How Much Do You Pay Creditors in Chapter 13?
A Chapter 13 bankruptcy is a chance to reorganize your debts without having to liquidate your assets. The monthly payment set up in a Chapter 13 bankruptcy depends on what kinds of debt you owe and how much of that debt you can afford to repay.
David Offen has spent over 20 years practicing bankruptcy law in Philadelphia. He has helped more than 10,000 clients through the bankruptcy process. Call (215) 625-9600 to schedule a consultation.
There Are Three Types of Debt Under Chapter 13
When a bankruptcy court and its appointed trustee review your filing, they will identify priority, secured, and unsecured debts. Let’s take a look at what these terms mean:
- Priority Debts: These debts cannot be discharged. They must be paid in full through the bankruptcy process. Unpaid taxes, child support, and certain fines are all priority debts that can not typically be discharged through bankruptcy.
- Secured Debts: These are debts with collateral behind them, such as a house or a car. Chapter 13 requires you to establish a payment plan that will bring these debts current if you want to keep the collateral.
- Unsecured Debts: Unsecured debts are not backed by collateral. Credit cards, personal loans, and medical bills are the most common types of unsecured debt. You must make a good-faith effort to repay these loans, but only to the limits of your disposable income.
You Don’t Pay Creditors Directly
When you file for Chapter 13 bankruptcy, the court will appoint a trustee to manage the business of disbursing payment to your creditors. You won’t have to worry about dealing directly with your creditors.
Do you pay more in Chapter 13 or Chapter 7?
Many people are put off of filing for Chapter 13 bankruptcy by the thought of repaying their debts in monthly installments. What these people fail to realize is that certain debts must be repaid no matter which method you choose.
If you have a steady income, repaying secured debts and allowing some unsecured debt to be discharged can leave you with more assets after bankruptcy than if you had filed Chapter 7.
What determines how much you have to pay?
The primary factors for determining your payment is your income, necessary expenses, what kinds of debt you have, and the value of your unprotected assets.
Your projected income and expense are the prime factor in deciding how much you will need to pay your bankruptcy trustee each month. Expenses are a combination of your actual monthly expenditures for your basic cost of living, medical and childcare expenses.
After comparing your expenses to your monthly income, your bankruptcy lawyer will arrive at a “disposable income” that can be put towards paying down your debts. This disposable income will need to be paid in full each month for a period of 36 to 60 months.
Depending on how much priority debt you have, there will be an absolute minimum monthly payment you would need to make to meet the terms of your bankruptcy. This would be the outstanding priority debts broken into 36 to 60 installments.
Once you have determined the minimum you must pay and compared it to your disposable income, you can decide which secured debt you can afford to repay, and of that figure, which debts you want to repay. This is often the time to make tough but sensible decisions that will put you in a better financial place.
After you have settled the payment necessary to your priority and secured debts, the remainder of your monthly payment will be split between your unsecured debts. Whatever unsecured debts remain unpaid after 36 to 60 months will be discharged.
How Much Does Each Creditor Get from a Chapter 13?
Feds Paid in Full
Priority debts like taxes and child support must be paid first and in full. Back taxes and child support must be completely repaid within 36-60 months, and are not dischargeable.
Collateral is Complicated
Secured debt such as car loans and mortgages require that you pay most to all of what you owe. Whether the lender demands full payment depends largely on the value of the collateral. A house is a useful example. If you owe $250,000 but with deflation, the house is now worth a little over $200,000, the bank would lose money if you defaulted on the loan. So it would be in their interest to accept your Chapter 13 repayment plan.
Alternately, inflation could have raised the home’s value significantly since you took on the mortgage. In such cases, the bank is unlikely to accept anything but full repayment of the loan along with all of their expenses.
Unsecured Debts Come Last
There is only an obligation to repay unsecured debts to the limits of your disposable income. If you make all your payments, the remaining debt on unsecured credit through Chapter 13 is wiped out.
Considering Chapter 13?
David M. Offen has spent over 20 years practicing bankruptcy law in Philadelphia. He has helped more than 10,000 clients through the bankruptcy process. Call (215) 625-9600 to schedule a consultation.
