How a Chapter 13 Bankruptcy Zero Percent Plan Can Save Your Home and Car

Instead of filing for Chapter 7 bankruptcy, save your home and car—and wipe out other bills—by filing a Chapter 13 zero percent plan.

By , Attorney

Most people prefer to file for Chapter 7 bankruptcy because it quickly wipes out qualifying debt without requiring creditor payments. However, if you're behind on your mortgage or vehicle payment and want to keep the home or car, Chapter 7 bankruptcy won't help you. Instead, you'll need to look to Chapter 13.

Only Chapter 13 bankruptcy has a mechanism that will let you catch up on missed payments and keep the property. The good news is that if you qualify for Chapter 7 bankruptcy, your monthly Chapter 13 payment might be more affordable than you expect.

Chapter 13 Bankruptcy Helps People Save Property

Most people don't file for Chapter 13 bankruptcy unless they make too much money to file a Chapter 7 case. Why? Because unlike Chapter 13, the debtor (bankruptcy filer) isn't required to repay creditors in Chapter 7 bankruptcy.

Sometimes, however, a debtor who qualifies for Chapter 7 bankruptcy might be better served by filing a Chapter 13 matter. For instance, a Chapter 7 bankruptcy won't help a debtor who is behind on a mortgage or vehicle payment (called secured debt) keep the property. According to the contract terms, a debtor must pay secured debt; otherwise, the lender will foreclose on the house or repossess the car.

That's when Chapter 13 bankruptcy is a better bet. It gives a debtor three to five years to catch up on arrearages so the debtor can save the home or keep the car.

What Is a Zero Percent Plan?

A Chapter 13 zero percent plan is a repayment plan that doesn't pay any money to nonpriority unsecured debts, like credit card bills, personal loans, and medical balances. Most Chapter 13 filers with high incomes have disposable income that can (and must) be used to pay such creditors.

The Chapter 7 means test—the test that determines whether someone is qualified to receive a Chapter 7 discharge (the order that wipes out debt)—examines the availability of disposable income to pay creditors. In other words, an individual with disposable income that can be used to pay something toward nonpriority unsecured creditors in a Chapter 13 bankruptcy will fail the Chapter 7 means test (more below).

By contrast, a debtor who passes the means test won't have disposable income to pay nonpriority unsecured debt. And the calculation won't change just because a debtor files a Chapter 13 case. Therefore, such a debtor will likely save money by proposing a zero percent plan in courts that allow them.

What a Debtor Must Pay in a Zero Percent Plan

A zero percent plan doesn't mean that a debtor pays nothing at all. You'll have to pay your monthly house and car payment, plus any arrearages over the course of a three- to five-year repayment plan. You'll also have to fully repay any priority debt you might have, such as domestic support arrearages and most tax debt.

However, you won't have to pay anything to your nonpriority unsecured creditors. And, if that debt is dischargeable in a Chapter 13 case—such as credit card balances, medical and utility bills, and personal loans—it will get wiped out when you complete your plan payments.

In other words, all you'll pay are those things that you'd be left responsible for if you filed a Chapter 7 case. Also, you'll keep your property and won't pay anything on debt that would typically get wiped out in a Chapter 7 case.

The Means Test

Chapter 7 bankruptcy discharge eligibility requires you to establish one of two things:

  • your family income doesn't exceed the state median income for the same size family, or
  • after subtracting all allowed expenses, the debtor doesn't have sufficient income to pay nonpriority unsecured creditors.

Expenses that are deductible from your income include:

  • a mortgage payment
  • a reasonable car payment
  • vehicle operating expenses
  • overdue and ongoing income taxes
  • domestic support obligations
  • childcare expenses, and
  • food and utility costs.

You're allowed to use your actual expense for some items. For others, you'll use predetermined amounts. If the calculations show that you have disposable income left over after taking the deductions, you must file a Chapter 13 case. Otherwise, a Chapter 7 matter is available to you.

(To learn more about qualifying for Chapter 7 bankruptcy, go to The Bankruptcy Means Test.)

Proposing a Zero Percent Plan in Chapter 13 Bankruptcy

In most cases, the means test calculation won't change if a Chapter 7 qualified debtor decides to file for Chapter 13 bankruptcy to catch up on a secured debt. In the zero percent plan, the debtor will likely propose to pay the following over three to five years:

  • monthly mortgage or car payment
  • mortgage or car payment arrearages, and
  • priority debt, such as child support or taxes.

The debtor must pay any priority debt in full over the course of the plan. However, you can spread out the balance owed for all arrearages, car payments, and priority debts over the duration of the plan.

Also, being a zero percent plan, the debtor won't have to pay anything to nonpriority unsecured creditors. Balances on any of those debts will get wiped out after the debtor completes the plan. (You'll find an example demonstrating how this works in What Is a Bankruptcy Zero Percent Plan?)

As with any Chapter 13 case, the debtor will have to demonstrate that the debtor has sufficient monthly income to make the plan payments.

Learn more information about Chapter 13 Bankruptcy.

Do You Have More Equity Than You Can Exempt?

In bankruptcy, you're allowed to protect (exempt) a certain amount of equity in a house or car. You can find out how much by checking your state exemption laws.

In a Chapter 7 bankruptcy, the bankruptcy trustee appointed to your case will sell the property and distribute the nonexempt equity amount to creditors. In a Chapter 13 bankruptcy, you can keep your property, but you'll have to pay creditors for the nonexempt equity through your plan.

Significant amounts of nonexempt equity will drastically increase a plan payment, and many debtors won't have enough income to make the high payment. In such a case, filing for bankruptcy might not be your best option.

Consult With an Attorney

Preparing a Chapter 13 bankruptcy is complicated, and most people need help from a bankruptcy attorney. Also, not all jurisdictions allow for zero percent plans. A local bankruptcy lawyer will be in the best position to explain your options.

Talk to a Bankruptcy Lawyer

Need professional help? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
Get Professional Help

Get debt relief now.

We've helped 205 clients find attorneys today.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you