Which debts do I have to repay in Chapter 13?
For many people unfamiliar with bankruptcy, Chapter 13 bankruptcy may seem counterintuitive. Such people often wonder why this type of bankruptcy is necessary, since they have heard that it involves paying back creditors under a payment plan. They may think that if they had the money to pay back creditors, why would they file for bankruptcy. As a result, they may be drawn to Chapter 7.
However, the reality is that not everyone is eligible for Chapter 7. Additionally, Chapter 13 offers certain benefits not available in Chapter 7, such as superior protection against foreclosure and repossession. Despite, what you may have heard about Chapter 13, not all of your debts have to be paid back during the process. Understanding how it works is crucial in determining whether Chapter 13 is right for you.
Chapter 13 and debt
Whether a debt must be repaid in full during the Chapter 13 payment plan depends heavily on the type of debt that it is. In order for the payment plan to be approved by the court in Chapter 13, it must meet certain criteria. Firstly, all Chapter 13 payment plans must repay all priority claims and administrative expenses in full. These types of debts include taxes, child support, alimony, attorneys’ fees and court costs.
In addition, unsecured debts, which are debts that are not secured by collateral (e.g. credit cards or medical bills) do not have to be repaid in full (or at all) under most plans. However, bankruptcy law requires all payment plans to be in the “best interests of the creditors” with regard to its treatment of unsecured debt. This means that the plan must give all unsecured creditors at least as much as they would have received in Chapter 7.
Although it may appear from this requirement that all plans must provide for at least some repayment of unsecured debts, this is not the case in most situations. The reason for this is that under Chapter 7, most unsecured creditors are entitled to recover nothing. As a result, most Chapter 13 plans do not have to provide for the repayment of unsecured debts.
The only instance when Chapter 13 plans must provide for payment of unsecured debts is when an unsecured creditor objects to the plan. If this happens, the debtor must pass a “disposable income” test. Under this test, the court analyzes the debtor’s disposable income-income left over after paying bills and necessities-to see if there is a sufficient amount left over to apply against the unsecured debt.
Since most bankruptcy filers do not have much disposable income, most are able to pass this test quite easily. However, even if there were sufficient disposable income, it would be likely that it would not be sufficient to repay the unsecured debt in full by the end of the bankruptcy. As a result, most unsecured debt is discharged once the plan has concluded in three to five years.
Unlike unsecured debt, secured debt (e.g. mortgages and car loans) must be made current under Chapter 13 plans, if foreclosure of the house or repossession of the collateral is to be avoided. However, since Chapter 13 plans allow you to pay in monthly installments over three to five years, it is significantly easier to catch up on any arrearages.
An attorney can help
Whether Chapter 13 is right for your depends heavily on your situation. To learn more about your debt relief options, contact an experienced bankruptcy attorney. An attorney can recommend an option that would best protect your interests.