If you file for Chapter 13 bankruptcy, you will repay creditors, in part or in full, through your Chapter 13 plan over three to five years. You cannot decide the order in which your creditors are paid. Instead, bankruptcy law sets forth the order that your bankruptcy trustee must pay your debts. Usually, the trustee pays them in this order: secured debts first, followed by priority debts, and then unsecured debts. (Learn about secured, unsecured, and priority claims.) You may pay some of those debts in full through your plan, and others just pennies on the dollar.
You can use Chapter 13 bankruptcy to manage your debts in various ways. Through your Chapter 13 plan, you might pay some creditors fully, but you'll likely pay most of your debts less than what you owe.
You start making payments into your Chapter 13 plan within the first month of filing. However, the trustee doesn't distribute the payments to creditors right away. Instead, the money goes into the Chapter 13 trustee's trust account, where most of it sits until the court confirms your plan.
If the court confirms your plan, the trustee distributes the money in the trust account according to the terms in the plan. You'll continue to make monthly post-confirmation payments in the amount approved by the court, but the monthly payment could be different if a creditor or the trustee successfully objected to the plan.
If the bankruptcy court doesn't confirm your plan, the trustee will return the funds to you, except for some amounts the trustee must forward to your creditors, such as amounts paid toward your car loan. We explain this in further detail in the "Adequate Protection" section below.
Bankruptcy law determines the order in which your creditors receive the funds available. Typically, the order that the trustee must pay your creditors and administrative amounts is as follows:
In your plan, you'll pay the total amount of attorney's fees, trustee fees, and priority debts. You'll pay your monthly secured payments, such as your car loan and mortgage, plus all arrearages and late payments. Your unsecured debts will divide your "disposable income," or the amount remaining after paying the above debts and allowed monthly expenses.
Sometimes a Chapter 13 plan will call for the trustee to repay secured debts in full before distributing any money to unsecured creditors. Other times, a plan will permit payments to unsecured creditors while the priority debts are still being paid.
Learn more about how the Chapter 13 payment plan works.
Unless you pay your attorney in full before filing your case, the Chapter 13 trustee will pay your bankruptcy attorney's fees before your other debts.
You will also have to pay the Chapter 13 trustee fees of roughly 5% to 10% of the total amount you'll pay into your Chapter 13 plan. The precise amount differs by state and trustee. The trustee will take the allotted percentage out of the filer's monthly payment before distributing money to creditors.
Secured debts are those for which a piece of property serves as collateral for payment of the debt. Examples include car payments and mortgages. Debts for new furniture are often secured, with the furniture serving as collateral for payment. Computers, jewelry, mattresses, and appliances purchased on credit are also secured debts.
How you or the trustee pays your secured debts varies, depending on the type of debt (mortgages get special treatment) and what you intend to do with the property that serves as collateral.
Learn about your house in Chapter 13 bankruptcy.
If you plan to keep the collateral property, you must pay the secured debt through your Chapter 13 plan. You might be able to pay the debt at a reduced interest rate. And in some instances, if the property is worth less than you owe, reduce the total amount due to the property's value using "lien stripping" or a "cramdown."
Talk to a local bankruptcy attorney to determine how much you will likely have to pay to keep certain property.
You can "surrender" or give it back property you don't want to the secured creditor, and any unpaid balance owed to that creditor becomes an unsecured debt. You won't pay more to surrender property because it will share your disposable income with other unsecured creditors.
Sometimes secured creditors are allowed to receive "adequate protection" payments before the confirmation of your plan. The purpose of adequate protection payments is to offset the depreciation of the property (for example, your car).
The trustee can distribute adequate protection payments to the secured creditor before the court confirms your plan. Creditors eligible for adequate protection payments receive payment before all other creditors, including your bankruptcy attorney's fees.
Mortgage payments are treated differently than other secured debts. In some jurisdictions, you can pay your mortgage lender directly on a regular basis outside of the Chapter 13 plan. This keeps you current on the loan.
However, if you are behind on your mortgage, bankruptcy law treats that amount (called the arrearage) just like other secured debts. The bankruptcy trustee will pay it on a pro rata basis with your other secured debts. Learn more about what happens to mortgages in Chapter 13 bankruptcy.
Priority debts include recent tax debts and child support arrears. You can't complete your Chapter 13 case unless you pay these debts in full throughout the life of your Chapter 13. The trustee will start paying priority creditors before distributing any money to unsecured creditors.
Unsecured debts are any debts that aren't secured by collateral or that are not priority debts. These include medical debts, credit card debts, paycheck advance loans, and personal lines of credit.
The Chapter 13 trustee generally pays unsecured debts on a pro rata basis after paying all secured debts, priority debts, and attorney's fees. Sometimes, though, the trustee will pay unsecured debts alongside secured debts depending on how you elected to treat the secured debt in your plan (although your secured creditors must get something before the trustee starts paying unsecured creditors or priority creditors). Often unsecured creditors receive very little, if anything, through a Chapter 13 plan.
Student loans. Although student loans are unsecured debts, they get different treatment. Unlike most unsecured debts, you can't discharge student loans at the end of your Chapter 13 case unless you can prove undue hardship. You'll usually pay a smaller amount than your regular student loan payment because student loans share in the pool of money available for general unsecured debt. However, discuss how a Chapter 13 plan might affect your income contingent payment plan with your bankruptcy lawyer.
Learn more about student loans in Chapter 13 bankruptcy.
Some debtors are interested in the order of payments through the Chapter 13 plan because they want to ensure that a family member, friend, local doctor, or local bank gets repaid an unsecured debt. If you are in this situation, talk to a local bankruptcy attorney to discuss your options.
One thing you'll want to avoid is paying off particular creditors shortly before bankruptcy. Making a large payment to a creditor before filing bankruptcy could complicate your bankruptcy and cause headaches for the very creditor that you tried to protect. Why? Because if it's considered a "preferential payment," the trustee could demand or "clawback" the funds.
Learn more about the clawback provision in bankruptcy.
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
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