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Will I Be Able to Afford Chapter 13?

13 August 2010

The first thing to ask yourself is why you’re thinking about a Chapter 13.  Before filing a Chapter 13, you may wish to consult with a bankruptcy attorney to discuss your options.  If you are advised to file a Chapter 13, be sure to ask why Chapter 7 isn’t the better option.  The two most common reasons to file Chapter 13 are for debts that can’t be addressed through a Chapter 7, like mortgage arrearages and income taxes, and income too high to get a discharge in a Chapter 7.

If you are considering Chapter 13 because of debt, to cure arrearages on a house or car, you may have to answer hard questions about whether you can really afford to keep that asset.  A majority of Chapter 13s fail, mostly because Debtors are unable to make the plan payments.  Before committing your time and money to a repayment plan, give serious consideration to whether you can really make those payments and still eat.

There are three types of debts in bankruptcy and they require different treatment.  Secured creditors, those who hold a lien on property you want to keep, have to be paid with interest, in or out of the plan.  Priority debts, like child support and taxes, must be paid at 100%.  Other unsecured creditors must be paid from disposable monthly income at whatever percentage you can afford.

There are real limits to the relief you can get under Chapter 13; it’s designed to reorganize rather than eliminate secured debt and I frequently advise my clients that the best option for their family may be to sacrifice the house or car rather than continue to live above their means.  That is a worst case scenario, though.  In many other cases, clients come to me after a crisis, like a medical problem or job loss and just need time to get back on their feet.  The best Chapter 13s are for people on the upswing.  If your financial situation has improved, but during the crisis you fell behind, Chapter 13 can be an ideal solution to buy time to repay.

If you’re considering Chapter 13 because a careful evaluation of your budget shows your disposable  income is enough above average that it would or might be an abuse of Chapter 7 to eliminate all of your debts, a Chapter 13 must, by definition, be affordable for you.  You don’t have to pay 100% to all creditors.  An unintended consequence of the 2005 BAPCPA bankruptcy changes is that at least in Northern Kentucky and Cincinnati, where I practice, it is possible to have successful Chapter 13 plans with very low payout to unsecured creditors.

Chapter 13s can be extremely complex and allow an experienced attorney a lot of room for creativity, but they’re only a good solution if you can afford to make the payments.