Which debts must be repaid under a Chapter 13 plan?

Contrary to what many believe, Chapter 13 does not require the full repayment of all debts.

People filing bankruptcy choose Chapter 13 for many reasons. Perhaps they are behind on their mortgage or car payments and want to save these items from being foreclosed upon or repossessed. Maybe they have significant nonexempt assets that they would like to keep, but would otherwise lose if they chose Chapter 7. Whatever the reason, Chapter 13 offers certain advantages over Chapter 7. Unfortunately, this is not always known because it is a widely held belief that Chapter 13 saves property by requiring filers to pay back all of their debts, which can make this type of bankruptcy seem unattractive. Of course, this is not the case.

Repayment in Chapter 13

Chapter 13 requires the filer to form a repayment plan to pay his or her debts over a three to five-year period. This may sound like all debts must be fully repaid, but in reality, only certain debts must be fully repaid. In fact, some debts are only partially repaid and many do not have to be repaid at all.

Under the bankruptcy laws, all repayment plans must repay certain debts in full by the time the repayment period is up. These debts include priority debts such as taxes, alimony or child support. In addition, expenses incurred in filing the bankruptcy, such as attorneys’ fees, filing fees and court costs, must also be paid in full.

However, some debts only need to be partially repaid. In most cases, these include secured debts-debts that are secured by collateral (e.g. mortgages or car loans). Under the repayment plan, filers have three to five years to catch up on back payments owed for this type of debt, but do not have to actually repay the entire amount of the loan off in full. One of the benefits of Chapter 13 is that as long as the filer is making regular payments towards the debt, the property cannot be seized in a foreclosure or repossession.

In addition, many debts do not need to be repaid at all. By and large, unsecured debt, like credit cards and medical debt, fits within this category. Under the bankruptcy laws, the filer must pay their unsecured creditors the amount that they would have had to pay if they had filed Chapter 7 instead. Since most unsecured debt is wiped out in Chapter 7 without being repaid, in most cases this means nothing must be repaid in Chapter 13 as well.

The exception to this rule is if the filer has a significant amount of disposable income that would allow the partial repayment of his or her unsecured debts. In such cases, an unsecured creditor may object to the repayment plan and ask the court that it be modified to provide for the partial payment of the debt. Fortunately for filers, this is rare, as most do not have the financial resources necessary to do this, once essential living expenses, secured debts and priority expenses have been paid each month.

Once Chapter 13 bankruptcy has been completed after three to five years, the filer is up-to-date on his or her secured debt and receives a discharge of most of the unsecured debt.

If you are interested in availing yourself of the benefits of Chapter 13, it is wise to speak with an experienced bankruptcy attorney. An attorney can adequately assess whether this type of bankruptcy would be right for you.