How are debts prioritized within a Chapter 13 payment plan?
Priorities are set for creditor payments in Chapter 13 bankruptcy
The order in which creditors are paid within a Chapter 13 bankruptcy plan is intended to accomplish several things.
It brings secured debts such as mortgages up-to-date and discharges remaining unsecured debt. But most importantly, when the case filed in the U.S. Bankruptcy Court ends, the debtor should be in a better financial position to keep secured debts from becoming delinquent again because the debt burden has been lessened.
Once the debtor's income, value of non-exempt assets and reasonable living expenses are determined, the court focuses on what required payments are addressed first. For instance, all administrative and legal fees - including the trustee's usual commission of 10 percent of the total monthly payment - are paid in full through the plan.
Any non-dischargeable debts such as child support, alimony and most taxes are also paid completely. These are considered priority debts, including wages, commissions and benefits that must be compensated for employees if the debtor owns a business.
Secured debts, such as mortgage and car payments, must include the regular installment due each month, plus a specified amount to bring back payments up-to-date by the time the plan ends.
"Add all these up, and that’s the minimum that must be paid under the plan," writes Maryland attorney Brett Weiss on Bankruptcy Law Network.
Unsecured debt payments
Beyond the minimum monthly payment, the plan is also expected to take care of at least a portion of the unsecured debts, including credit card and medical bills. These are usually prioritized with a certain percentage paid on each debt. Whatever unsecured bills remain when the plan ends are discharged by the court.
Payments on unsecured debts can range widely, and creditors often receive from 10 to 40 percent of the total they are owed. The amount that is granted to unsecured creditors depends on the balance that remains of the monthly payment after the priority and secured debt installments are made.
The length of the court-ordered plan also influences how much money will be paid to unsecured creditors. According to the National Association of Chapter 13 Trustees, debtors' finances for the six months prior to their bankruptcy filing determine if they are over or under the median income of those in similar households in their home state. Generally, over-median debtors are assigned a five-year plan and those who fall below the median aren't expected to commit to one that is longer than three years.