Potentially Pay Nothing to Most Creditors in Chapter 13

 Posted on December 21, 2016 in Discharge of Debts

In some jurisdictions you can pay nothing to your “general unsecured” creditors, if all your money goes to paying higher priority ones.

We’re in the middle of a series of blog posts about the discharge of debts through Chapter 13. We’re specifically talking about Chapter 13 cases in which you’d pay nothing to some or even most of your creditors.

A Conventional Chapter 13 Plan

The U.S. Bankruptcy Code’s official name for Chapter 13 is “Adjustment of Debts of an Individual with Regular Income.” In most cases that “adjustment” means you must pay something to all or most of your creditors.

Here’s the way it usually works. You and your bankruptcy lawyer put together your budget. It shows your monthly income, expenses, and the remaining “disposable income.” That remaining amount is usually what you pay into your Chapter 13 plan each month.

In many cases much of that plan payment first goes to pay special debts in full—such as a home mortgage arrearage or income taxes. Your “general unsecured” debts get what’s left over.

The “general unsecured” debts are all your debts that are neither secured nor “priority.” Secured debts are those with a lien on something you own. “Priority” debts are special ones that you must pay in full before paying anything on the “general unsecured” debts.

You pay your monthly plan payment to the Chapter 13 trustee as long as you’re required to. That’s usually either 3 or 5 years, depending on your income at the time of filing. (Sometimes you qualify for the shorter 3 years but can stretch it longer simply to lower your monthly plan payments. You don’t pay any more than if you paid more per month for 3 years.) From your plan payments the trustee pays your creditors according to the terms of your Chapter 13 plan.

Partial Payments on Your “General Unsecured” Debts

So, the total amount of money you pay your “general unsecured” debts is the amount you pay into your plan throughout the life of your case beyond what goes to pay off secured and “priority” debts (plus “administrative expenses” like trustee and attorney fees). When your “general unsecured” debts get enough to pay them 50 cents on the dollar, that’s called a “50% plan.” If those debts receive 2 cents on the dollar, that’s a 2% plan. Keep in mind that this is usually after your plan pays other debts—the secured and “priority” ones—in full.

The 0% Plan

So what happens if you only have enough “disposable income” to pay your secured and “priority” debts? What if there’s nothing left over for your “general unsecured” debts? You pay all you are required to pay each month and do so for as long are you are required to do so, but your secured and/or “priority” debts are so large compared to your “disposable income” that there is nothing at all left over for your “general unsecured” debts.

That’s called a “0% plan.” Your “general unsecured” debts get nothing out of the plan—0% of what you owe them.

Let’s be clear what that means. Assume you owe $10,000 in recent “priority” income taxes and are $8,000 behind on your mortgage. You also owe $100,000 in “general unsecured” debts—credit cards, medical bills, personal loans, older (non-priority) income taxes, and such. Your income qualifies you for a 3-year plan. Your budget says your monthly “disposable income” is $500. You pay 36 months of $500 Chapter 13 plan payments, a total of $18,000. (Let’s disregard “administrative expenses” like the trustee’s fee to make the math easier here.)

That $18,000 paid into your plan is enough to pay off the $10,000 “priority” income tax and to fully catch up on your $8,000 mortgage arrearage. But it leaves nothing for the $100,000 in “general unsecured” debts. With a 0% plan, you would pay nothing at all on that $100,000. Then at the end of your 36-month Chapter 13 plan all those debts would be discharged, permanently written off.

The Best of Both Chapter 7 and 13

With 0% Chapter 13 plans you get the benefit of discharging your “general unsecured” debts without paying anything on them. That’s what usually happens in a Chapter 7 case. But you get to deal with your secured and “priority” debts with the numerous advantages of Chapter 13. In our example, the tax creditor(s) and mortgage lender must let you catch up based on a sensible budget. Tax interest and penalties stop accruing, tax liens can’t be recorded, and you likely won’t have to pay prior penalties. There are many other Chapter 13 advantages in other situations.

0% Plans Not Accepted Always or Everywhere

But there are also some situations where you aren’t allowed to pay nothing on your “general unsecured” debts. For example, if you are keeping an asset that does not fit within a property “exemption,” usually in return you are required to pay a certain minimum to your pool of “general unsecured” debts. There are other situations like that.

There are also some jurisdictions where the bankruptcy judges frown upon or simply do not allow 0% Chapter 13 plans. Your bankruptcy lawyer will tell you what limitations there are along these lines in your bankruptcy court.