In a word, NO. A common misconception among consumers is that a chapter 13 bankruptcy requires payment in full of ALL debts. To the contrary, unsecured debts are often slashed dramatically with credit card debt frequently paid out at less than 10%. Chapter 13 bankruptcy involves filing a repayment plan with the court, the extent to which debts are repaid is a function of your disposable income and the value of your assets. Exactly how is a chapter 13 plan payment calculated? The process is complicated and requires the guidance of a knowledgable bankruptcy attorney , however, this article will tackle the bare bones basics.

Estimating Your Plan Payment

(1) Disposable Income – to be confirmed, a chapter 13 plan will require that all of your disposable income is committed to the plan over a 3-5 year period. Disposable income is calculated by deducting your allowed expenses from your currently monthly income. As far as the trustee is concerned, the money left over after expenses represents your disposable income and forms the first part of your plan payment.

(2) Non-exempt assets - A chapter 13 plan will not be confirmed if unsecured creditors would be in a better position in a chapter 7 liquidation (creditors must receive at least as much as they would were your non-exempt assets sold at auction). This requires an analysis of the debtor’s assets and applicable exemption law. Debtors with no non-exempt assets (a “no asset case”) have no property that can be sold to pay off creditor’s claims. The law deems all of their property protected or exempt from creditors. As such, their plan payment will be based primarily on disposable income and debts classified as “priority” such as child support and taxes which must be paid in full. Very little disposable income and no non-exempt assets could result in a very low plan payment and a significant restructuring of unsecured debt.

The debtor with non-exempt assets will be forced to pay out the value of the non-exempt portion of those assets through the plan. Remember, if unsecured creditors would receive a larger dividend in a chapter 7 liquidation, the chapter 13 case won’t be confirmed. Debtors often choose chapter 13 as a way of protecting non-exempt property from liquidation, however, the property value factors into their plan payment.

To summarize, chapter 13 bankruptcy does not require that you pay back 100% of all your debts. You will be required to commit disposable income and if you own non-exempt property, you must pay creditors the value of what they would have received at auction. In addition, priority claims, such as child support, must be paid in full. At the end of all this analysis it is common for debtors to pay back unsecured creditors at pennies on the dollar, which beats most debt consolidation plans. If you are considering filinng for bankruptcy, contact an attorney.

To read about how chapter 13 bankruptcy can help you catch up on past due mortgage payments, click here.

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