Because higher income earners are less likely to qualify for Chapter 7 bankruptcy, Chapter 13 can provide a great alternative depending on your situation.
For example, let’s say you have $40K in credit card debt. As you continue to attempt to pay that off little by little, month by month, on your own, you’re racking up tons of additional dollars in interest. And the longer it takes you to pay it off, the more interest you’ll be paying.
By filing for Chapter 13 bankruptcy, you’ll essentially be freezing your credit card debt and cutting those interest payments off at the knees. Now, it is important to note that you will have to pay both attorney and trustee fees but those will be determined up front and, for the most part, included in your payment plan.
Your payment plan will be comprised of your total debt + attorney fee + trustee fee. Many attorneys will take a portion of their fee up front and put the remainder into your payment plan.
In our example, let’s say your attorney fee is $4K and the attorney requests $1K up front, the remaining $3K will go into your payment plan.
In regards to the trustee fee, that will be, at a maximum, 10% of your plan total (debt+attorney fee within the plan).
The maximum number of months per plan is 60 months.
It'll all break down like such for your plan total:
Therefore your payment plan will look like:
$47,300/60 (months) = ~$788/month
So, in 5 years, your $40K credit card debt will be paid off without having to deal with and worry about compounded interest.
One thing to take note of is your tax refund during this time. Your trustee will take any/all of your tax refunds so it is in your best interest to adjust your holdings so they yield little to no refund and you’re getting the maximum amount possible on a per paycheck basis.
To find out if you quality for Chapter 13 bankruptcy, speak with a local bankruptcy attorney.
Source: Janet A. Lawson, Bankruptcy Attorney