How is Unsecured Debt Handled in a Chapter 13 Filing?

A Chapter 13 bankruptcy allows a debtor to restructure his debt and pay it over a three to five year period. All Chapter 13 debtors must file a Chapter 13 plan with the bankruptcy court. The Chapter 13 plan is the debtor’s proposal for how he will repay his debts.

Chapter 13 Eligibility

Not every debtor qualifies for Chapter 13 debt relief. To qualify for Chapter 13 debt relief, a debtor must have stable and regular income sufficient to make the payments required by his Chapter 13 plan. Additionally, the Bankruptcy Code limits the amount of liquidated unsecured debt a Chapter 13 debtor may have to $336,900. Moreover, a Chapter 13 debtor’s secured debts may not exceed $1,015,650.

Treatment of Unsecured Debts in a Chapter 13 Case

Unsecured debts are given the lowest priority in a Chapter 13 case. Depending on the debtor’s monthly net disposable income and the composition of his Chapter 13 plan, unsecured creditors may receive only pennies on the dollar. If a debtor’s Chapter 13 plan proposes to pay unsecured creditors less than 100% of what they are owed, the law requires that 100% of his monthly net disposable income be paid into the plan.

If a debtor’s plan proposes to pay less than 100% of allowed general unsecured claims, each creditor will receive a pro rata share of the total amount allocated by the plan for payment to general unsecured creditors. At the conclusion of the Chapter 13 case, any amounts remaining owing to general unsecured creditors will be discharged and the debtor will be relieved of any further liability or responsibility for those debts.

Do Late Fees and Penalties Accrue on Unsecured Debts?

When a consumer files bankruptcy, all interest, late fees, and penalties stop accruing. Therefore, the balance owed on unsecured debts will not continue to grow.

What is a Proof of Claim?

All creditors that wish to be paid through a debtor’s Chapter 13 plan must file a proof of claim. The proof of claim must set forth, among other things, the amount and nature of the debt owed. A debtor has the right to object to any proof of claim. If the court finds that an objection to proof of claim is valid, the claim will be disallowed. Only creditors with allowed claims will be paid through the Chapter 13 plan.

Getting Legal Help