Chapter 13 is a great way to repay your creditors without worrying about harassment from bill collectors while eliminating high-interest rates and fees on credit card debt. Ultimately, the question that comes up is do I have to repay the full amount that I owe? The answer is NO, you only have to pay what you can afford to pay (disposable income) as long as you satisfy the Bests Interest of Creditors Test.
Section 1325(a)(4) of the Bankruptcy Code sets out the Best Interest of Creditors Test, also known as a liquidation test, which basically requires you to pay your unsecured creditors as much as they would have received under a Chapter 7 distribution. For most people, this won’t be a problem since the bankruptcy exemptions let you keep a fair amount of assets. But, the more stuff you have that is not exempt or the more equity you have in your home, the more you will have to pay in your Chapter 13 bankruptcy.
The liquidation test exists to ensure that creditors are receiving the most value from the debtor. The test guarantees that you are not able to pay such a small amount of money under a repayment plan so that creditors end up with less overall than if your assets were sold by a Chapter 7 Trustee.
In a Chapter 13 bankruptcy, you get to hold onto all their property in exchange for paying a portion of all your debt in a repayment plan. Paying less than 100% to your unsecured creditors is considered a “Composition Plan” or a “Pot Plan”. A Composition Plan will pay unsecured creditors a pro-rata percentage of their unsecured claims in addition to 100% of secured, priority and administrative claims. A Pot Plan is where you only have a certain amount that you can pay each month and all of your creditors (secured, priority, administrative and unsecured) are all paid from the pot of money that you are able to generate over the term of your plan. The typical term for a plan is a minimum of 36 months and a maximum of 60 months.
You can propose a Composition or Pot Plan so long as you satisfy the Best Interest of Creditors Test. If a creditor would stand to make more under Chapter 7 it would be unfair to allow you to file Chapter 13and keep your property.
The amount that you must pay unsecured creditors is the greater of your disposable income or the value of your nonexempt property. So, your creditors will usually get at least an amount equal to your nonexempt property, regardless of whether you file for Chapter 7 or 13 bankruptcy—and even more if your disposable income exceeds the value of your nonexempt property.
Your disposable income is the amount of your total net household income less total household living expenses. This figure is presumably what you have available to pay your creditors. Very few people are able to stick to their budget to the penny, so as long as you haven’t included any unusually high expenses, most courts will confirm a plan even if the payment that you propose is a few dollars less than your disposable income.
The “best interest of creditors” test calculates the minimum amount you must pay to your unsecured creditors through your Chapter 13 plan. If you can’t repay this minimum amount or come close as I mentioned above, the court will not confirm your Chapter 13 plan, which means you will either need to convert to Chapter 7 or your case will be dismissed.
This is why the timing of your bankruptcy filing is critical. If you have too many assets, you may have to consider selling some of your property in order to work out settlements with your creditors before attempting to file a Chapter 13. You can also propose to sell your assets while in a Chapter 13 case so that you can fund your plan by using the proceeds from the sale of your property and pay off the balance of the debt using your disposable income. You should speak with a bankruptcy lawyer about your options before deciding to file for bankruptcy.
If you are struggling to pay your debts and concerned about the future welfare for you and your family, it is important that you seek the advice of a bankruptcy lawyer to ensure that your assets are protected and the debts you seek to eliminate are dischargeable. Our attorneys have been assisting consumers and business owners with bankruptcy matters for over 25 years. If you are considering filing for bankruptcy, please consider contacting the Nomberg Law Firm. Our office number is 205-882-5005.
Steven D. Altmann has been a lawyer for more than 25 years. Steve has earned an AV rating from Martindale-Hubbell’s peer-review rating and was recently named a Super Lawyer and Top Attorney by Birmingham Magazine in the area of Bankruptcy Law.
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