The majority of people who file Chapter 13 cases do not complete their plans and get a discharge of debt. These plans last three to five years and a lot can happen to people over that span of time.
Loss of jobs or income, whether by death, disability, or illness, can end the ability to make plan payments. A divorce can lead to additional household costs and new attorney fees. A car accident or major household repair can force a debtor to change payment priorities and paying creditors may have to wait.
Even before such events, we can evaluate who is a good candidate for Chapter 13. Studies have shown that certain conditions or factors are good predictors of Chapter 13 success.
• Having an attorney. Represented debtors are 6 times more likely to finish their cases.
• Children are expensive. The more we have, the less likely we are to successfully complete a Chapter 13 plan.
• Medical insurance helps. Probably because it softens the financial blow of an illness or accident.
Surprisingly, higher unsecured debt leads to more success. Those with more debt are more likely to finish their plan payments. This could be that they have more incentive to do so. The rewards are greater.
Of course there could be, and likely are, other factors.
The Bankruptcy Code does not provide a lot of help to Chapter 13 debtors who encounter problems. The Code requires debtors to pay into the plan “all disposable income.” When all disposable income is committed to debt repayment, there is no cushion for emergencies which are almost certain to arise over three to five years.
We do have strategies for dealing with these problems.
• Suspending plan payments.
• Extending the length of the plan.
• Seeking a hardship discharge.
• Dismissing the case to use other tools.
Which of these is best will vary from case to case, depending upon the facts.