When you file for Chapter 13 bankruptcy, you enter into a payment plan to pay off your debts. However, not all debts are treated equally by the bankruptcy code. Some debts must be paid first, other debts must be paid in full, and other debts may be able to be reduced (and substantially so). In this post, we’ll discuss which debts are which and how it impacts your Chapter 13 payment plan.
For reasons of public policy, Congress has decided that some debts are more important than other debts. These are referred to as “priority debts.” Under the bankruptcy code, your payment plan must pay off your priority debts first, and you must pay them in full. Here are some examples of common priority debts:
- Unpaid taxes
- Past-due Child support
- Past-due Spousal support
- Unpaid wages owed to employees within the last six months
- Claims that are the result of injuring or harming another person due to being under the influence of drugs or alcohol
- Unrefunded deposits owed to customers or lessees
As you can see, the nature of the debts makes it understandable as to why they are given priority. Unpaid child support, for example, should be paid in full and paid off as quickly as possible.
Priority debts are also often (although not always) nondischargeable. This means that if there is a remaining balance due on these claims when you receive your bankruptcy discharge, you remain liable for the remainder of the claim.
Secured debts are debts that are secured by property. In other words, the creditor can take or “attach” the property if you don’t pay the debt. A car loan is a good example of a secured debt - if you don’t make your car payment, the bank who holds the loan will repossess your car. Mortgages are another common example of secured debts.
Car loans and mortgages are based on voluntary agreements. Some secured debts, however, are involuntary, such as a tax lien.
If you wish to keep the property that secures the debt, you can include the arrearage in your Chapter 13 plan and bring it current over time. However, you must remain current on any payments that come due after the date you file for bankruptcy. If you fail to pay the arrearage through the Chapter 13 plan or make the subsequent payments, the creditor may ask the court for permission to attach and sell the property to satisfy their claim.
Unsecured debts are debts that have no security. As a result, there is no property that can be attached and sold by the creditor, unless the creditor has obtained a judgment against you. Here are some examples of unsecured debts that people commonly include in their bankruptcy case:
- Credit card debt
- Medical bills
- Utility bills
- Personal loans
Depending on your Chapter 13 plan, you may pay your unsecured debt in full or in part, based on what you can afford.
- You must pay all of your disposable income into the plan. Your disposable income is what is left over after paying your allowed expenses and making payments on any secured claims.
- You must pay your unsecured creditors at least what they would receive in a Chapter 7 complete liquidation.
It’s important to remember that unsecured debt can also be priority debt, such as child support payments or taxes. That said, secured debt arrears will be given preference over unsecured, non-priority debt. If you were to liquidate your assets and there was no money left over after paying off your secured debt arrears, the “general” unsecured creditors will receive what’s left (it has to be something).
The One Hundred Percent Plan
For people in Chapter 13 bankruptcy with high incomes, they may be able to pay all of their debts in full, including their unsecured creditors. This is sometimes referred to as the “one hundred percent (100%) plan.”
Contact a Minnesota Bankruptcy Attorney for Help
Chapter 13 bankruptcy can be a great way for many people to get control of their debt and build a brighter future. An experienced bankruptcy attorney can help you get the most of out of your bankruptcy case. The attorneys at Kain & Scott help Minnesotans navigate the bankruptcy courts in order to get relief from their creditors and achieve their goals. If you would like to schedule a free consultation with a lawyer who can help, call us today at 800-551-3292 or contact us online.