Unsecured Debt in Your Chapter 13 Bankruptcy Plan: Repaid or Discharged?

Find out whether you can discharge some unsecured debt in Chapter 13 bankruptcy, or if you'd need to repay all of it.

Chapter 13 bankruptcy is often referred to as a restructuring or reorganization of debt.   It usually results in the creation of a plan to pay back existing debts by reducing payments and extending the payment schedule.   The plan is typically three to five years in duration and is administered and enforced by a court-appointed trustee.   It applies to both secured and unsecured debts and is available to those with a verifiable income stream.

After the filing, creditors are given the opportunity to submit claims to the court for the amounts owed.   As a general rule, the unsecured creditors never receive 100% of the claims.   Unsecured debts do not have collateral attached to them that can be repossessed by the lender in the event of default.   Examples are signature loans, medical bills, credit cards, utility bills, and amounts owed to merchandise retailers.

Administering the plan

After the plan has been approved by the bankruptcy judge, the debtor makes regular payments to the trustee.   The trustee is responsible for redistributing those payments to the various creditors in accordance with the plan.   If the debtor makes the payments according to the plan, the unsecured debt not paid off at the conclusion of the plan will be discharged or eliminated.   Unsecured creditors lose their right to recover any balance owed following successful completion of the plan.   If an unsecured creditor failed to file a claim with the court, they will not receive any payments under the plan.

Factors that are Considered

There are several factors that determine the amounts that each creditor will receive under the plan:

  • Your monthly income and current expenses.   After providing for your household necessities, the remaining income will go to creditors.
  • Value of your assets versus liabilities (net worth).   You are required to pay at least as much as the unsecured creditors would have received under a Chapter 7.   So if you own nonexempt property that would have been liquidated in Chapter 7, the plan will mandate payments equivalent to the expected proceeds to the unsecured creditors.
  • A “means test” is applied that can affect those whose median income exceeds the median for their state.   This is pegged to the average gross income during the six months prior to the filing, less allowable deductions.   This test will determine the percentage of the payments that will be allocated to unsecured creditors.

Discharging Unsecured Debts

The final plan emerging from bankruptcy will dictate the amount to be paid to unsecured creditors, and the amount beyond that (if any) that will be discharged.   Stick to the repayment plan and make all the payments that are stipulated.   The goal should be to deal with your debts, get your finances in order, and avoid going back to court.   This will help put you on the road to improving your credit rating.

For in-depth information, see What Happens to Unsecured Debt in Chapter 13 Bankruptcy?

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