What debts must be repaid under the Chapter 13 payment plan?

Many people are confused about the Chapter 13 process, as they believe that the repayment plan requires them to repay all their debts. However, this is simply not true, as many debts need to be repaid only partially or not at all.

Which debts must be repaid?

Whether a given debt must be repaid in Chapter 13 depends primarily on the type of debt it is. In order for the payment plan to be approved by the court, it must provide a plan for the full payment of certain debts. These debts include priority and administrative expenses, such as court costs, attorneys' fees, certain taxes and child support.

Regarding unsecured debts, the plan must meet certain standards in order to be approved. Unsecured debts are debts where no collateral is pledged to secure repayment of the debt (e.g. credit cards and medical bills). Specifically, the law requires the plan to pass what is called the "best interests of the creditors" test. Under this test, the plan must repay unsecured creditors the same amount that would be repaid if the person had filed Chapter 7 instead.

Although this may seem as if a significant portion of the unsecured debts must be repaid in a Chapter 13, such is not the case. The reason: Chapter 7 discharges most unsecured debt without requiring repayment. As a result, most Chapter 13 filers do not have to pay anything (or pennies on the dollar) towards their unsecured debts. In Chapter 7, especially in Pennsylvania, most assets can be exempted which means that payment to creditors from such assets does not have to occur. The same exemptions would apply in a Chapter 13 case.

There is a rarely used exception to this rule that occurs if an unsecured creditor objects to the repayment plan (this seldom happens). If this occurs, the filer must pass another test called the "disposable income" test. Under this test, the court examines the filer's disposable income. If the disposable income is high enough to allow for the repayment of a portion or all of the debtor's unsecured debts, the court may require the repayment of at least some of the unsecured debts. Because, however, most persons who bankruptcy do not have much disposable income, this test rarely comes into play.

Secured debts, like mortgages and car loans, are technically not required to be repaid under the plan. However, if these debts are not made current through payments under the plan, secured creditors may repossess the collateral (i.e. house or car) that is securing the repayment of the debt. Fortunately, filers behind on secured debts find Chapter 13 especially beneficial, as it gives them 3-5 years to catch up on their secured debts and allows them to hold on to the collateral as they do so.

Speak to an attorney before proceeding

For many in debt, Chapter 13 offers the extra time and help that is needed to return to financial solvency. However, it should not be undertaken lightly. An experienced bankruptcy attorney can examine your financial situation and advise you further on the options that would be right for you.