the famous mantra is “location, location, location…” Well, in bankruptcy and finances in general, it is all about “interest, interest, interest…” (or APR if you want to get fancy). The great gift that you get in a chapter 13 bankruptcy filing is that you will pay no interest! The interest stops to accumulate the moment you file. So back to my single guy making $92,000 per year with $40,000 in credit card debt for instance…this gentleman has been making timely payments of $1500 per month for the last three years, but since the interest rate is an average of 20% his monthly payments only cover the minimums. Meaning, for the last three years he has not put even the slightest dent into the total amount that he owes because each penny that he has been paying has only covered the interest. Sounds familiar?! Compare that to a chapter 13 bankruptcy where you have to pay back all that you owe in full (the worse case scenario in a 13), what would the payments look like? The bankruptcy court would take that $40,000 that you owe, divide it by 60 months, add a bit of a trustee commission, and your payments would be about $700 per month. So which would you rather do? Keep paying monthly minimums and getting no where? Or having a payment plan where every single payment you make goes towards the principal?

2. In order for a creditor to be entitled to get paid in a chapter 13 bankruptcy plan, the creditor must submit a proof of claim in a timely fashion with the bankruptcy court. If they are late to file –and that happens-, or if they do file but you have a legitimate defense to the creditor’s proof of claim, then the court may determine that they are not entitled to get paid. So now, for example, instead of having to pay back $40,000 in total debt interest free, if one of the creditors “showed up to the party late” or simply failed to file a proof of claim all together then that creditor will not get paid. If the creditor was owed $8,000 for example, then now the total of what you will have to pay has gone down to $32,000 interest free, thereby reducing your monthly payments even further. As far as challenges to proof of claims, well, if the debt owed is now in the hands of a debt buyer, a careful and aggressive bankruptcy lawyer will have a golden opportunity to challenge that creditor and may very well be able to convince the bankruptcy judge that the debt buyer is not entitled to get paid. Again, the total debt that you will have to make payments on may be greatly reduced.

3. You do not have to deal with the enormous stress of being taken to court, harassing phone calls and letters from collectors, and trying to negotiate a settlement or a payment plan with various creditors. The chapter 13 bankruptcy filing gives you the opportunity to once and for all deal with all of your creditors, and put all of your debt behind you.

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This entry was posted on Friday, March 16th, 2012 at 3:33 pm and is filed under Chapter 13 Bankruptcy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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