Legal Law

The Cost of Waiting to File Chapter 13 Bankruptcy

Bankruptcy is not something that people look forward to and because this is the case, many people who know that bankruptcy is in their future put off and put off filing for years. Usually, there is some event that creates an urgency to file and causes them to seek a bankruptcy attorney. This event could be a notice of foreclosure sale, repossession of your car, or notification of a lawsuit. Whatever the reason, most people don’t file for bankruptcy until they feel compelled by their creditors, and this delay can cost them tens of thousands of dollars and a lot of unnecessary stress.

Procrastination can be very costly for those in debt. This is especially true for those who file bankruptcy and have high incomes. For high-income taxpayers, a quick and easy Chapter 7 bankruptcy case is generally not an option. The Bankruptcy Code limits relief under Chapter 7 bankruptcy to households with below-average income. High-income filers generally must file a Chapter 13 bankruptcy case and make a payment to a trustee over five years. The trustee takes the money paid to her and pays it to the creditors.

In Chapter 13 bankruptcy, debtors are only required to pay their unsecured creditors if they have disposable income. Disposable income is calculated using a form very similar to what you would expect to fill out if you were filing a tax return. This form takes your average income for the last six months, excluding payments under the Social Security Act, and then reduces this amount using IRS deductions such as taxes, insurance, expenses associated with operating a vehicle, and many other deductions. Many Chapter 13 debtors pay nothing to their unsecured creditors, but high-income debtors often pay 100% of the amount owed to these creditors.

If you are in the category of debtors who have to pay all their unsecured creditors, delaying can be very expensive. As anyone with a credit card can tell you, debts grow and the longer they stay unpaid, the higher the balance will be. For example, the balance on a credit card that earns 30% annual interest doubles every two and a half years. At that rate, a credit card with a balance of $10,000 can grow to $40,000 in five years and that doesn’t factor in late fees and attorney fees if you’re sued. Filing bankruptcy earlier means you pay less in your bankruptcy case because you don’t owe as much at the time you file.

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