How will My Payments Change When I File for a Chapter 13 Bankruptcy?

Unlike in Chapter 7, where the bankruptcy court will discharge all eligible debt but the debtor may have to give up valuable property, a Chapter 13 debtor must repay creditors but can keep their property. Chapter 13 is sometimes referred to as a “wage earner plan.” Chapter 13 is appropriate for debtors that want to repay creditors, want to save their home from foreclosure, want to keep valuable property, and want to save their car from repossession. In Chapter 13, the debtor will repay creditors, but may not have to repay the full amount due

The Repayment Plan

A Chapter 13 debtor will repay all or a portion of what they owe to creditors in a three or five-year installment plan. The term of the plan depends on the debtor’s income. If the debtor earns less than the median income in their state, the plan term is for three years. All other debtors must enter into a five-year plan.

The debtor will make payments to the bankruptcy trustee instead of to creditors. The debtor will begin making payments about 30 days after filing the petition for bankruptcy. Initially, the trustee will not distribute the payments until the confirmation of the plan. The trustee will distribute the Chapter 13 payments according to the terms of the plan once confirmed.

Chapter 13 Payments 

In Chapter 13, a debtor will only have to repay some creditors in full, while repaying other creditors only a portion of the amount owed. The payments a creditor receives will depend on the priority of the debt and the type of debt. Repayments receive the following prioritization:

• The debtor must repay administrative and priority debts in full -  trustee fees, attorney fees, child support payments, alimony, wages owed to employees, and nondischargeable tax debt.
• The debtor must stay current on secured debt that survives bankruptcy - mortgages, home equity loans, car, motorcycle, and boat loans, and personal loans.
• The debtor must repay some secured creditors in full during the term of the plan - tax liens, judicial liens, statutory liens, and promissory notes secured by personal property.
• Unsecured creditors must receive at least as much as the debtor’s nonexempt property is worth - credit card debt, medical bills, union dues, and back rent.

In a Chapter 13 plan, unsecured creditors receive payment last. All of the debtor’s disposable income—current monthly income after the payment of expenses and other creditors—must go toward paying unsecured creditors. In some cases, if nonexempt property is worthless and the debtor has no disposable income left, unsecured creditors will receive nothing in the repayment plan.

Getting Legal Help

If you are deciding whether bankruptcy is the right choice and you want to learn more, contact an experienced bankruptcy attorney. Bankruptcy is a complex process and an attorney can help determine whether Chapter 13 or Chapter 7 is most appropriate for your situation.