Why Should I File Chapter 13 if I Was Forced Into It Due to Disposable Income?

There are a variety of reasons why a person may file a chapter 13. One of the reasons a person may file a chapter 13 is he has too much disposable income to file a chapter 7. Basically, if you have disposable income at the end of every month, then you are not allowed to file chapter 7 to get rid of your debt. You need to file chapter 13.

Disposable income is how much income you have left over at the end of every month after deducting your regular living expenses which includes secured debts such as a car. However, you cannot deduct secured debts on a luxury item and you cannot deduct the monthly payments you make on unsecured debts such as credit cards.

I often see clients who come in to see me and they want to file a chapter 7 because they want a "FRESH START". But when I go through their budget, I notice they have disposable income sufficient enough for them to file a chapter 13. They do not want to do it and they ask certain questions about it.

One question often asked is "how is this different from Debt Consolidation".

Well, that is a good question. So let us look at how chapter 13 is different from debt consolidation. In debt consolidation you are probably paying off 100% of your debts with interest based on what the creditors want you to pay. This debt consolidation would also probably last more than 5 years or forever.

If you are in a chapter 13 only because of disposable income, you are only paying based on your disposable income. In other words, it is based on what you can afford. The creditor cannot dictate how much you pay them. You may only pay them 1% or up to 100%. You are also in the plan only for 3-5 years. You are only in a plan for 5 years based on disposable income if your average 6 month income is over median income for your region.

Another question is "why should I file chapter 13 if I am paying 100% of my debt anyways". The Answer is the interest doesn't accrue on the debt you are paying in a chapter 13 if you are paying all of your disposable income. Plus if a creditor doesn't file a proof of claim, you are automatically discharged from that debt as long as you complete the plan and you gave that creditor notice.

Sometimes my client says "I don't want to be in this for 5 years". The answer to that comment is the debtor is going to have that debt forever since they are not allowed to file chapter 7 and don't want to file chapter 13. Isn't it better to bankruptcy and make payments for 5 years to get rid of the debt then to be miserable with your debt for the rest of your life?

As you can tell, if you are forced into chapter 13 based solely on disposable income, it is the only way for you to get out of debt unless you have a rich uncle or you win the lottery, especially if you have at least $30,000 debt. Chapter 13 is still the best alternative.

So you have to ask yourself "Am I better off struggling to pay off my debt the rest of my life, or should I go ahead and file chapter 13" I think the answer is obvious. File chapter 13. You will be happy 5 years later and feel that a load was lifted off your shoulders.

Submitted on March 12, 2015