What Happens to Unsecured Debt in Chapter 13 Bankruptcy?

Here's how your unsecured debt, like credit cards and medical debt, is treated in Chapter 13 bankruptcy.

In Chapter 13 bankruptcy, how your unsecured debt is treated depends on whether it is “priority” debt or not. You must pay priority claims in full through your plan. When it comes to nonpriority, unsecured debt, how much you must repay depends on several factors, discussed below. In the real world, most Chapter 13 filers only pay a portion of their nonpriority, unsecured debt. The rest is discharged at the end of the repayment period.

Read on to learn which of your debts you must pay in full, and how much of your nonpriority, unsecured debt you must pay through your plan.

(To learn more about how Chapter 13 bankruptcy works, see the articles in our Chapter 13 Bankruptcy topic area.)

Priority Debt: Unsecured Debt That You Must Pay in Full

Bankruptcy law requires Chapter 13 debtors to pay some unsecured debts in full through their Chapter 13 plan. These are called priority claims.  You must pay priority claims in full unless their holders agree to different treatment.  The most common priority claims in Chapter 13 cases are:

Domestic support obligations. Child and spousal support obligations owed as of the filing date are entitled to top priority in payment under the Bankruptcy Code.

Administrative expenses. Administrative expenses are claims incurred in connection with a bankruptcy case. Administrative expenses are second in line for payment under the Bankruptcy Code. The primary administrative expenses in most Chapter 13 cases are fees owed to debtor’s counsel and the Chapter 13 trustee.

Taxes. Delinquent state, federal, and property taxes, subject to specified time limits, also have priority over general unsecured claims.

Nonpriority, Unsecured Debt

Most unsecured debt does not fall into the priority category. Examples of nonpriority, unsecured claims include ordinary credit card debt, medical bills, back rent, student loans, utility bills, loans that do not require collateral, health club dues, union dues, and some tax debts.

How much you end up paying on these unsecured debts depends primarily on:

  • what your unsecured creditors would have received if you had filed for Chapter 7 bankruptcy (the “bests interests of creditors” test), and
  • how much of your “disposable income” is left over after you pay other required obligations.

The Best Interests of Creditors Test

The "best interests of creditors" test requires Chapter 13 debtors to pay unsecured creditors at least as much as they would receive in a Chapter 7 liquidation. This is dependent, in large part, on how much of your property is exempt. (To learn more about exemptions in Chapter 7 bankruptcy, see the articles in our Bankruptcy Exemptions topic area.)  If you do not commit to pay unsecured creditors at least as much as they would receive in a liquidation, the court will not confirm your plan.  This is a low threshold, however, because liquidations typically raise little or nothing for unsecured creditors.

Debtors Must Commit All Disposable Income to the Plan

Generally in Chapter 13 cases, any distributions to unsecured creditors are funded from the debtor’s plan payments. One of the requirements for confirming a Chapter 13 plan is that the debtor commit all of his or her "disposable income" for a period of three to five years. "Disposable income" is the difference between a debtor’s total earnings and the amount "reasonably necessary" to pay for the debtor’s family’s maintenance and support.

Debtors who earn less than the median family income in their home state must commit to make plan payments for a period of at least three years. The commitment period is extended to five years for debtors who earn more than their state’s median family income.

How Your Unsecured Creditors Get Paid

Debtors make plan payments to the Chapter 13 trustee on a monthly basis.  The Chapter 13 trustee deducts a fee from each monthly payment (usually, 10%) and distributes the balance to creditors in accordance with the plan.  Most Chapter 13 plans authorize distributions to general unsecured creditors only after priority and secured claims are paid in full.  This means that even if payments to unsecured creditors can be made, they are not funded or distributed until late in the plan period – in other words, about three to five years after you file bankruptcy.  Distributions are made on a pro rata basis, so each unsecured creditor is paid the same percentage of its claim.

In addition, as long as you act in good faith, you may selectively pay nonpriority claims under a Chapter 13 plan, in effect favoring some creditors over others. Nonpriority claims that may be paid ahead of general unsecured debt in Chapter 13 cases include:

Cure obligations. Many Chapter 13 bankruptcy filings are triggered by home foreclosures and automobile repossessions. A Chapter 13 plan can cure loan defaults so you can keep your  home or vehicle.  Any arrearages, however, must be paid over the plan term. Typically, cure obligations are paid ahead of general unsecured debt under Chapter 13 plans.

Nondischargeable obligations. Some claims, such as student loans and criminal fines, are nondischargeable, even under Chapter 13. Unless a claim is discharged, it can still be enforced through collection remedies, such as garnishments and sheriff sales, after the bankruptcy case is closed. Chapter 13 plans, on occasion, provide for payment of nondischargeable obligations before other unsecured debt.

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