The Benefits of a 100% Chapter 13 Bankruptcy Plan

February 6, 2011

By: David M. Serafin

In my Denver based consumer bankruptcy practice, I represent plenty of higher income filers (those who do not come close to passing the Means Test) who are obviously looking to discharge as much of their unsecured debt as possible. Typically, these filers have an annual income of over $100,000 (and sometimes $100,000 for each spouse) and not enough allowable expenses, such as a mortgage or car payment, or out-of –pocket medical expenses, to allow for anything less than a monthly payment paying back 100% of unsecured debts over the full 60 months back to the creditors. As such, the bankruptcy debtor(s) must pay all monthly disposable income back to the chapter 13 trustee, and unsecured creditors are entitled to receive at least as much as they would have in a chapter 7 case.

In the absence of priority debt (such as non-dischargeable taxes), arrears owed for a mortgage or car loan, or other secured debt being paid through the plan, and with the exception of administrative expenses for attorney’s fees and the trustee’s fees, the overwhelming majority of the chapter 13 plan payment will pay back unsecured creditors. A 100% plan pays back both priority and non-priority debt in full.

Of course, many of my clients initially balk at the prospect of a 100% repayment plan wondering why a bankruptcy should even be filed if none of the unsecured debt will be discharged. The answer is that even a 100% plan can save a debtor thousands of dollars over the 3 to 5 year life of the plan in the form of foregone interest, penalties and late fees. For instance, imagine you have $30,000 of credit card debt and medical bills combined. Left alone over the next few years, and with higher rates of interest exponentially compounding this debt daily, this same debt may grow to $50,000 or more. With this unsecured debt paid back through a 100% chapter 13 plan, you’re provided a fresh start by not having to deal with any additional interest (think interest rates of 15% to 35% or more), penalties or late fees – all added on top of one another.

Many of my clients intend to file for chapter 13 strictly to “strip off” a second mortgage lien, regardless of their income, if the property’s value is less than the balance owed on a first mortgage alone. Even though a 100% chapter 13 requires that the balance owed on the second mortgage (now rendered unsecured due to the strip off) be paid back in full – in addition to credit card debt, medical bills or other unsecured debt – through the plan, the mortgage lender is likewise enjoined from pursuing the debtor for any additional interest, penalties or late fees.

Also, because the chapter 13 trustee is appointed to represent the best interests of the unsecured creditors (by making sure they are paid as much as possible from the debtor’s monthly disposable income), a 100% plan is much more likely to be confirmed by the Colorado Bankruptcy Court without any objection by the trustee.

Further, even if the Means Test ordinarily would require the debtor to pay back his monthly disposable income over 3 to 5 years in the chapter 13 plan, the amount actually paid back will be less if 100% of the unsecured debts is less than multiplying the monthly disposable income by 36 or 60 months. In other words, the Bankruptcy Code does not require a bankruptcy debtor in Colorado to pay back more than 100% of unsecured debts, regardless of income.

And, if the amount of unsecured debt owed is relatively low, the normal Bankruptcy Code requirements that a repayment plan be at least 36 months does not apply for a 100% plan. For an Aurora chapter 13 lawyer, please contact us at (303) 862-9124.