Because they have heard it involves the repayment of debts, many people assume that all of a person’s debts must be repaid under Chapter 13. However, this is not true, as some debts are typically only partially repaid; some others are not repaid at all. If you are considering Chapter 13, it is helpful to know the basic rules regarding repayment, so you can understand how it would affect your situation.
Which debts must be repaid in full?
The rules regarding repayment of debts in Chapter 13 depend on the type of debt at issue. Under the bankruptcy code, certain debts must be repaid in full in order for the repayment plan to be approved by the bankruptcy court. These debts are called priority and administrative debts. Debts that fall under this category include court costs, attorneys’ fees, certain type of taxes and child support.
Which debts do not necessarily need to be repaid in full?
For unsecured debts (i.e. debts not secured by collateral), the bankruptcy laws require the payment plan to pass a test-the “best interests of the creditors” test. Basically this test requires you to repay your unsecured creditors the same amount that you would have paid them had you decided to file Chapter 7 bankruptcy instead.
Although this test would make it seem like you must repay your unsecured creditors a significant amount, this is generally not the case, since Chapter 7 eliminates most unsecured debt without any repayment. As a result, most credit cards, medical bills and other unsecured debts are eliminated at the end of Chapter 13 without the need to pay anything (or very little) towards them.
There is an exception to this rule regarding unsecured debts that comes into play in the rare case that an unsecured creditor objects to the proposed payment plan. If this happens, you may have to pass another test-the “disposable income” test-before the bankruptcy court will approve your payment plan. This test examines your disposable income to see if it is sufficient to allow you to repay your unsecured debts partially. If so, you may be required to repay at least some of your unsecured debts. However, since most bankruptcy filers have little or no disposable income, this test is almost never an issue.
Aside from unsecured debts, the bankruptcy laws generally do not require you to repay your secured debts, such as mortgages and car loans, in order for your repayment plan to be approved. However, if you fail to address these debts in the plan, your creditor may take back the collateral securing the debt. Fortunately, Chapter 13 is an excellent choice for those struggling with secured debts, as it gives debtors 3-5 years under the plan to catch up with all missed payments, while preventing creditors from taking back the collateral.
Considering bankruptcy? Get legal advice
If you are in debt, the choice between Chapter 7 and Chapter 13 may seem academic. However, it is an important one, as it can determine whether you are ultimately successful at your attempt to address your debt problems. The experienced bankruptcy attorneys at Reed Law Firm, PA can consider your unique debt situation and recommend the best course of action.