On the curious under-utilization of chapter 13 bankruptcies.

By Edward Jurkiewicz
In March 22, 2015
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I think chapter 13 bankruptcies are under-utilized as a method of resolving unsecured debt.

Starting with the Bankruptcy Reform Act of 2005, Congress introduced an income-based, supposedly objective, test for determining eligibility under chapter 7, the liquidation chapter of the Bankruptcy Code. The intent was to create a “switching mechanism” which would shunt higher-income cases to chapter 13, the so-called “wage-earner reorganization” chapter.

When eligibility is borderline (and absent other factors, such as mortgage arrearages, which would make chapter 13 the first choice), I always try really hard to qualify the client for chapter 7 as a first option. I’ve had a great deal of success in these borderline cases. However, it’s not always possible.

When a client is advised that re-payment of some portion of their unsecured debt (ranging from 0% to 100%, with all stops in between) in chapter 13 is their best option, there is, understandably, usually some degree of disappointment. Some clients opt for other perceived remedies, such as debt-consolidation plans, and lump-sum repayments to individual creditors. These options are almost always very expensive and ultimately ineffective.

Here, in a nutshell, are the positives of using chapter 13 to repay unsecured debt:

1-) A confirmed chapter 13 plan is binding upon all creditors, and unsecured creditors are usually not active in the confirmation process. In contrast, debt-consolidation companies require a large up-front fee and sometimes can negotiate a large payment to a single creditor, but non-consenting creditors almost always scuttle the consolidation attempt.

2-) While binding upon your creditors, a confirmed plan is completely voluntary for you. Of course, the goal is a truly feasible plan. But if payment becomes unmanageable, you can dismiss the case any time.

3-) A chapter 13 filing freezes the running of interest and penalties as of the date of the filing. This, in itself, is huge.

4-) Unsecured debt may be paid at 0% interest, if the “means test” allows you to confirm a plan paying less than 100%. But in a worst-case scenario (a 100% payout), interest must be paid at the federal judgment rate in effect on the date of confirmation. Per 28 U.S.C. Sec. 1961, this is a rate equal to the weekly average one-year constant maturity Treasury yield. By way of example, for the week ending March 9, 2015, the federal judgment rate was 0.12% per annum! If you were applying for a unsecured loan, where could you find an interest rate like this, even with perfect credit? Answer: nowhere.

5-) Delinquent taxes that exist on the petition date must be paid through the plan. In 100% plans, you can pay taxes just like other unsecured debt, at the minimal federal judgment rate. In less than 100% plans, taxes get zero interest.

In short, chapter 13 is like writing yourself a loan to consolidate unsecured and other debt, under the most favorable terms imaginable. But there is a catch: the maximum duration of a chapter 13 repayment plan is five years, which can be, particularly at the start, a tight-squeeze.

If it is at all possible, however, chapter 13 is worth serious consideration. It may be difficult, but in five years, you will be free of credit card debt and tax debt, and if you are keeping your house, your mortgage will be current. The goal, after all, should be to position yourself to accumulate wealth, not to resign yourself to a lifetime of struggling with debt.

For more information about chapter 13 bankruptcy, please visit my website at  http://www.ljct-lawyers.com/practice-areas/bankruptcy/Chapter-13-Bankruptcy-Explained, or call (860) 299-6263 to schedule an appointment with a Torrington-Avon bankruptcy attorney.


Hartford area bankruptcy attorney and divorce lawyer Edward P. Jurkiewicz has over 20 years of experience representing clients. Our firm represents debtors and creditors and handles both relatively simple divorces and bankruptcies and more complex litigation matters. With this depth of experience, our firm is able to anticipate and prepare for any potential issues that could arise in your bankruptcy, divorce or family matter.

CONTACT US TODAY AT 860-299-6263