Creditors get paid in a Chapter 13 bankruptcy according to a legal pecking order. Knowing that pecking order can improve your chances for success.
If you’re thinking about Chapter 13 bankruptcy – whether because you want to or because you don’t have any other options – you know it’s designed to repay debts over time.
You probably have more than one debt, and you want to know who’s going to get what during the course of your Chapter 13 Plan.
Here’s what you need to know about where the money goes in your Chapter 13 case.
Types Of Debts
In general, there are three major types of debts. They are:
Secured Debts: When you give collateral to a lender in exchange for borrowing money, the debt is secured by the collateral. Common secured debts are mortgages and car loans.
Priority Unsecured: Some debts aren’t secured by collateral, but the law treats them as more important than others. Some of the more common priority debts are:
- alimony, maintenance, or support;
- some income tax debts;
- customs, duties, and penalties owing to federal, state, and local governmental units; and
- claims for death or personal injury (not property damage) resulting from driving under the influence of alcohol or drugs.
General Unsecured: When you have a debt for a credit card, personal loan, medical or dental bill, or any other obligation that isn’t secured by property or owed to the government, it’s considered a general unsecured debt. This classification is essentially a slush pile of everything else you owe.
Order Of Payments
In general, payments made to creditors in a Chapter 13 bankruptcy go in the following order:
- Secured debts;
- Priority debts; and
- General unsecured debts.
Other obligations such as attorney’s fees and other administrative costs such as trustee commissions are paid through your Chapter 13 Plan as well. Some courts pay those amounts before the arrears on secured debts, whereas others pay them out over the course of your Chapter 13 Plan.
Who Gets Paid How Much?
In order for your Chapter 13 Plan to be successful, secured debts must be paid in full with interest.
In addition, all priority debts must be paid in full.
General unsecured claims are paid on a pro-rata basis. That’s best explained by example.
Let’s say your Chapter 13 Plan calls for payments of $500 per month for 60 months. That means a total of $30,000 will be paid through the Plan. If you have $10,000 in arrears on your mortgage and $5,000 due to priority creditors, there will be $15,000 left over to pay general unsecured debts.
Looking at your general unsecured debts, suppose you owe the following:
- $50,000 in student loans
- $10,000 in credit cards
- $5,000 in medical debts
Your student loans comprise about 77% of your general unsecured debt. Therefore, the student lender will receive 77% of the $15,000 left over for general unsecured creditors – $11,550.
This example doesn’t account for administrative expenses such as legal fees and trustee commissions paid through the Plan, but that’s simply to make the math easier.
The Difficulty Of Calculating In Advance
My clients always want to know how much they’ll be required to pay in a Chapter 13 bankruptcy, and understandably so. You want to have some measure of certainty, and it helps to know if you’ll be able to afford the payments required in Chapter 13.
Unfortunately, that’s not always possible.
Secured claims and priority claims, both of which must be paid in full, sometimes are uncertain when the case is filed. You may not have an up-to-date statement of the amounts due, or interest may accrue more quickly than you expect.
In addition, the interest rate on the secured claims may not be obvious when your case is filed.
For that reason, we may not always know how much you’ll need to pay over the life of your Chapter 13 bankruptcy case.
Rest assured, however, that we’ll go through the claims filed as soon as they come in so that we can get a handle on things as quickly as possible.