Different types of debts are paid in different ways in a Chapter 13 bankruptcy. The Bankruptcy Code classifies creditor claims and requires your Chapter 13 plan to pay these different classes of claims in particular ways. The most common classes of claims in a Chapter 13 case are secured claims, unsecured priority claims, and general unsecured claims.
Read on to learn how each of these types of debts is paid in a Chapter 13 bankruptcy.
(To learn more about how Chapter 13 plans work, see the articles in The Chapter 13 Repayment Plan.)
How secured claims are paid in Chapter 13 depends on how long your ongoing payments will last, and in some cases whether your loan is underwater or not.
Secured claims are claims for debts that are secured by collateral. If you do not pay a secured debt, the creditor can come take the collateral and sell it to obtain payment. The most common examples of secured claims are home mortgages, property taxes when a lien has been attached to your property, and car loans. If you file a Chapter 13 and intend to keep the property that secures the loan, you have to pay the loan.
For the most part, secured claims must be paid in full with interest in a Chapter 13 case. The interest rate will depend on the debt. And in certain situations, you can satisfy the claim by paying less than what is owed (this happens in "cramdowns"). If the contract on a secured debt calls for ongoing payments that would normally last longer than your Chapter 13 plan (for example, if you have 15 years left on your mortgage payments), you don't have to pay off the entire debt during your plan. Instead, you continue with your regular monthly payment during and after your repayment period.
Here's how the most common secured debts are treated:
Mortgage debt. Although your mortgage is a secured debt, you do not have to pay your mortgage in full in a Chapter 13 case. Mortgages are classified as ongoing debts; as such, you make your monthly mortgage payment during your Chapter 13 case and then continue to pay on it when your case ends. If you have a past due balance, however, this must be paid in full through your plan. For example, if your monthly mortgage payment is $1,000, you were three months behind on your mortgage when you filed bankruptcy, and you incurred $450 in interest and fees, you must continue making $1,000 per month payments to the mortgage lender and also pay $3,450 (which represents the three months of arrears, plus the overdue interest, and fees) with interest over the life of the plan. To learn more about mortgage debt and your options under Chapter 13, check out Nolo's section on Your Home and Mortgage in Chapter 13 Bankruptcy.
Property taxes. If you are paying past due property taxes though your Chapter 13, you must pay the entire past due balance in full with interest over the life of the plan. The amount of interest you pay will depend on the local rate where you live.
Car payments. If you car loan balance becomes due before the end of your Chapter 13 plan, you must pay the balance in full over the life of your plan. How much you end up paying, however, will depend on a number of factors. If you are upside down on your car loan (meaning you owe more on the loan than the car is worth) and you bought the car more than 910 days ago, the secured claim is limited to the value of the car. You pay market value plus interest through your plan. The remaining balance becomes part of your unsecured debt. This is called a "cramdown." To learn more about cramdowns, and car loan cramdowns in particular, see the articles in Reducing Loans and Non-Residential Mortgages in Chapter 13 (Cramdowns).
However, if you bought your car less than 910 days ago or if the loan you're paying was not the loan you used to buy the car, you must pay the full balance due with interest through your plan.
Unsecured priority claims are claims that are not secured by collateral but that the Bankruptcy Code has granted priority over other unsecured debts. Unsecured priority claims must generally be paid in full through the Chapter 13 plan. Unsecured priority debts include certain income tax debts, past due child support, past due spousal support and other past due domestic support obligations. Unsecured priority debts also include administrative expenses, such as your attorney's fees and the Chapter 13 trustee's fees.
General unsecured claims are claims that are not secured or priority. The most common general unsecured debts are credit card debts, personal loans, medical bills, and utilities. General unsecured claims receive a percentage of what is owed based upon your disposable income and the value of your bankruptcy estate; that is, whatever your best effort at payment will yield is what the creditors will receive, and they must also receive at least what they would have received if you had filed Chapter 7. Many Chapter 13 debtors pay only a small portion of their unsecured debts through the Chapter 13 plan.