Myth: Chapter 13 means paying off all of your creditors.
Fact: That rarely happens. In most cases, the majority of your debt is wiped clean.
What does happen in a Chapter 13 reorganization is that most of your unsecured debts are written off in most cases. You pay what you can afford to pay. When you start making payments into a bankruptcy plan, your unsecured creditors (like credit card debts) are at the end of the line — paid last. Here’s the creditor “pecking order”:
1. First, your bankruptcy attorney fees and the fees of the bankruptcy trustee are paid early in the plan.
2. Second, any Domestic Support Obligations to your former spouse and then priority taxes to the IRS or State of Colorado are paid.
3. Next, any arrearages on your mortgage are paid.
4. If you are paying for a motor vehicle through the reorganization plan, that is paid next.
Finally, at the end of the plan, whatever is left over goes to your credit cards and other unsecured creditors. In most cases, this is very little. A Chapter 13 bankruptcy can provide broader, more complete relief in many cases compared to Chapter 7 bankruptcy.
How Chapter 13 bankruptcy really works:
Chapter 13 bankruptcy is based in part on your ability to repay. Simply put, the bankruptcy court looks at your net income minus your expenses in determining how much you must pay to your creditors every month. However, under bankruptcy “reform”, your ability to repay is determined mainly by application of maximum “allowable” expenses established by the Internal Revenue Service’s collection standards.
When you retain us as your Chapter 13 bankruptcy attorney, we know how to use the law to your advantage. This means that even though your expenses may be higher than the IRS’ idea of “average” we look for other allowable deductable expenses that help reduce your monthly Chapter 13 bankruptcy reorganization plan payment. Such expenses include, but are not limited to:
401(k) contributions up to the maximum you can contribute to your plan
Mortgage expenses over and above the presumed housing allowance
Medical and life insurance expenses
Mandatory payroll deductions
Domestic Support Obligations