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Chapter 13 Bankruptcy – How do Creditors get Paid?

Consumer Law Pro
2851 S Parker Rd, Ste 1158
Aurora Co 80014
Phone: 303-297-7729

Consumer Law Pro is designated as a Federal Debt Relief Agency by an Act of Congress and the President of the United States. We proudly assist consumers seeking relief under the U.S. Bankruptcy Code. A Member of the National Association of Consumer Bankruptcy Attorneys

The following information is provided for informational purposes. You should consult with your own bankruptcy attorney regarding your case.


How do creditors get paid?

Secured Debts –

In most cases, you will make payments to secured creditors (mortgage, auto loan) outside of the bankruptcy just as you normally would.

In some cases the debtor can reduce the amount of principle they owe on their auto loan. For example, if your vehicle was purchased more than 910 days ago you may be able to reduce the loan amount to the current value of the vehicle. So for example, if you owe $10,000 on a vehicle worth only $5,000, you may be able to reduce the loan amount to $5,000 through a cram-down. Be sure to speak to your attorney if you are upside down on your vehicle.

Unsecured Debts –

These are those debts for which you did not pledge any property (auto loan, mortgage) as collateral. These creditors are paid directly from the chapter 13 trustee. They must file a claim to be paid.

Priority Debts-

Some debts must be paid in full and are paid before other debts. These are called priority debts. Your plan must provide for payment in full of these debts in addition to the minimum distribution to unsecured creditors (class IV). Types of priority debts include some taxes (state and federal), wage claims of employees, alimony and child support. Certain other non-dischargeable debts are treated as priority debts in a chapter 13. Discuss the dischargeability of your various debts with an attorney. This is not an easy area of law to decipher on your own. The statutes may appear straight-forward, however, it is the judicial decisions (court cases) which bring the various statutes to life.

You should ensure that you have filed a minimum of your last 4 years (state and federal) tax returns before you file bankruptcy. Some tax debts are non-priority and are treated the same as other unsecured creditors. If you have a high amount of tax debt, a chapter 13 may provide the relief you need.

Be Careful with Student Loans-

Student loans are treated the same as other unsecured creditors when it comes to plan payments. Your student loan creditors receive a pro rata share of the payments your plan provides to unsecured creditors. Creditors with the highest balances get paid a pro rata larger share than other creditors. You may be paying only 10% back to unsecured creditors in your plan. Be careful when it comes to student loans and a low percentage distribution to unsecured creditors. If you owe a large amount of student loan debt (25,000 or more) be aware that the interest on your student loans continues to accumulate during your chapter 13. You are responsible for any remaining balance after your chapter 13 plan is completed. If you are in a chapter 13 plan for 5 years and are only paying a small portion to your student loans within your plan, your student loan balances may have actually increased dramatically during your plan. Unlike other unsecured debts, the remaining balance of your student loans are not discharged in a chapter 13 bankruptcy.Further complicating the issue is that debtors are prohibited from paying student loans outside their plan. Be sure to speak to your attorney about your student loans so that you come out of the bankruptcy with the right expectations.