Repaying Debt and Chapter 13 Bankruptcy
Since it requires the repayment of debt, Chapter 13 often seems counterintuitive to many people. After all, if one is in serious debt and in need of bankruptcy, how can one afford to repay debts? However, this is a very common misconception about this type of bankruptcy. In reality, only certain debts must be repaid during Chapter 13. Even then, not all debts must be repaid in full.
Which Debts Must I Repay?
Which debts must be repaid under the payment plan in Chapter 13 depends largely on the type of debt. In order for the bankruptcy court to approve the payment plan, it must meet certain criteria. One of the requirements for approval is that the plan provides full repayment of priority and administrative expenses. These include court costs, alimony, attorneys’ fees, child support and certain types of taxes.
In addition to repaying these debts in full, the plan must also meet certain standards with regard to unsecured debts. These debts include all debts where there is no collateral pledged as security for the payment of the debt, such as credit cards and medical bills. Under the law, the plan must pass the “best interests of the creditors” test. This test requires debtors to pay their unsecured creditors at least as much as they would have to pay them in Chapter 7 bankruptcy.
Although this test sounds like it would require a significant repayment of debt, this is generally not true. In reality, Chapter 7 bankruptcy discharges most unsecured debt after little or nothing has been paid towards it. Consequently, most debtors in Chapter 13 do not have to repay any significant amount (or anything at all) under the payment plan. As in Chapter 7 bankruptcy, most unsecured debts end up discharged at the end of Chapter 13.
There is one rarely used exception to this rule. This comes into play if an unsecured creditor objects to the payment plan. If this happens, the debtor must pass another test-the “disposable income” test. During this test, the court examines the debtor’s disposable income-what is left over after taxes and necessities have been paid. In cases where the debtor’s disposable income is large enough to allow for repayment of the unsecured debts, the court may order the debtor to pay the debts, at least partially, under the payment plan. However, since most debtors contemplating bankruptcy do not have significant disposable income, this issue rarely comes up.
In order to be approved, the plan technically is not required to provide repayment of secured debts. These debts include mortgages, car loans and other debts secured by collateral. However, in reality, if these debts are not made current, the debtor could lose the collateral securing the debt. Fortunately, Chapter 13 give debtors 3-5 years to catch up on all missed payments on their secured debts, making it much easier to hold on to the collateral (i.e. avoid foreclosure or car repossession).
An Attorney Can Recommend the Best Path
If you are among the many struggling with debt, Chapter 13 may provide you with the extra help you need to get back on your feet. In fact, it may offer you many advantageous features not available in Chapter 7. However, filing any type of bankruptcy should only be done after consulting with an experienced bankruptcy attorney. An attorney can look at your financial situation and recommend the best debt relief option for you.