Unsecured Debt in Chapter 13: How Much Must You Pay?

How much you must pay to your general unsecured creditors in Chapter 13 bankruptcy depends on your disposable income and the "best interest of creditors" test.

Updated By , Attorney

One of the benefits of filing for Chapter 13 is that some filers can pay off debt for "pennies on the dollar." But don't be fooled—you can't reduce all types of debt. Most filers can reduce general unsecured claims only, such credit card balances, medical bills, and personal loans.

In this article, you'll learn how much you'll pay unsecured creditors. For more about the Chapter 13 plan and how much you must pay on claims, see The Chapter 13 Repayment Plan.

Types of Debt in Chapter 13

Chapter 13 bankruptcy divides debt into several categories: secured debt, priority unsecured debt, and general unsecured debt. How much you must pay for each type of debt differs.

For instance, you'll pay all of your priority debt—such as support obligations and most tax debt—in your Chapter 13 repayment plan. You'll make your secured debt payments (such as a mortgage and car loan) if you intend to keep the car or house serving as collateral (the house or car).

All debts other than priority and secured obligations are general unsecured debt—and the amount you'll pay to your unsecured creditors in Chapter 13 bankruptcy will be the greater of your disposable income or the amount your creditors would have received had you filed for Chapter 7 bankruptcy.

  • Disposable income. You must devote all of your disposable income to your plan. The amount your unsecured creditors get depends on how much money you have left over each month after paying allowed expenses, secured debts, and priority claims.
  • Best interest of the creditors. Also, at a minimum, your unsecured creditors must get what they would have received had you filed for Chapter 7 bankruptcy. In a nutshell, it's an amount equal to the value of the property that you can't protect with a bankruptcy exemption.

Keep in mind that priority creditors are also unsecured. After paying secured creditors, you'll pay priority unsecured creditors. Any funds remaining go to general unsecured creditors.

Disposable Income: How Much Can You Afford?

In Chapter 13 bankruptcy, you must devote all of your "disposable income" to repayment of your debts over the life of your Chapter 13 plan. Your disposable income first goes to your secured and priority creditors. Your unsecured creditors share any remaining amount.

Disposable income is what you have left over at the end of every month after you pay your reasonable and necessary living expenses. The court determines your disposable income by reviewing the Chapter 13 means test forms. The forms are similar to the Chapter 7 means test forms used to decide whether or not you qualify for a Chapter 7 bankruptcy.

  • What is the Chapter 13 means test? When you file for Chapter 13 bankruptcy, you will fill out the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period form which calculates your income based on the six-month period before the month you filed bankruptcy. The test compares your average income to the median income of others in your county or state of the same household size.
  • If your income is higher than the median. In this case, you must complete the Chapter 13 Calculation of Your Disposable Income form, taking deductions for certain expenses, including secured debt payments such as car payments and mortgages. The result will show a monthly figure which, multiplied by 60, will decide how much your unsecured creditors will receive over the life of your case.
  • If your income is lower than the median income. You won't have to complete the second form if your income is low enough. The court will base your disposable income on your income and expense schedules: Schedule I lists your actual monthly income from all sources, and Schedule J lists your actual monthly expenses. The difference between your income on Schedule I and your expenses on Schedule J will be your Chapter 13 plan payment. Your unsecured creditors will receive a percentage of the disposable income that remains after secured and priority creditors receive payment.

Best Interest of Creditors: The Hypothetical Chapter 7

The "best interest of creditors" test calculates the minimum amount you must pay to your nonpriority unsecured creditors through your Chapter 13 plan. The test ensures that creditors will not be disadvantaged just because you filed for Chapter 13 rather than Chapter 7 bankruptcy. If you can't repay this minimum amount, the court will not confirm your Chapter 13 plan (which means you won't be able to proceed with your case).

The amount that you must pay unsecured creditors is the greater of your disposable income (discussed above) or the value of your nonexempt property (property that a bankruptcy exemption doesn't protect).

In essence, your creditors will always get at least an amount equal to your nonexempt property, regardless of whether you file for Chapter 7 or 13 bankruptcy—and even more if your disposable income exceeds the value of your nonexempt property.

However, the way creditors get paid for your nonexempt property differs depending on the chapter that you file.

  • Nonexempt property in Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, you're allowed to keep the property you'll need to work and live using bankruptcy exemptions. The Chapter 7 bankruptcy trustee sells any nonexempt property and uses the proceeds to pay unsecured creditors (both priority and general unsecured creditors).
  • Nonexempt property in Chapter 13 bankruptcy. By contrast, the Chapter 13 bankruptcy trustee won't sell any of your property—but that's not to say that you'll get a windfall of sorts. You'll have to pay for your nonexempt property in your Chapter 13 repayment plan. This system ensures that unsecured creditors receive virtually the same amount in both a Chapter 7 and a Chapter 13 bankruptcy.

