Buckets of Money

SECURED            PRIORITY       UNSECURED

   HOUSE                   IRS                       VISA

Chapter 13 bankruptcies are convoluted, confusing, littered with traps and lasts longer than many marriages.  Chapter 13’s  used to be called ‘wage earner’ bankruptcies since you had to “earn” a wage to make it work.  That said, explaining how a Chapter 13 works to a new client is difficult because when you break it down in its simplest form, it still leaves out a lot of important nuances. A Chapter 13 bankruptcy has more tricky rules than a non-refundable airline ticket.

I like to explain a Chapter 13 like this.

You have 3 buckets. SEE ABOVE.

Here are some assumptions we will make:

You are a single person with a 5-year-old child and earn $30,000 a year.

You owe the Bank $5,000 in late payments.

You owe the IRS $3,000 in back taxes.

You owe VISA $50,000 in credit card debt.

We take your income minus your living expenses and simple math shows us you have $200 per month leftover. That $200 goes to pay off your debt for a period of up to 5 years. You will send $200 to the trustee (who administers your case) and it distributes $200 every month to the people you owe.

So what about those buckets? Well, when the $200 comes in, some goes into the secured creditors bucket first, and in this case, the mortgage company who you owe $5,000 – then some goes into the priority creditors bucket, in this case the IRS who you owe $3,000 – and then if there is any money left over, the VISA gets its share. Many times the credit card companies get little or no money. And this scenario keeps happening for up to 5 years –  every time the $200 comes in, the trustee disburses the money in a certain order or priority . The first 2 buckets  (secured and property) must get all the money they are owed for the Chapter 13 plan to work, or for it to be a feasible plan. If not the plan will fail.

Now, please understand, this is a general example of how a Chapter 13 works – there are a lot more mechanical operations including pro-rata, fixed payments, adequate protection payments and other items – but in a simple sense, this is the concept – and I hope it helps you understand the framework of this type of bankruptcy.

 

Bennett Cunningham is a Bankruptcy Attorney licensed in Texas and is a former Investigative Reporter for the CBS Television Station in Dallas. Mr. Cunningham has garnered 7 Regional Emmy Awards, including the Best Investigative Reporter in Texas 2 years in a row, as well as several National Awards for his exposés into the mismanagement of taxpayer dollars and government waste.

This blog is not meant to give you legal advice. If you need to seek legal advice, you should consult a licensed attorney in your jurisdiction.

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