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Kevin O'Flaherty

This article will discuss how those that qualify for a Chapter 7 bankruptcy can be eligible for a Chapter 13 bankruptcy zero percent plan and save their home and car. We will answer the following questions:

  • What is the difference between Chapter 7 and Chapter 13 bankruptcy?
  • What is a zero percent plan?
  • What does the debtor pay in a zero percent plan?
  • How does the Mean's Test determine eligibility for a Chapter 13 zero percent plan?
  • Is a zero percent plan still an option if I have too much equity?

One of the first questions someone considering bankruptcy asks is, "Will I be able to keep my car and home?" The answer may not be evident initially, but once the debtor has completed the Mean's Test, we can determine their eligibility under Chapter 7 or Chapter 13 bankruptcy and begin working on a plan. 

What Is The Difference Between Chapter 7 And Chapter 13 Bankruptcy?

Chapter 7 bankruptcy involves liquifying all the debtor's assets, administering those funds to the debtor's secured and priority debts, and wiping out all the unsecured debt, non-priority debt. All of a Chapter 7 bankruptcy filer's debt is discharged after the bankruptcy process; however, she still has to pay priority debts such as child support, certain tax debts, and alimony. For those that qualify, Chapter 7 bankruptcy is a popular option because they don't have the means to continue paying for their current lifestyle after the bankruptcy is complete.

In Chapter 13 bankruptcy, the debtor agrees to a three- to five-year repayment plan that includes their unsecured debt, such as credit card payments and medical bills, and any arrearages on secured and priority debt. It's the most popular bankruptcy option for those who don't qualify for Chapter 7 or want to keep their home, car, or any other nonexempt property. The amount paid back to the nonpriority unsecured creditors depends on how much disposable income you have after subtracting your secured debt, unsecured priority debt, and essential costs of living from monthly income. 

Those that qualify for Chapter 7 but don't want to lose their home or car can still choose Chapter 13 bankruptcy if they have the means to pay the mortgage payments after the bankruptcy is complete.

Chapter 13 bankruptcy

What Is A Zero Percent Plan?

A zero percent plan combines the benefits of not paying any money towards nonpriority unsecured debts with the ability to retain personal assets, such as a home and vehicle. A chapter 13 zero percent plan is only available to those that qualify for a Chapter 7 bankruptcy via the Mean's Test. Most Chapter 13 filers have higher incomes, and the filer must use any disposable income to pay unsecured nonpriority debts. 

A debtor who passes the Mean's Test shouldn't have disposable income after subtracting their monthly income from their secured and priority unsecured debt. The Mean's Test calculation doesn't change based on the bankruptcy chapter, so an individual who qualifies for Chapter 7 bankruptcy can still choose Chapter 13 if they can afford to pay their loan arrears and their regular mortgage and car payments. However, not all courts allow a zero percent Chapter 13 bankruptcy.

What Does The Debtor Pay In A Zero Percent Plan?

Referring to this type of bankruptcy as a "zero percent plan" might create the misconception that the debtor pays nothing. The closest any bankruptcy option gets to paying nothing is through a Chapter 7 bankruptcy, and even then, the debtor still pays something through the assets the trustee liquifies. The "zero percent" of a zero percent plan refers to the debtor not paying any unsecured nonpriority debt under a Chapter 13 bankruptcy. The debtor must still pay her monthly house and car payment plus any arrearages over the three- to five-year plan. She will also be responsible for paying her priority debt, such as most tax debt and domestic support arrearages. Any dischargeable debt under Chapter 13 bankruptcy is wiped out at the end of the payment plan.

How Does The Mean's Test Determine Eligibility For A Chapter 13 Zero Percent Plan?

The primary criterion for determining eligibility for a Chapter 13 zero percent plan is passing the Mean's Test. Passing the Mean's Test indicates that you qualify for Chapter 7 bankruptcy. Qualifying for Chapter 7 bankruptcy requires that you establish one of two things:

  1. After subtracting the debtor's expenses from her income, she doesn't have any money left over to cover her unsecured nonpriority debts;
  2. Her median income is less than the state median income for a comparably sized family.

Expenses deductible from income include:

  • Costs of owning, maintaining, and operating a reasonable vehicle
  • Certain taxes
  • Mortgage payment
  • Alimony
  • Child Support
  • Food and utility costs
  • Childcare expenses

Is A Zero Percent Plan Still An Option If I Have Too Much Equity?

Bankruptcy allows debtors to exempt a certain amount of equity in their homes. Any amount beyond the exemption must be paid to creditors. In Chapter 7 bankruptcy, the home is sold, and the proceeds (equity) is used to pay down secured creditors and priority debts first, with the remainder split amongst the unsecured nonpriority creditors. For those considering Chapter 13 bankruptcy, especially those interested in a zero percent plan, having too much equity may force them to reconsider their options. Under a Chapter 13 repayment plan, equity beyond the allowable exemption amount can considerably increase their monthly payments.

Disclaimer: The information provided on this blog is intended for general informational purposes only and should not be construed as legal advice on any subject matter. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship. Each individual's legal needs are unique, and these materials may not be applicable to your legal situation. Always seek the advice of a competent attorney with any questions you may have regarding a legal issue. Do not disregard professional legal advice or delay in seeking it because of something you have read on this blog.


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