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

  • Daycare expenses

  • Mortgage expenses over and above the presumed housing allowance

  • Medical and life insurance expenses

  • Mandatory payroll deductions

  • Domestic Support Obligations

Before the summer of 2010, this was a lot of ambiguity regarding the size of your bankruptcy payment. The Chapter 13 Trustee argued that your payment had to be based on your last six months of income (means testing) instead of being based on your current income and ability to pay.

The U.S. Supreme Court shot down this unreasonable position in a decision called Hamilton vs. Lanning. Your bankruptcy payment now must be based on your actual current ability to pay — NOT entirely on your past income. More information on the Lanning decision is located here.

After we crunch all the numbers for you, we determine an affordable monthly debt reorganization payment and propose a Chapter 13 plan to the court.  After a hearing, sometimes two hearings. the bankruptcy court approves your reorganization plan.  You then receive a Chapter 13 discharge when your Chapter 13 bankruptcy plan is completed in three to five years.  In the average case, you repay less than 20% of your debts — sometimes only a few pennies on the dollar.  The rest of what you owe is simply written off.

Some chapter 13 bankruptcies may be filed with little more than $100 attorney fees out of pocket to you. This requires a wage order to the bankruptcy trustee for your plan payments and payment of the court filing fee. Certain repeat filers will not qualify for this offer depending on the circumstances.

Click here for Chapter 13 Frequently Asked Questions