Your Chapter 13 repayment plan is an essential part of your bankruptcy. It details which debts will get paid and the amount your creditors will receive.
During a Chapter 13 bankruptcy, you'll make monthly payments to a bankruptcy trustee appointed to your case. The trustee will pay your creditors according to the repayment plan. In this article, you’ll learn how the Chapter 13 repayment plan works.
Find out about other aspects of a Chapter 13 repayment plan.
Some debts move to the front of the line in bankruptcy. Others might receive some or no payment at all. It will depend on the type of debt and where it falls in the Chapter 13 payment hierarchy.
Some debts are necessary enough to be characterized as priority debts. These obligations receive special treatment in your bankruptcy case. The most common priority debts are domestic support obligations such as alimony and child support, recently-incurred taxes, and wages owed to employees. Priority debts receive full payment through your repayment plan in Chapter 13 bankruptcy.
If a creditor has a right to take back property when you default (fail to make payments) on your loan obligation, then that is a “secured debt.” Examples of secured debts are your mortgage (which is secured by your house) and car loans. You must address each secured debt in your repayment plan as follows:
Depending on where you live, some courts will require you to pay your ongoing mortgage payments through your plan as well, but other courts will allow direct payments to the lender.
In most cases, you must also pay your car loans in full through your bankruptcy plan (unless you are surrendering the cars). Another benefit of Chapter 13 bankruptcy is that it might allow you to reduce the principal balance and interest rate on your car loan through a cramdown. Since your car payments will get stretched out over the life of your plan, this will likely reduce your monthly expenses as well. In certain situations, especially if your car is worth more than what you owe on it, you may also be able to exclude it from the plan and pay the lender directly outside of the bankruptcy.
In some cases, you can wipe out a junior mortgage on your residential property. You’ll have to show that your house is sufficiently underwater that if sold, no funds would be available to pay any portion of the junior mortgage in question. Find out about stripping a lien in Chapter 13.
Almost all of your remaining debts will be “nonpriority unsecured debts.” These include credit card debts, medical bills, and personal loans. These debts do not have to be paid in full and do not receive individual treatment in your bankruptcy plan. Instead, they are lumped together and paid a percentage (anywhere from 0% to 100%) of the balance owed.
The percentage depends on your income because all of your disposable income after payment of priority and secured debts must go to your nonpriority unsecured creditors. These creditors usually end up receiving a small percentage or nothing at all, especially if your income is below the median income level of your state.
If you are paying back all of your creditors in full (including your nonpriority unsecured creditors), there is no length requirement except that your plan cannot be longer than five years.
Many people won't pay back all creditors in full and the plan length will depend on whether your income is above the median income level of your state. If you are below the median, then your repayment plan only has to last three years. However, you can extend it to as much as five years, depending on how much debt you have to pay back and what you can afford to pay each month. If your income is above the median income of your state for a family of your size, then your repayment plan must last five years.
For more information on plan length, see How Long Does a Chapter 13 Repayment Plan Last?
When you complete all required payments under your plan, you won’t owe anything on your priority debts, mortgage arrearages, and cars. Also, any balances on qualifying nonpriority unsecured debts, such as credit card balances, medical bills, and personal loans, will be discharged (wiped out) by your bankruptcy.
One exception is student loans. Bankruptcy will not discharge student loans unless you can show that paying them will be an undue hardship on you, which is extremely hard to prove.
Learn about the differences between secured, unsecured, and priority debts.