Chapter 13 Bankruptcy: What Creditors Receive

In Chapter 13 bankruptcy, a debtor must be able repay all required debt in the repayment plan. A Chapter 13 plan will last for three or five years, depending on the debtor’s income. The debtor makes payments to the bankruptcy trustee who distributes the payments to creditors. Depending on the type of creditor, over the life of the plan the creditor may receive payment in full, a portion of the amount owed, or nothing at all.

Secured Creditors

A creditor has a secured claim when collateral secures the debt. When the debtor is in default on a secured debt, like a mortgage or a car loan, the debtor must pay the past due amount in full in order to keep the property. The debtor must stay current on the payments to secured creditors during the plan.

A secured debt may be a combination of both a secured and an unsecured debt. In some circumstances, if the loan amount exceeds the value of the collateral, the amount not secured by the collateral becomes unsecured debt. In this situation, the debtor can reduce the amount owed on secured debt by doing the following:

Stripping a second or third mortgage: A debtor can strip off a lien when the value of the home has fallen so much that the mortgage no longer secures the home. When the value of the home does not exceed the amount of a first or even a second mortgage, the debtor can strip the lien and the stripped portion becomes unsecured debt. A debtor cannot strip a first mortgage.
Cram down a car loan: A debtor can cram down a car loan when the actual value of the car is less than the amount owed on the loan. This applies to debtors that owned the car for at least 30 months before filing for bankruptcy. The bankruptcy court will reduce the loan to the actual value of the car, but the debtor must repay the creditor this entire amount in the plan.

Unsecured Creditors

Unsecured creditors, creditors with a claim not secured by property, will receive 0% to 100% of what the debtor owes. The debtor must repay unsecured creditors an amount that is at least equal to the debtor’s nonexempt property; they would have received this amount in Chapter 7. The amount of the debtor’s disposable income will also determine how much unsecured creditors will receive.

Priority Claims

A debtor must pay priority debts in full. Priority debts include child support, alimony, taxes, and wages owed to employees.

Administrative Fees

A debtor must pay the following in full: bankruptcy filing fee, trustee’s commission, and attorney fees. If you are unsure how much you will have to repay creditors, consult with a bankruptcy attorney to learn more.

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