Don't worry, a Ch. 13 repayment plan doesn't mean all debt must be paid
Often times, when individuals considering bankruptcy hear the phrase "repayment
plan" in connection with a
Chapter 13 bankruptcy, they become apprehensive. After all, if they had the means to completely
repay all of their debt, they likely would not be seeking the protection
of bankruptcy in the first place.
However, the truth is that many of those who file a Chapter 13 bankruptcy
- and thus are subject to a repayment plan - will not be required to pay
back all of their debts. In fact, with certain types of debts, individuals
may only need to pay back a fraction of what they owe. This is why it
is important to know how courts will evaluate proposed repayment plans.
Establishing Chapter 13 payment plans
First and foremost, a court must approve a Chapter 13 payment plan before
it becomes effective. In addition, a court will not approve a Chapter
13 plan unless it accounts for the payment of all priority debts - which
can include back taxes and child support - and all administration fees,
such as attorney and trustee fees.
When it comes to all other unsecured debts, courts will initially apply
what is known as the "Best Interests of the Creditors" test.
Basically, this test requires that a mathematical comparison be done to
ensure that unsecured creditors will be paid an amount under the payment
plan "not less than the amount that would be paid on such claim if
the estate of the debtor were liquidated under Chapter 7."
So, under this test, unsecured creditors during a Chapter 13 bankruptcy
will only be entitled to the amount they would have received under a Chapter
7 bankruptcy - which is often zero.
However, an amendment to the bankruptcy code now provides that if an unsecured
creditor objects to the payment plan, the court must also analyze the
debtor's disposable income and his or her ability to pay these unsecured
claims - otherwise known as the "Best Efforts" test.
Essentially, this means that when it comes to unsecured debt, an individual
filing for Chapter 13 will likely be responsible for paying the
higher amount of these tests - but only the higher amount, not both.
Consequently, making the correct payment plan decisions during a Chapter
13 bankruptcy can have a significant impact. Accordingly, if you are currently
contemplating bankruptcy it is often best to seek the counsel of an experienced
bankruptcy attorney. A skilled attorney can help review your case and
explain whether Chapter 13 may be right for you.