Often times, when individuals considering bankruptcy hear the phrase "repayment plan" in connection with a Chapter 13 bankruptcy, they become apprehensive. After all, if they had the means to completely repay all of their debt, they likely would not be seeking the protection of bankruptcy in the first place.
However, the truth is that many of those who file a Chapter 13 bankruptcy - and thus are subject to a repayment plan - will not be required to pay back all of their debts. In fact, with certain types of debts, individuals may only need to pay back a fraction of what they owe. This is why it is important to know how courts will evaluate proposed repayment plans.
Establishing Chapter 13 payment plans
First and foremost, a court must approve a Chapter 13 payment plan before it becomes effective. In addition, a court will not approve a Chapter 13 plan unless it accounts for the payment of all priority debts - which can include back taxes and child support - and all administration fees, such as attorney and trustee fees.
When it comes to all other unsecured debts, courts will initially apply what is known as the "Best Interests of the Creditors" test. Basically, this test requires that a mathematical comparison be done to ensure that unsecured creditors will be paid an amount under the payment plan "not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7."
So, under this test, unsecured creditors during a Chapter 13 bankruptcy will only be entitled to the amount they would have received under a Chapter 7 bankruptcy - which is often zero.
However, an amendment to the bankruptcy code now provides that if an unsecured creditor objects to the payment plan, the court must also analyze the debtor's disposable income and his or her ability to pay these unsecured claims - otherwise known as the "Best Efforts" test.
Essentially, this means that when it comes to unsecured debt, an individual filing for Chapter 13 will likely be responsible for paying the higher amount of these tests - but only the higher amount, not both.
Consequently, making the correct payment plan decisions during a Chapter 13 bankruptcy can have a significant impact. Accordingly, if you are currently contemplating bankruptcy it is often best to seek the counsel of an experienced bankruptcy attorney. A skilled attorney can help review your case and explain whether Chapter 13 may be right for you.