Filing Chapter 13 Bankruptcy: Payment Plan

Filing Chapter 13 bankruptcy allows a debtor to restructure his debts and pay them over a three to five year period. Every Chapter 13 debtor must file a Chapter 13 plan which sets forth his proposal for how he will repay his debts. (See also how to get out of a Chapter 13 payment plan).

How Are the Chapter 13 Plan Payments Calculated?

Generally, a Chapter 13 debtor must allocate 100% of his monthly net disposable income for payment into the Chapter 13 plan. However, if a debtor’s plan calls for payment of 100% of what is owed to general unsecured creditors, his plan may be confirmed even if it does not allocate 100% of his monthly net disposable income for payment into the plan.

A debtor’s monthly net disposable income is calculated by first subtracting certain allowed deductions from his gross monthly income to arrive at his net monthly income. Next, the debtor’s monthly expenses are subtracted from his net monthly income. The difference is his monthly net disposable income.

What are Administrative Claims and How are They Treated in a Chapter 13 Bankruptcy?

In a Chapter 13 bankruptcy, debts are paid according to their classification or priority. Administrative claims receive the highest priority, and, therefore, are paid first. Administrative claims include:

Trustee’s fees;
Attorney’s fees; and
Other costs of the bankruptcy case.

What are Secured Claims and How are They Treated in a Chapter 13 Bankruptcy?

A secured claim is any debt which is secured by property in which the debtor has a legal interest. Examples of secured claims include:

Mortgages;
Auto loans;
Title loans;
Certain debts for the purchase of appliances and furniture; and
Judgment liens.

Secured claims receive better treatment than unsecured claims; however, they are not treated as well as administrative claims. All secured claims will be paid in full before payment of priority unsecured and general unsecured claims.

What are Priority Unsecured Claims and How are They Treated in a Chapter 13 Bankruptcy?

Priority unsecured claims are given the next best treatment in a Chapter 13 bankruptcy case. Examples of priority unsecured claims are:

Domestic support obligations; and
Certain tax debts.

Priority unsecured claims will be paid in full before general unsecured claims are paid.

What are General Unsecured Claims and How are They Treated in a Chapter 13 Bankruptcy?

General unsecured claims receive the least favorable treatment in a Chapter 13 case. Examples of general unsecured claims include:

Credit card debts;
Personal loans;
Medical bills; and
Certain tax debts.

Depending on the composition of the debtor’s Chapter 13 plan, general unsecured creditors may receive only pennies on the dollar. As a matter of fact, it is not unusual for general unsecured creditors to receive nothing.

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