As a result, the best interest of creditors test figures out how much your creditors with nonpriority, unsecured claims would have received had you filed for Chapter 7 bankruptcy. You must repay these creditors at least this much in your Chapter 13 bankruptcy.

Example. Say you own a car worth $10,000, and you can only exempt $3,450. The nonexempt value is $6,550. If you had filed Chapter 7, hypothetically the trustee would have sold your car, paid you your exemption, and paid the remaining $6,550 to your general unsecured creditors pro rata. That means that in your Chapter 13 case, your unsecured creditors must receive, as a group, at least $6,550. Each creditor will receive a percentage of that amount, depending on the amount of its claim.

What Is a Chapter 13 One Hundred Percent (100%) Plan?

The income of some filers is high enough that they're required to fully repay all of their creditors in the repayment plan. Other filers have to pay back all of their debt because they own (and keep) a substantial amount of nonexempt property. The repayment plan in either situation is commonly known as a 100% plan.

What Is a Chapter 13 Zero Percent (0%) Plan?

In Chapter 13 bankruptcy, a zero percent plan is a three- to five-year repayment plan that doesn't pay anything to nonpriority unsecured debts, such as credit card balances, medical bills, student loans, or personal loans. Instead, a filer can use all available income to catch up on a mortgage or car payment or to pay off priority debts, such as back taxes or domestic support arrearages.

A Zero Percent Plan Can Help You Save a House or Car

Each bankruptcy chapter offers different benefits to filers. For instance, even though Chapter 7 bankruptcy is an excellent way to quickly wipe out qualifying debts without paying into a repayment plan, Chapter 7 bankruptcy doesn't have a mechanism that allows a debtor to catch up on secured debt, such as an overdue mortgage or car payment.

So, even though filing a Chapter 7 case might temporarily delay foreclosure or repossession, ultimately, the filer would likely lose the house or car secured by the defaulted loan. To keep the property, a debtor behind on a house or car payment would need to file for Chapter 13.

Who Qualifies for a Chapter 13 Zero Percent Plan?

Not all courts allow a zero percent plan, but for those that do, a debtor who qualifies for a discharge in a Chapter 7 bankruptcy (or a three-year repayment plan) is in the best position to get a break on a Chapter 13 monthly payment.

Unlike most Chapter 13 filers, a debtor who qualifies for a zero percent plan doesn't need to pay anything toward general nonpriority debts, such as most credit card balances, personal loans, medical bills, and student loans. The best part is that these nonpriority debts will still get wiped out (discharged) in a bankruptcy case (but not student loans). You won't be able to use a zero percent plan if you have priority debt that must be repaid in your Chapter 13 case, unless you have the funds to cover it.

What You Must Pay in a Chapter 13 Zero Percent Plan

A debtor will have to pay any monthly mortgage payment, plus the following amounts spread out over three to five years:

  • mortgage arrearages
  • any remaining loan balance on a vehicle the filer intends to keep (although this might be payable outside of the plan), and
  • any priority debt balances (such as child support arrearages and overdue taxes).

Of course, the debtor will have to be able to pay monthly living expenses, too. And, as with any Chapter 13 case, a debtor must prove that sufficient income exists to cover the plan payment before a bankruptcy court confirms (approve) the plan.

How to Make It Work

The required repayment plan payment might seem overwhelming; however, there are ways to make it more affordable. For instance, a car balance, arrearages, and priority debt balances can be stretched out over three to five years—thereby lowering the monthly payment amount—if it helps make the plan payment work.

Example. After falling ill, Josh found himself three months behind on both his $1,000 mortgage payment and his $300 car payment. He also wasn't able to make the $250 payment on $8,000 of credit card debt. Josh wanted to keep his house and car, so even though he qualified for Chapter 7 bankruptcy, he filed a Chapter 13 case and proposed a zero percent five-year plan at $1,083 per month. The plan payment covered his monthly mortgage payment, $3,000 in mortgage arrearages, and his $2,000 car loan balance. His low income allowed him to avoid paying anything on the credit card debt, making it a zero percent plan. Better yet, his payment was substantially less than the $1,550 he typically paid, and at the end of five years, he was caught up on his mortgage payment, had paid off his car in full, and wiped out his credit card debt. (Note that in an actual case, a debtor must pay trustee fees, too.)

(To learn more about this strategy, read How a Chapter 13 Bankruptcy Zero Percent Plan Can Save Your Home and Car.)

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