Chapter 13 payment plans usually have you pay something to all of your creditors. But not necessarily. Certain creditors may get nothing.
Our last blog post was about the “discharge”—the permanent write-off—of debts through a Chapter 13 “adjustment of debts.” This discharge happens at the end of a successful case, which usually takes 3 to 5 years.
Misconceptions about Chapter 13
Although 3 to 5 years may sound like a long time, the length can actually be a big advantage. You have more time to catch up on or pay off debts that you either want to or must pay. So what seems like a disadvantage could actually be an advantage.
There are lots of other misconceptions about how Chapter 13 works. That’s partly because it is such a flexible option. Chapter 13 cases can be very different from each another, with each addressing the unique circumstances of each person. So that leads to some confusion, as you hear about something in one case that may have little or nothing to do with how Chapter 13 would work for you.
One misconception is related to an objection often raised about Chapter 13: why pay my creditors all or part of what I owe them when I could just discharge those debts entirely in a Chapter 7 “straight bankruptcy” case?
Actually, often in Chapter 13 you pay some creditors nothing at all. Sometimes even all of your creditors receive nothing, expect those you want or need to pay.
A Standard Chapter 13 Case
In maybe the most standard kind of Chapter 13 case (if there is such a thing!), you pay certain special debts in full and you pay other more ordinary debts only a percentage of what you owe, and often only a small percentage. The special debts you pay are often those secured by collateral you want to keep. So you may be catching up on a home mortgage arrearage or “cramming down” a vehicle loan. Oher special debts are ones that can’t be discharged in Chapter 7. Examples include recent income tax debt or unpaid child or spousal support.
Then your remaining “disposable income” goes towards the rest of your debts. Usually you pay those “general unsecured” debts only whatever’s left over. If the special debts you are paying in full are relatively small and your “disposable income” left over each month is relatively large, you could pay a relatively high percentage of what you owe on the “general unsecured” debts. But more often you don’t have much money left over and so you end up paying just a drop in the bucket of what you owe on those debts.
Debts Paid Nothing
So how could you pay nothing at all on certain debts in a Chapter 13 case? Here are four circumstances that would happen:
- No money available for “general unsecured” debts because ALL of your “disposable income” is spent on your special debts.
- A creditor does not file a proof of claim on the debt, or does not do so on time. So you don’t pay anything on that debt.
- Your bankruptcy lawyer objects to a creditor’s proof of claim. Then the creditor either fails to respond on time or you prevail on that objection.
- At some point in your Chapter 13 case your circumstances significantly change. So your lawyer converts your case into a Chapter 7 one, discharging all or most of your debts in full.
We’ll cover each one of these in our next 4 blog posts. This will give you a better idea how Chapter 13 really works.