Which debts must be repaid during Chapter 13?

If you are in debt and considering filing bankruptcy as a solution to your problems, you may have questions about the Chapter 13 process. Specifically, you may have heard that it involves a payment plan. However, you may not know what debts must be repaid under the plan. Fortunately, Chapter 13 does not require you to repay every debt that you have. For many of your debts, the plan only requires you to repay a fraction of them before they are discharged. However, for other debts, the plan requires you to pay the debt in full or at least the amount that is overdue.

The plan and repayment of debts

During Chapter 13, the payment plan becomes effective after the court confirms it. Before the court does so, the plan must meet certain criteria regarding the repayment of your debts. Under the law, all priority and administrative expenses must be repaid in full by the end of the plan. These include attorneys' fees, court costs, taxes, alimony and child support.

In addition to repaying priority and administrate expenses in full, the plan must meet a test regarding your unsecured debts. These debts include credit cards, medical bills, personal loans and other debts not secured by collateral. The test the plan must pass is called the "best interests of the creditors." Under this test, your plan must pay your unsecured creditors the amount that they would have received had you filed Chapter 7 bankruptcy instead.

Although you may think that the amount your unsecured creditors would receive would be significant, this is not the case, since Chapter 7 discharges all unsecured debt in most cases. As a result, your plan does not have to provide repayment of your unsecured debts in most cases.

The main exception to this rule is the rare instance that an unsecured creditor objects to your proposed plan. If this occurs, you must pass a disposable income test. If you have sufficient disposable income to repay your unsecured creditors, you may be forced to structure your plan to provide at least partial repayment of your unsecured debts. However, since most Chapter 13 filers do not have significant disposable income in most cases, unsecured creditors rarely object to the original payment plan.

Aside from your unsecured debts, your secured debts (e.g. car loan or mortgage) must be brought current by the end of the three to five-year plan in order for you to be able to keep the collateral securing the debt (i.e. your car or house). However, this is not a requirement for your plan to be confirmed.

An attorney can advise you

For a significant number of people, Chapter 13 offers certain advantages over Chapter 7. To find out whether it is a viable solution for you, it is important to consult an experienced bankruptcy attorney. An attorney can assess your situation and recommend the best course of action for you to relieve yourself of your debts.