Updated: Oct 22, 2021
While Chapter 13 is in many ways a debt repayment program, it is not necessarily a 100% repayment plan. This is a surprisingly common misperception that I’ve heard a few times from clients who have been advised to file Chapter 13 rather than Chapter 7. Yes, it’s true that some debts will be repaid 100%, yet usually these are the types of debts that you actually want to have paid in full: arrears on your home mortgage or income taxes that cannot be discharged in any form of bankruptcy. In fact, most Chapter 13 plans provide for only a fractional dividend to be paid to unsecured creditors such as credit cards, medical bills, personal guarantees, etc. That percentage varies for each person, and may be as low as 5% or 10% in some cases—a far better repayment than most creditors would accept in a debt settlement outside of bankruptcy . And in Chapter 13, even a low dividend is paid over three to five years, rather than in a lump sum up front. After the three to five years of a Chapter 13 plan being paid timely each month, whatever amounts remain on dischargeable debts is then discharged… Bankruptcy works again to provide real debt relief.
So if your attorney advises you that Chapter 13 is the only bankruptcy option available, dig a little deeper into what this means for you. What would your monthly Chapter 13 plan payment be, and for how long would you need to pay this? Run the numbers considering the total amount you would pay for Chapter 13 against the total debt that would be resolved in Chapter 13. If Chapter 13 allows you to get out of your debts for a fraction of what is owed, that may be a great alternative over continuing to wrestle to pay your debts 100%.