Credit Card Debt in Chapter 13 Bankruptcy

How much of your credit card debt you must pay through your Chapter 13 bankruptcy plan depends on a number of factors. Whatever amount is left at the end of your repayment period will be discharged (wiped out).

Chapter 13 Bankruptcy and Your Debts

Chapter 13 bankruptcy is a reorganization bankruptcy. When you file Chapter 13, you propose a repayment plan that repays your creditors over a period of three to five years. Some are paid in full, some in part, and some not at all -- this depends on what type of priority bankruptcy law gives the type of debt. Credit cards generally have the lowest priority in a Chapter 13 plan.

(To learn more about how Chapter 13 works, see Chapter 13 Bankruptcy.)

Debt Priority Under the Bankruptcy Code

Bankruptcy law sorts your debts into different classes. The three main debt classifications are general unsecured debt, priority unsecured debt, and secured debt.

Secured debt includes debts such as car loans and any other loans that are secured by property. A loan is secured by property if you pledged property in exchange for obtaining the loan. (To learn more, see What is a Secured Debt?) If you default on a secured loan, the lender can take the property to satisfy the debt. That's why if you don't make your car payment, the lender will repossess it; if you don't make your house payment, the lender will foreclose. Different rules apply to different secured debts in Chapter 13, but generally, if you want to keep the property that secures the loan, you must pay the loan in full (mortgages are the exception).

Priority unsecured debts are debts that are not secured by collateral but that bankruptcy laws have given priority. These debts are generally nondischargeable -- meaning, if you were to file Chapter 7, you could not wipe them out. Certain income tax debts are priority unsecured debts. Priority unsecured debts also include back child support and spousal support. In Chapter 13, priority unsecured debts must be paid in full with interest. (Learn more about priority claims in Chapter 13 bankruptcy.)

Credit card debts are general unsecured debts. General unsecured debts are at the bottom of the barrel; how much they get paid depends upon a number of factors, but usually Chapter 13 debtors do not have to pay their credit card debts in full.

Beware though. Some credit card debt is secured. If it is, the payment priority will be that of a secured debt. (To find out if your credit card debt is secured, see When Credit Card Debt Is Secured.)

How Much of Your Credit Card Debt Will You Pay in Chapter 13?

When you file your Chapter 13 plan, you must list all your creditors and propose how you will pay each class of debt. Your plan payment must be enough to pay all secured debts if you want to keep the property securing the debt, plus all priority unsecured debts. (To learn more, see Debts That Must Be Paid in Chapter 13 Bankruptcy.)

However, you must also pay whatever you can afford into your plan -- so if you can afford to pay more than just your secured and priority debts, you will be required to do so. The credit card companies will receive a percentage of what is owed to them based on this leftover amount. (To learn more about paying what you can afford and figuring out what you can afford under the bankruptcy laws, see the articles in The Chapter 13 Repayment Plan.)

Example. Joe owes $5,000 on his car and $10,000 to the IRS. To pay these claims with interest, he must pay enough into his Chapter 13 plan every month to pay $20,000 over the next three years. Joe's credit card debt totals $40,000.

Because of Joe's income and expenses, he can afford to pay $30,000 over the next three years. That means $20,000 will go to secured and priority debts and $10,000 will go to his credit card debt. $10,000 is 25% of $40,000, so each of Joe's credit card companies will receive 25% of what is owed. The rest will be wiped out when Joe receives his discharge at the end of the Chapter 13 case.

Credit Card Charges for Luxury Items or With No Intent to Pay

If you incurred credit card debt close to your bankruptcy for luxury items, or with no intent to repay the debt, the creditor can object to the discharge of the debt. To learn more, see Recent Luxury Debts and Cash Advances: Can You Get Rid of Them in Bankruptcy?