by: Baran Bulkat, Attorney
During a Chapter 13 bankruptcy, you make monthly payments to a bankruptcy trustee who then pays those amounts to your creditors according to a specific repayment plan. Your repayment plan is the most important part of your bankruptcy because it details which debts will get paid through your bankruptcy as well as how much your creditors will receive. So let’s learn how the Chapter 13 repayment plan works.
Some debts are paid in full through your plan, others may be paid in part.
Certain debts have been deemed important enough by Congress to be characterized as "priority debts." These receive special treatment in your bankruptcy case. The most common priority debts are domestic support obligations such as alimony and child support, certain taxes, and wages owed to your employees. Priority debts must be paid in full through your repayment plan in your 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. Each secured debt must be addressed in your repayment plan.
If you wish to surrender (give up) your house or car, you may do so in your plan. However, if you want to keep your house then all of your mortgage arrearages (payments you are behind on) must be paid in full through your repayment plan. 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). This is usually a good thing because a Chapter 13 bankruptcy may 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.
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 certain percentage (anywhere from 0% to 100%) of what is owed on them.
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 5 years.
If you won't be paying back all of your creditors in full (which is the case for most people), your plan length depends on whether your average income during the six months before you file bankruptcy is above or below that of 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 median, then your repayment plan must last five years.
For more information on how long your plan will last and why, see How Long Does a Chapter 13 Repayment Plan Last?
When you complete all required payments under your plan, all of your priority debts, mortgage arrearages, and cars (if included in the plan) will be paid off. Your nonpriority unsecured debts, including any unpaid portions, 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.