Chapter 13 Bankruptcy Can Offer Better Value than Direct Creditor Payment Even When Paying Debt in Full
What Is Chapter 13 Bankruptcy?
First, read more about Chapter 13 bankruptcy here. That said, Chapter 13 bankruptcy is a form of personal bankruptcy that requires you to repay some percentage of what you owe to your creditors over a fixed period of time before you receive a discharge on the balance of your debt. A Chapter 13 is a payment plan bankruptcy, in which you make a monthly payment not to your creditors but to the Chapter 13 Trustee assigned to your case by the Federal Bankruptcy Court, who then takes your monthly payment and disburses it out to your creditors in a priority order based on what kind of debt they hold (secured mortgage debt over priority tax debt over last-in-priority unsecured credit card, medical, and other such debts). Whatever your creditors receive through the 3-5-year Chapter 13 payment plan is ALL that they receive (unless the debt is of the non-dischargeable sort), with the balance still owed to the creditors "on paper" being discharged in balance, the same way they would have entirely been in a Chapter 7 bankruptcy. What you pay each month depends on what you have left over from your monthly household take-home pay, after your necessary household expenses are subtracted. So, if what your family has at the end of an average month after accounting for food, transportation, medicine, clothing, rent, utilities, and other necessary expenses is $200, that is your monthly Chapter 13 plan payment. That is all that you pay. For a fixed number of months, as mentioned. The minimum length of a Chapter 13 plan is 36 months, and the maximum length is 60 months. And no longer. So the first advantage of a Chapter 13 plan over a non-bankruptcy debt-consolidation or "snowball" payment scheme is that you don't have to pay 100% of what you owe. Unless, of course, your household income is just high enough to produce a monthly plan payment that actually does pay off ALL of your debt within 60 months. What's the point of a Chapter 13 plan in that circumstance?
In Chapter 13 Bankruptcy, Federal Law Protects You AND Co-Debtors from Collections
When you file a Chapter 13 or Chapter 7 bankruptcy, the first thing that happens is that an injunction under Federal law called the "automatic stay against collections" is issued, which stops ANY collections activity of ANY sort by ANY creditor, with very few exceptions. Even those who may be holding non-dischargeable debt, such as the IRS for recent tax-debt. In a Chapter 13, this automatic stay stops collections not only against you but also individual (human) co-debtors for consumer (non-business, non-tax or similar) debts. This is something that does not happen in any non-bankruptcy debt defense alternative. ONLY a Federal bankruptcy automatic stay injunction will freeze your creditors in place, stopping garnishments, repossessions, foreclosures, annoying phone-calls, and other measures while you pay your principal down.
Pay No Interest or Further Late-Fees in Chapter 13 Bankruptcy
Yes, you read that correctly: in a Chapter 13 bankruptcy, you are paying what you can afford to pay of the balance you owe as of the date of filing of your Chapter 13 bankruptcy case without any further accrual of interest or late-fees. What you pay in your Chapter 13 is what you owe as of the date of filing. It never continues to balloon on you after you file your case. Outside of Chapter 13 bankruptcy, in some sort of debt consolidation or management plan, interest and late-fees will continue to accrue and snowball, sometimes leaving you with a balance that never seems to disappear, no matter how much you pay---and often dragging on for far, far longer than the maximum 5-year length of a Chapter 13 plan.
Negotiate Nothing with Creditors in Chapter 13 Bankruptcy
Outside of Chapter 13 bankruptcy, you can, on your own or with an experienced attorney assisting you, sometimes negotiate a settlement, a payment plan, or some other relief with a creditor. The word "negotiate" is the operative word in that statement. In order to reach a satisfactory settlement or other outcome, you first have to have a creditor on the other end of the phone conversation willing to talk to you. That creditor holds all the cards: you signed a contract, they have the right to sue, to obtain a judgment for breach of that contract in a court of law, to garnish your wages, to seize your property, etc. You will have to give them something to get what you want. And it is a myth that debts are commonly settled out for pennies on the dollar. In Chapter 13 bankruptcy, you hold the cards. So long as you have not engaged in fraud, have not concealed assets or failed to disclose what is required to be disclosed in the bankruptcy petition, you will get your discharge and are entitled to relief from your debt. The creditors have little to say about it. Further, in order to get paid from a Chapter 13 payment plan, creditors have to file a form called a "proof of claim" with the Bankruptcy Court, and, frequently, some will fail to do so. A Creditor who does not file a proof of claim is paid nothing, and the debt is discharged in full at the end of the Chapter 13 process. Meaning that the "100%" you are paying in your Chapter 13 is less than the "100%" you would pay outside of the bankruptcy process.
Chapter 13 Bankruptcy 100% Payment Plans: The Bottom Line
The bottom line in Chapter 13 bankruptcy is that, even when, "on paper," your Chapter 13 Payment Plan may require you to pay back all that you owe, it is likely still a significant advantage over non-bankruptcy options, unless certain other circumstances complicate your situation (such as the possession of high-value assets). If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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