What debts must be repaid under the Chapter 13 payment plan?

Because it involves a payment plan, many people assume that if they file Chapter 13 bankruptcy, they must fully repay all of their debts. However, in reality, only certain debts must actually be repaid in full; most other debts are either partially repaid or not repaid at all.

Repayment in Chapter 13

In general, the type of debt a given debt is determines whether it must be repaid in Chapter 13. Under the bankruptcy laws, certain debts must be repaid in full over the course of Chapter 13 in order for the court to approve the repayment plan. These are called priority and administrative debts, which include attorneys’ fees, court costs, child support and certain taxes.

If the debt in question is unsecured (i.e. not secured by collateral), the bankruptcy laws require the repayment plan to address this type of debt a certain way. Specifically, the payment plan must pass what is called the “best interests of the creditors” test. This test requires unsecured debts to be repaid to the same extent that they would have been paid, had the debtor filed Chapter 7 instead.

Based on this test, it is easy to assume that most unsecured debts must be repaid. However, this is not the case. The reason for this is that Chapter 7 discharges most unsecured debts without any repayment at all. Because of this fact, most unsecured debts, such as credit cards and medical bills, are discharged in Chapter 13 after little or nothing has been paid towards them under the plan.

The main exception to this rule occurs in the rare instance an unsecured creditor objects to the proposed payment plan. If this happens, the debtor must pass another test-the “disposable income” test. Under this test, the court looks at the debtor’s disposable income. If the disposable income is sufficient to allow for at least partial repayment of the unsecured debts, the court may require the payment plan to reflect this. However, since few people who file bankruptcy have significant disposable income, this test is rarely an issue.

The bankruptcy laws do not require the plan to repay secured debts, such as mortgages and car loans. However, if the plan does not address these debts, creditors may take back the collateral securing the debt (i.e. house or car). However, Chapter 13 can be very helpful to debtors behind on their secured debts, as it gives them 3-5 years to become current on the debts. While debtors are catching up with their missed secured debt payments, Chapter 13 prevents creditors from taking back the collateral.

If in debt, see an attorney

Since the choice between Chapter 7 and Chapter 13 bankruptcy should not be made on a whim, it is important to get competent legal advice before proceeding. The experienced bankruptcy attorneys at FurrCohen, P.A. can assess your situation and recommend the best way out of your debt problems.