Recently a client asked if they could pick and choose which creditors to pay in a Chapter 13 case. In a word, “no”. The majority of my clients file Chapter 13 petitions. These cases can be complex but there are some general rules that can be explained. A Chapter 13 bankruptcy plan needs to be filed and it must meet certain requirements.
Rule Number 1: All creditors in each class, for example secured creditors or unsecured creditors, must be treated equally.
So, you cannot decide to discharge your American Express and keep your MasterCard, both of which are unsecured creditors. You can discharge all you unsecured debt (all credit cards) and still retain secured debt (your motor vehicles and homes). A plan for repayment could be devised in which to keep your home or car but get rid of your credit card debt. If you keep the property that is secured you must pay the debt as agreed under the bankruptcy plan.
You may want to discharge most of your debt, including your car (secured) and credit cards (unsecured). While this might seem like a violation of Rule Number 1, you can decide to return property to a secured creditor and then the creditor is unsecured and falls into that category and the underlying debt can be discharged.
In many cases payments are used to retain houses when you have fallen behind on your mortgage or to pay tax debt that is not subject to a bankruptcy discharge.
You may stop a mortgage foreclosure with a Chapter 13 plan as long as you make the current monthly mortgage payments and cure (pay) the arrears (missed payments) in full over the plan term.
Rule Number 2: Your Chapter 13 Bankruptcy payment plan must cover the value of your assets minus your allowed exemptions. The so-called ”liquidation analysis”. This is because creditors in Chapter 13 must get at least as much as they would if you file a Chapter 7 case and a Trustee liquidates the assets. You are required to prepare and file a list of your property, both real and personal, and declare its value. Then your allowable exemptions listed in the bankruptcy code and state statues (i.e. household goods, motor vehicles, homestead, etc.) are deducted from the total and the remaining value must be covered in payments over the length of your bankruptcy plan that can be thirty six to sixty months.
Rule Number 3: You must pay all your disposable monthly income into the plan. How you arrive at that figure depends if you are above or below the median income for your family size.
This rule is complex because your income determines what deductions you can take from your income to arrive at the “disposable monthly income” figure. If your family income is below the median income for your family size you can use you actual budget numbers. If you income is over the median you must use IRS collection guideline figures that may be more of less than your actual expenses. Under either calculation, the bottom line number must equal the monthly plan payment. In most case a bankruptcy plan provides for a percentage payment to unsecured creditors that is less than one hundred percent.
Because of the complexities in the Bankruptcy Code, filing a Chapter 13 bankruptcy without the benefit of experienced counsel is like performing surgery on yourself, not recommended.