The Cost of Waiting to File Chapter 13 Bankruptcy

Bankruptcy isn't something people look forward to and because this is the case, many people who know bankruptcy is in their future procrastinate and put off filing for years. There is usually some event that creates urgency to file and causes them to seek a bankruptcy attorney. This event could be notice of a foreclosure sale, repossession of their car or being served with a lawsuit. Whatever the reason may be, most people don't file bankruptcy until they feel they are being forced to by their creditors and this delay may cost them tens of thousands of dollars and a lot of unnecessary stress.

Procrastination can be very expensive for the indebted. This is especially true for bankruptcy filers who have a high income. For filers with high incomes a quick and easy Chapter 7 bankruptcy case is usually not an option. The Bankruptcy Code limits relief under Chapter 7 bankruptcy to below-median income households. High income filers are generally required to file a Chapter 13 bankruptcy case and make a payment to a trustee for 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 like taxes, insurance, expenses associated with operating a vehicle and many other deductions. Many Chapter 13 debtors don't pay anything to their unsecured creditors, but high income debtors often repay 100% of the amount owed to these creditors.

If you are in the category of debtors that have to pay back all of your unsecured creditors then procrastinating can be very costly. As anyone with a credit card can tell you, debts grow, and the longer they remain unpaid the larger the balance. For example, the balance of a credit card incurring 30% annual interest is doubling every two and a half years. At that rate a credit card with a $10,000 balance can increase to $40,000 in five years and that isn't taking into account late fees and attorney's fees if you get sued. Filing bankruptcy earlier, means that you repay less in your bankruptcy case because you don't owe as much at the time of filing.