Bankruptcy By the Numbers: 60, or a Non-Communist Five Year Plan

When most people think of bankruptcy, they think of “total bankruptcy,” or “straight bankruptcy,” otherwise known as a Chapter 7. It is the most commonly filed type of personal bankruptcy by far, and is a great tool for giving consumer debtors a fresh start, wiping off (most of) their debts and letting them begin again in just a few months time.

By Federal Highway Administration - MUTCD (http://mutcd.fhwa.dot.gov/shsm_interim/index.htm) [Public domain], via Wikimedia Commons

By Federal Highway Administration - MUTCD (http://mutcd.fhwa.dot.gov/shsm_interim/index.htm) [Public domain], via Wikimedia Commons

Chapter 13 bankruptcies are more powerful than a Chapter 7 bankruptcy. They allow people to keep their property, and can discharge debts that a Chapter 7 cannot. Such a powerful tool does not come without a cost (of course). For Chapter 13 cases, those costs are money and time.

What makes a Chapter 13 Plan (the document that outlines how creditors are to get treated) tick is a regular (usually monthly) payment made over a period of time that is not to exceed 60 months, or 5 years. That money is then distributed among the creditors by the Chapter 13 Trustee, who is responsible for the administration of the case.

Many prospective debtors are intimidated by the 60 month time frame. If you look back 5 years ago, it’s very likely that what you see is very different than how you live today; people get divorced, married, gain and lose jobs, have kids or send them to college. How can a bankruptcy plan account for things that are simply not anticipated?

The answer is, in short, that a Chapter 13 Plan doesn’t anticipate everything. The plan is put together based on the information we have, a bit of historical information (mostly about income), and a reasonable assumption of what may change in the near future. If nothing or little changes of consequence for those 60 months, then the plan can stay the same. I have a few clients with whom I speak twice a year and have no contact with their case outside of that; their case is the same because their situation is basically the same. They make the payment every month, and it clicks reliably towards discharge.

Most cases are affected by changes in people’s lives - income rises or falls, or households change in composition through age, marriage, divorce and death. When these things occur, they can cause a “change in circumstance” that allows your attorney to make changes in the plan to reflect what is happening at that time. In a happy example, if a debtor wins the lottery (which they shouldn’t be playing…) then that extra income would be used to pay off the debts in full, and allow a person to get their discharge early.

There are limits as to what can change, of course (some debts are required to be paid to either keep property or get a discharge), and your attorney should be knowledgeable in where those limits lie. In some cases, letting a Chapter 13 case dismiss is the best of the available options.

So while 5 years is a long time to be tied up in a legal matter, the stronger relief afforded by a Chapter 13 bankruptcy may be worth the investment of time and money it requires.