Today’s blog is posted in response to an email I received asking how a bankruptcy trustee distributes payments it receives from debtors. The answer is that the terms of the Chapter 13 Plan that is approved by the Court control how the Trustee distributes the money.

In a typical Chapter 13 bankruptcy Plan, the administrative costs are paid first. In some districts this means that ALL administrative costs are paid before anything is paid to any creditors. In most jurisdictions, the administrative costs are paid a little bit per month and the remaining money is then divided pro rata among the other classes of creditors depending on priority.

First priority are administrative costs which include things like the Trustee’s administration fee, outstanding attorney fees and costs and things like that. Next, secured creditors are paid. If there is more than one secured creditor and the Plan does not specify a “set” payment to a particular creditor, then the secured creditors would share the money that is available after administrative costs pro rata. This means that the largest claim gets a bigger portion of the money. The exact amount is determined by figuring out a ratio of the claim to the total of the claims in a particular class. The creditor then gets that percentage of the debtor’s payment each month. The next class of creditors that would be paid are priority unsecured creditors and once those claims are paid in full, general unsecured creditors than begin to get paid, pro rata.

An ex-spouse who is owed child support or maintenance payments is a priority unsecured creditor. This creditor has priority over general unsecured creditors like credit card companies, medical providers, utility companies, etc… There are other priority unsecured creditors, but a detailed discussion of all of them is beyond the scope of this blog.

After all the secured and priority unsecured creditors are paid in full, then general unsecured creditors can start sharing, pro rata the money. In some plans there are separate classes of unsecured creditors, so each class could be treated differently. In the basic case, all unsecured creditors are treated the same and each creditor gets a pro rata share of the money. Remember, pro rata means that each creditor gets the share that represents the proportionate share its total claim has to all claims.

I’ll leave you with an example. Assume 3 creditors, A, B and C. Creditor A is owed $5,000, Creditor B is owed $3,000 and Creditor C is owed $2,000. Assume the Debtor’s Plan pays $300 per month and that there are no remaining administrative costs. Creditor A will get $150 of the $300 (50% of $300 since its $5,000 claim is 50% of the total general unsecured debt), Creditor B will get $90 (30% of $300, since its $3,000 claim is 30% of the total general unsecured debt), and Creditor C will get $60 (20% of $300, since its claim is 20% of the total general unsecured debt).

Well, I’ve got another sad story to tell. I received an email from a person who lost his house and car and now needs to file bankruptcy to eliminate the deficiency balances.

What is unfortunate about this situation is that the person waited so long before contacting us. It is possible that we could have had options to try to help this person before his car and house were taken.

Chapter 13 is a good way to help people who have fallen behind on mortgage payments to get time to get caught up and prevent the mortgage company from taking the property. This person may have been a good candidate for Chapter 13 and if he would have contacted us before his house was foreclosed we might have been able to put together a repayment plan to save his house!

Fortunately, we can still file a Chapter 7 so he doesn’t have to pay back the deficiency balances on his mortgage and car. In case you didn’t know, if the car finance company doesn’t get all of its money under the contract from the proceeds from the auction, the finance company can sue this person for the “deficiency” balance. So, this person would be subject to a double-whammy! The person loses his transportation and still must pay the creditor money. OUCH! The good news is that we can still file a Chapter 7 for him and protect his wages and other property from this creditor’s collection actions.

The bottom line, don’t wait! There may be options available to you that could help you out of a situation before the situation goes from bad to worse. The earlier you contact someone and get information, the more options you may have to help solve your problems! To find out about your legal options, start here.

Our firm is happy to announce the opening of our new Miami bankruptcy law office on August 8, 2005! The office will be on NE 167th Street in North Miami Beach!

I was reading an article at msn.com called “New threats to your credit score.” It caught my interest because of my blog yesterday. This is evidence that even the smallest late payment and/or late fees charged by a creditor appear on your credit report and can affect your rating and the interest rate a lender will charge you, even without a bankruptcy filing.

In this article, the author had moved from one city in California to another one and the post office was not forwarding her mail properly and it turned out that one of her book boxes was packed with some books from the library from her old city. She didn’t get the notice because of the poor mail forwarding and didn’t unpack that box for several months. In keeping with recent trends, the library turned the account over to a collection agency that reported the late fees and fines to one of the credit bureaus. The author didn’t know about this until she was denied a credit card for the first time in her life and she ordered a credit report.

She took care of the fine and fees immediately upon discovering what happened, but the notation about the fine and late fees remained on her report and her credit score was 50 points lower than the score reported by the other two credit reporting bureaus where this item did not appear.

This article demonstrates that one’s credit report and score are affected by delinquent payments and late payments, even without a bankruptcy. Many things can “ruin” your credit rating, not just bankruptcy. For people who can’t afford to pay off outstanding debt, concern about “credit rating” should be the farthest thing from their mind. They need to be thinking about the future and how to get out of debt and worry about the credit rating once they’ve taken care of the debt. In many cases, bankruptcy is the only reasonable option available to get out of debt and if you find yourself with little or no hope of being able to pay your way out of debt, you should look into the bankruptcy solution despite the worries about “credit rating” or “credit score.”