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.

By , Attorney University of the Pacific McGeorge School of Law
Updated 7/26/2022

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 people who file for Chapter 13 can reduce only general unsecured claims, such as credit card balances, medical bills, and personal loans, although some exceptions exist.

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 Bankruptcy

In Chapter 13 bankruptcy, you'll divide debt into 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 to Pay in Chapter 13 Bankruptcy?

In Chapter 13 bankruptcy, you must devote all of your "disposable income" to the 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 complete the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period form. Using the form, you'll calculate your income based on the six months 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. Using this form, you'll deduct certain expenses, including secured debt payments like car payments and mortgages. The result will show a monthly figure that, 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. The court will base your disposable income on your income and expense schedules: Schedule I lists your monthly income from all sources, and Schedule J lists your 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 remaining 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 won't be disadvantaged just because you filed for Chapter 13 rather than Chapter 7 bankruptcy.

The court will not "confirm" or approve your Chapter 13 plan at the confirmation hearing if you can't repay this minimum amount. You won't be able to proceed with your case.

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

In essence, your creditors will always get an amount equal to your nonexempt property or more, regardless of whether you file for Chapter 7 or 13 bankruptcy. Your creditors will get 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 you file.

  • Nonexempt property in Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, you keep the property needed to work and live using bankruptcy exemptions. The Chapter 7 bankruptcy trustee sells nonexempt property and uses the proceeds to pay priority and general unsecured creditors.
  • Nonexempt property in Chapter 13 bankruptcy. By contrast, the Chapter 13 bankruptcy trustee won't sell any property. But that's not to say you'll come out ahead by filing for Chapter 13. Instead, you pay to keep nonexempt property in your Chapter 13 repayment plan. This system ensures an equal division of money under Chapters 7 and 13.

As a result, the best interest of creditors test determines 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. Suppose you own a car worth $10,000 and 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 repay all of their creditors fully in the repayment plan. Other filers must pay back all 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, 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 you must pay 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 need enough income 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

If the required repayment plan payment seems overwhelming, there are ways to make it more affordable. For instance, you can lower the monthly payment amount by stretching a financed car balance, arrearages, and priority debt balances over three to five years if it helps make the plan payment work.

Example. After falling ill, Josh found himself three months behind on his $1,000 mortgage payment and his $300 car payment. Also, he couldn't make the $250 payment on an $8,000 credit card balance.

Because Josh wanted to keep his house and car, he filed a Chapter 13 case even though he qualified for Chapter 7 bankruptcy. He proposed a zero percent five-year plan at $1,083 per month, which 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. (In an actual case, a debtor must pay bankruptcy trustee fees, too.)

Consult With a Chapter 13 Bankruptcy Lawyer

Filing for Chapter 13 is a complicated process that most people can't file without help. Not only will you need to draft a proposed Chapter 13 repayment plan that complies with all of the bankruptcy rules, but it's common to run into problems over the course of the three- or five-year plan.

A local bankruptcy attorney is in the best position to explain your options and choose the best bankruptcy chapter for you. Find out what to expect from your bankruptcy lawyer and options if you can't afford to hire an attorney.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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