How much do creditors have to be repaid in Chapter 13?

The requirements for repaying creditors in a chapter 13 are somewhat detailed. The following is a general summary that notes the basic rules without going into finer details or exceptions.

Secured Debt

Secured debt is any debt where the creditor has an enforceable right against particular collateral. For individuals, mortgages and car loans are most common secured debts. Debtors have a choice in chapter 13 to give up the collateral (surrender it) or to pay for it. If paying for it, sometimes the debtor will have to pay the entire balance of the loan, other times only the value of the collateral. Additionally, for debts where the final payment would be due after the chapter 13 is done (e.g. a 30 year mortgage), the debt can be paid back at the contractual payment amount plus an additional amount to catch-up and cure missed payments (cure and maintain). On our blog, I discuss paying secured debt in chapter 13 in more detail.

Priority Debt

Priority debt, which includes many taxes and domestic support obligations like child support and alimony, must ordinarily be paid off in full over the course of the chapter 13 plan. More details on priority claims and their consequences can be found on our blog.

Other Debts: General Unsecured

General unsecured debt includes most credit card accounts, medical bills, utility bills, and personal loans. If payments are required for these debts depends primarily on three tests:

1. Means Test / Disposable Income Test: An occasionally convoluted test concerning the debtor's income and expenses and ability to repay unsecured creditors. Using statutory means testing, if a debtor is below the state's median income for their household size, disposable income is determined using actual reasonable expenses. In practice, few below-median debtors have disposable income for unsecured creditors. If above the state's median income, a set of allowances are used to determine the amount of income that must be committed to unsecured debt repayment.
2. Liquidation Test / Best Interests of Creditors Test: Simply put, chapter 13 cannot leave unsecured creditors worse off then they would have been in chapter 7. So, if the debtor has valuable property that would have been liquidated and sold in chapter 7, the chapter 13 must pay an equivalent amount unsecured creditors. The exact calculation mechanics of the liquidation test vary by district and sometimes amongst standing trustees.
3. Good Faith Test: Most nebulous of the tests is a requirement that a chapter 13 plan have been "proposed in good faith." Situations where this requirement comes into play are difficult to describe concisely. Good faith issues with plans are not particularly common, but may involve some decision by the debtor that works an atypical and unfair result on creditors.

Our office would be pleased to evaluate what debts you would be required to pay back in a chapter 13 plan, and help you decide if chapter 13 is right for you.