What Is A Zero Percent Plan In Chapter 13 Bankruptcy?
As a general rule, most people prefer chapter 7 bankruptcy over Chapter 13, because in Chapter 7 there are no payments to creditors. Of course, in certain cases, like if you make too much money, or there is property that you would like to keep that isn’t exempt, Chapter 13 may be the best option. But if you have a choice and can file either one, most prefer 7.
When Chapter 13 is Better
But there’s one time that a Chapter 7 won’t help as much as a Chapter 13 bankruptcy does: When you are in foreclosure, or you are behind on payments towards other kinds of secured property, like a car. You don’t get to keep secured property if you are behind in payments in Chapter 7, and there is no avenue in Chapter 7 bankruptcy to catch up if you are behind with payment.
But there is a way to do all of this in Chapter 13. As a general rule, creditors in Chapter 13 receive as much as they would if you’d filed for Chapter 7. So, in your hypothetical Chapter 7 case, if creditors would have received nothing because all of your property is exempt, they will also receive nothing when you file for Chapter 13.
The Zero Percent Plan
That is called a zero percent plan. The zero percent plan in Chapter 13 bankruptcy is where all of your payments are being made to get you out of default with secured creditors (like mortgage companies), or else, going to help you get current with non-dischargeable debts like child support or taxes. No money is being paid from the plan to pay off unsecured creditors, like credit cards or medical debt.
Even though you are paying no money to the unsecured creditors in the zero percent Chapter 13 plan, those debts nonetheless get completely wiped out at the end of your payment plan. Think of a zero percent plan as a “catch up” plan, that only helps you get current with non-dischargeable debts, and with secured debts.
A Zero Percent Plan Can Help
The benefit of using Chapter 13 in this way is you are no longer in default (or foreclosure), so long as you can make the payments under the Chapter 13 plan. The collection calls stop. The court actions stop. Foreclosures or repossessions stop. At the end of the plan, you are current again, as if you were never in default. And if you did have secured debt, it is now gone, even though you paid nothing towards those debts.
This is all assuming you have a low-enough disposable income. Otherwise, you will have to pay some money to your unsecured, non-priority creditors-but only to the amount of your disposable income. There is a formula that is used in Chapter 13, that determines what your disposable income is.