How Does a Chapter 13 Work? Overwhelming Credit Card and Medical Bill Scenario
Determining the right plan to get your finances back on track can feel overwhelming. How do you determine which option is going to provide the best long term outlook and the quickest debt relief? Ultimately it is best to consult with a professional. Our firm offers free consultations to review your circumstances, determine the best course of action and clearly explain everything that is involved with the process.
Many people want to get a realistic understanding of how the Chapter 13 bankruptcy works. Since it is a customized debt management program based on your personal debt and income, ultimately we would need to run a specific budget scenario for you. But to give you a general understanding, here is a practical example of how the Chapter 13 reorganization can fix runaway credit card debt and medical bills. This example demonstrates how a Chapter 13 works to improve your monthly budget, your credit score and has the potential to provide significant debt reduction
Chapter 13 Scenario – Monthly Budget and Debt Reduction Potential
- Example: Household family of 4, Mounting credit card debt and medical bills due to a temporary income interruption during a medical leave. Both spouses are back to work, but debt has become overwhelming.
| Monthly Income (after taxes): | $4,350.00 | |
| Current Total Debt Load | Balance Owed: | Terms: |
| First Mortgage | $160,000.00 | 6% interest over 30 years |
| Vehicle loan 1 | $15,000 | 6.5% over 5 years |
| Vehicle loan 2 | $19,000.00 | 7.5% over 5 years |
| Credit card & medical bills | $90,000 | average rate: 12% |
| TOTAL DEBT: | $284,000.00 | |
| Current Monthly Budget | Chapter 13 Budget - 36 month plan | |
| First Mortgage | $1,125.00 | $1,125.00 |
| Vehicle 1 Payment | $293.00 | $293.00 |
| Vehicle 2 Payment | $381.00 | $271.00 |
| Gas & Maintenance | $650.00 | $650.00 |
| Groceries | $675.00 | $675.00 |
| Household goods & supplies | $125.00 | $125.00 |
| Utilities | $250.00 | $250.00 |
| Medical & dental expenses | $50.00 | $50.00 |
| Insurance (Auto & Medical) | $300.00 | $300.00 |
| Clothing and other living expenses | $350.00 | $350.00 |
| Misc. | $100.00 | $100.00 |
| Minimum payment on credit card/medical debt | $1,800.00 | $0 |
| MONTHLY EXPENDITURES | $6,099.00 | $ 4,189.00 |
| Income | $4,350.00 | $ 4,350.00 |
| Difference | $(1,749.00) Gaining further debt |
$161.00 Monthly Ch. 13 Plan Pymt |
| Debt Load after 60 Month Plan | Current | Chapter 13 |
| First Mortgage | $159,000.00 | $159,000.00 |
| Vehicle loan 1 | $0 | $0 |
| Vehicle loan 2 | $0 | $0 |
| Credit card & medical bills | $90,000.00 | $0 |
| Additional debt accrued by unbalanced budget |
$62,964.00 | $0 |
| TOTAL DEBT AFTER 36 MONTHS: | $311,964.00 | $159,000.00 |
| Savings vs. trying to pay bills on its own |
$152,964.00 | |
| Reduction in debt load vs. prior to filing |
$125,000.00 |
Summary of Benefits at Completion of Chapter 13 Plan:
- Debt free (except for mortgage) after only 36 months!
- Credit improved 36 month track record of timely payments and reduced debt-to-income ratio
- Reduced debt by $125,000 over the course of the program
- Legally eliminated over 96% of unsecured debt at the completion of the program
- Court protection from creditors during the repayment plan. This means no calls, no law suits, etc.
- All unsecured debts are paid back at 0% interest with no additional penalties
- Without the restructuring opportunity of a Chapter 13 for a 3 year time period, this family would have accrued an ADDITIONAL $62,964.00 worth of debt due to an unbalanced debt (high credit card minimum payments). Instead, the family was able to eliminate debt…the difference between doing nothing and completing the Chapter 13 is a whopping $152,964.00 savings!
Put Our Experience to Work for You
This hypothetical scenario is presented to describe a few of the potential benefits of a Chapter 13. We offer free consultations to help you better understand what the specific benefits would be for your personal finances. Schedule an appointment with one our licensed and experienced attorneys to discuss how to get you finances on the right track. Our licensed attorneys are dedicated to helping our clients navigate the best debt solution. Call for a free consultation at 866-261-8282, we are here to help.
