As he completes his plan, he will have settled that debt for three cents on the dollar.
No tax is due on the forgiven debt and no listed creditor can legally come back to try to collect the difference.
And that’s why I love Chapter 13 bankruptcy.
Chapter 13 in the real world
I’ve talked here lots about how Chapter 13 is structured, how plan payments are calculated, and all the nifty things Chapter 13 can do for those with bills they can’t pay. It’s sometimes dry and dense, but you see how it works.
But here’s how it worked for one real family now completing their plan.
They confirmed a Chapter 13 that resolved their debt for 3% of what they owed when they filed.
They got five years to pay that 3%, interest free.
The payments through their plan cured any pre bankruptcy arrears on their house, in full and without interest or penalty.
They were protected from the taxing authorities while they cured delinquent property taxes.
And in our insane real estate market in the Bay Area, their home appreciated about 50%. Appreciation that is theirs, rather than their creditors’.
Plan payment driven by asset value
Not all unsecured creditors are as lucky as these creditors, who got something on their claims, even if it was only three cents.
Because the couple had some stock and other assets that weren’t exempt, their plan had to guarantee unsecured creditors a share of the $11,500 value of those non exempt assets.
Based on their income and the infamous means test, general unsecured creditors wouldn’t have gotten anything.
So, the take-away is that just what you have to pay in Chapter 13 is decided by the interaction of the kind of debts you have; the income that the law says is available to pay those debts; and the value of your non exempt assets.
But seen from the top of this mountain, Chapter 13 is powerful. And the view of life after bankruptcy is stunning.