.jpg?width=300&height=202&name=shutterstock_1095344882(1).jpg "Why A Chapter 13 Pay In-Full Bankruptcy Can be an Optimal Way to Handle Debt in St. Paul, Minnesota")
Why A Chapter 13 Pay In-Full Bankruptcy Can be an Optimal Way to Handle Debt in St. Paul, Minnesota
In a Chapter 13 bankruptcy, a debtor pays as much as he or she can afford each month, in a three to five year repayment plan. Typically, the debtor only pays a fraction of all of their total debt, and upon successful completion of the Chapter 13 bankruptcy, will receive a bankruptcy discharge that wipes out the majority of their remaining debt (with exceptions, such as child support debt or student loan debt).
In some instances, the court may require that a debtor completely repay their debt in-full. Even though the debtor may be required to pay their debt in-full, it is still often much more beneficial to the debtor than handling debts on their own outside of the Chapter 13 bankruptcy.
One situation in which a “pay in-full plan” may be required, is if the debtor is a very high income earner, with not a whole lot of necessary monthly expenses. In a Chapter 13 bankruptcy, debtors are required to pay all of their disposable income each month towards their debts. A person’s disposable income is the amount of money left over each month, after deducting allowable monthly expenses (i.e. food, clothing, hygiene products, car payments, etc.) from their net take home income. A debtor with a high income and a low amount of monthly expenses will be left with a relatively higher amount of disposable income to pay their creditors. This is common in situations where a debtor or a married couple has a high paying job and no children to support as dependents. In these circumstances, it is not unusual for a bankruptcy court to require that the debtor pay their debt in-full.
Another situation in which a debtor may have to be in a pay in-full Chapter 13 plan, is if the debtor has a lot of property that is “not exempt.” Even though a debtor is not required to turn over any property to pay their debts in a Chapter 13 bankruptcy, the debtor’s Chapter 13 plan must provide that the debtor’s unsecured creditors are paid at least as much of the value of their properties that are not exempt. This is known as the “best interests test.” The best interests test means that creditors must be paid at least as much as they would have received if the debtor had filed a Chapter 7 bankruptcy, and had their nonexempt property liquidated. Sometimes, a debtor’s total value of nonexempt property exceeds the amount of debt they have. In these cases, the court will likely require that the debtor pay their debts in-full, in fairness to the debtor’s creditors, in exchange for their ability to keep all of their nonexempt property during their Chapter 13 bankruptcy.
Pay in-full Chapter 13 plans are beneficial for a debtor for several reasons. First, the debtor is protected by the automatic stay for the entire three to five year repayment plan. The automatic stay protects a debtor from being sued by a creditor, and protects a debtor from a repossession of a vehicle or a foreclosure. Secondly, in a Chapter 13 pay in-full bankruptcy plan, the debtor is allowed to pay back their entire debts interest free. Even though the debtor will have to pay attorney’s fees and must contribute 10% of the total amount paid in the plan to the trustee as trustee’s fees, the debtor’s Chapter 13 repayment plan is often far less than the amount the debtor would have to pay outside of a bankruptcy. Thus, a Chapter 13 saves a debtor money, with no interest payments. Lastly, a Chapter 13 pay in-full plan, often provides a debtor a monthly payment that is significantly less than the minimum payment the debtor would have to pay if dealing with creditors on their own outside of the bankruptcy. Minimum payments on credit cards and personal loans may start out low, but will increase over time with interest accruing. A Chapter 13 pay in full plan is designed to be affordable, because the debtor will only be paying what they can afford each month, under the supervision of the bankruptcy court.
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For all of the above reasons, a Chapter 13 pay in-full plan is a much better option to manage debt, compared to paying creditors on your own and being in a debt consolidation program. For advice on whether you would have to be in a pay in full Chapter 13 bankruptcy, come visit us at our new office location in St. Paul, Minnesota, or come see us at LifeBackLaw.com!
