The most common reason for filing bankruptcy is that a person has too much high interest credit card balances or medical bills that they cannot afford to repay both from their own perspective and in the eyes of the court. Occasionally, a person may have such a high income, or own assets of such high value, that the court does not allow them to eliminate their debt and get a fresh start. But what if that person is under financial stress and needs help. That is where the 100% plan comes in. A 100% plan refers to a Chapter 13 bankruptcy in which you repay all of your debt under a court-supervised repayment plan. You pay back all secured debt (which is required in all Chapter 13 cases) and 100% of all unsecured debt.
When Courts Do Not Allow You to Eliminate Debt
In order to file a bankruptcy in which you can eliminate debt (whether some or all of it), your income and your assets cannot exceed a certain threshold. In order words, you cannot make too much and you cannot own too much. If your income is too high, or your assets have too high of a value, the court will determine, through a complex formula that your lawyer will review with you beforehand, just how much of your debt you are capable of repaying. You will need to file a Chapter 13 bankruptcy and repay some, or possibly all, of the total debt that you owe through a court-monitored Chapter 13 plan. If your income is significantly above the median family income threshold, or your assets are significantly in excess of your allowable exemptions, then you will likely be forced into a 100% plan.
Useful to Stop Accrual of High Interest Credit Card Debt
So why would one file a bankruptcy if they are going to be paying back all of their debt. Well, one important reason is to stop the accrual of interest on high interest credit card debt. If you are making minimum payments on high interest credit cards, then you are not paying down your balances in any meaningful way and 10 years from now you are still going to have similar balances. If you were to file a Chapter 13 100% plan, you would stop the accrual of interest. You would put a cap on the total amount of debt, divide it by 60 months, and pay it back at 0% interest.
There is an exception to the 0% interest rule. Depending on how high your income is, or how high the value of your assets is, the court could require you to pay the prime rate plus 1% interest to your credit cards. This generally adds only a few dollars per month to your Chapter 13 plan payment and is much better than the alternative of paying the excessively high interest rates you are currently paying on your outstanding balances.
Prior Bankruptcy Discharge
Another situation in which you may need to file a 100 percent Chapter 13 plan is if you have had a prior bankruptcy discharge. Depending on how long ago you received the bankruptcy discharge, you may not currently qualify for another discharge of any debt. In that case, your attorney will advise you that a 100% Chapter 13 plan will be your only option.
Let’s say, for example, that you filed a Chapter 7 bankruptcy 2 years ago and received a discharge. Since that time, you fell behind on your mortgage payments and are facing foreclosure. You cannot obtain a discharge due to your recent bankruptcy so you cannot eliminate any debt. But you still have the option of stopping the foreclosure by filing a 100% Chapter 13 plan and paying back all mortgage arrears and all unsecured debt, if any, that you incurred since your prior Chapter 7 discharge.
A 100% plan is a legal remedy suitable to high income earners or debtors that own assets of very high value. It is a less commonly used but potentially very useful tool that a bankruptcy attorney can use to help a high income earner, or a debtor with lots of assets, get back on track so they can more effectively manage their finances.