Nope, that’s not a typo. There is such a thing as a zero-percent chapter 13 plan. Although, it is a misnomer in that the debtor is actually going to make some payments on the plan. (Otherwise it would be absurd.) Consequently, a zero-percent plan isn’t the opposite of the more commonly known 100 percent chapter 13 plan, in which the debtor pays all creditors off.
So what is a zero-percent plan? It means nothing in the plan’s distribution goes to the unsecured creditors. And what does this mean? In chapter 13, the creditors are prioritized. First the secured creditors, then the priority unsecured creditors (think tax debts), followed by the trustee, the debtor’s attorney(s), and finally the non-priority unsecured creditors (credit cards, student loans, etc.). The priority order is based on the fact that non-priority unsecured creditors would probably receive little or nothing if the debtor had filed in chapter 7.
The benefit of a zero-percent chapter 13 plan is that the debtor can pay off the secured creditors to keep a car or house, waive accrued interest, late fees, and penalties, stop collection efforts, and discharge non-priority unsecured debts.
Zero-percent plans are more common than 100 percent repayment plans, but the rub is that the unsecured creditors are more likely to not object to a plan where they will be paid than one in which they’re not. In chapter 7—if the debtor is eligible—the debtor’s secured assets might be included in the bankruptcy estate and sold off to satisfy the unsecured creditors, even if they aren’t fully satisfied. In some ways, then, a zero-percent plan can be thought of as the easiest chapter 13 plan debtors can afford if they can’t file in chapter 7.
For New York bankruptcy, zero-percent plans aren’t really possible because the trustee will also object to the nonpriority unsecured creditors receiving nothing. They usually demand some amount go to those creditors, so a 5 percent plan is realistically the best a debtor is going to get.
It isn’t easy for debtors to arrange their own chapter 13 plans, particularly when they have multiple classes of debts that need to be prioritized and the creditors and the trustee aren’t interested in accommodating the debtor’s interests. In that case, it’s necessary to hire an experienced New York bankruptcy lawyer to help organize the plan and advocate on the debtor’s behalf.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.