In my years of practicing bankruptcy, I’ve learned that there are a lot of misconceptions out there about the process. This usually applies more to Chapter 13 bankruptcy than to Chapter 7 bankruptcy because Chapter 13 tends to be more complex.
In general, the difference between Chapter 7 and Chapter 13 is explained as follows:
In a Chapter 7, the Trustee liquidates your non-exempt assets in order to repay your creditors. Any remaining debts that were not repaid with the funds from the liquidation will be discharged.
While Chapter 13 requires a debtor commit to an ongoing payment plan to repay their debt. In most Chapter 13 bankruptcies, all the debts that you owe are not repaid. Even though you propose a repayment plan, this does not mean a 100 percent of your debts will be repaid, in some cases general unsecured creditors get hardly anything at all.
How are Chapter 13 Plan Payments Determined?
The amount a debtor repays in his or her Chapter 13 repayment plan is determined through an assessment of:
- Equity in non-exempted assets often called the Chapter 7 test or the Best interest of creditors test; or
- Disposable Income; and
- Amount of Section 507 Priority Debts.
Repayment plans are stretched over three (3) to five (5) years. Once you have made all your plan payments, any debts not fully repaid within that timeframe will likely be discharged.
Are Your Creditors Guaranteed 100% Repayment?
Certain creditors that fall under Section 507 of the Bankruptcy Code are given priority and must be paid in full.
This priority status goes to creditors such as (a non-extensive list):
When it comes to repaying your debts in bankruptcy, these are the first to get attention and are guaranteed 100 percent repayment.
To qualify for Chapter 13, Section 1325(a)(6) requires debtor(s) to demonstrate that their Chapter 13 plan is feasible. In order to prove feasibility, debtors’ monthly income must be sufficient to pay all of their reasonable and necessary household expenses, their priority debts in full, the Bankruptcy Trustee’s fee and any secured debt their plan is attempting to pay.
What happens to your unsecured debt?
Some creditors might not get all of their money, even though a debtor is in a Chapter 13 repayment plan. Most unsecured debts such as medical bills, credit cards, personal loans, and other types of unsecured debts may receive pennies on the dollar. Since these debts are not considered priority debts under Section 507 of the Bankruptcy Code, they fall to the bottom of the list of claims to be repaid. Sometimes in a Chapter 13, when a debtor has relatively little disposable income, some of their debts might not ever be repaid but will be discharge.
What Should You Know Before You File for Chapter 13 Bankruptcy?
Despite Chapter 13 being considered the income earner’s bankruptcy, which requires a repayment plan, there is a good chance you will not be repaying all of your debts when you file a Chapter 13. This is because creditors only receive what you can afford to pay them over the course of three to five years the bankruptcy is pending. This is important because you don’t have to fret about repaying money you don’t have when you file a Chapter 13 bankruptcy.
Contact a Miami Bankruptcy Attorney
For more information about filing for Chapter 13 bankruptcy or to speak to a Miami Bankruptcy Attorney, contact Miceli Law, P.A. at (305) 515-5928.