Bankruptcy law requires that certain debts be paid through a Chapter 13 bankruptcy plan. For instance, any debts that are considered “priority unsecured debts” need to be paid back in full through the Chapter 13 plan. Debts that are priority unsecured debts generally include some back tax debt and delinquent child support and alimony obligations that the debtor owes on the date the case is filed. Exactly what gets repaid can be quite complicated and it is important for the debtor to consult with the debtor’s Salt Lake area bankruptcy attorney to understand the process.
Any secured debt arrears also need to be paid back in full through the plan if the debtor wants to keep the property related to the debt. Mortgage arrears represent the amount it would take to get the mortgage loan current on the date the case is filed. For example, if a debtor pays $1,000 per month as a mortgage payment and is behind three months as of the date of filing, the mortgage arrears would be approximately $3,000. The arrears may also include late fees, penalties and attorney fees that the bank has incurred in servicing the loan. If the debtor wants to keep the house, the total mortgage arrears need to be paid back through the plan. The debtor’s Salt Lake bankruptcy lawyer can assist the debtor in computing these amounts.
For secured debt attached to property that the debtor desires to surrender, the arrears do not need to be paid back through the Chapter 13 bankruptcy plan. The debtor also no longer needs to continue making regular payments to these creditors because the property will be surrendered.
While arrears are paid through the bankruptcy plan, usually ongoing payments are made directly to the creditor starting the month after the case is filed.
Some people elect to pay their cars through the Chapter 13 plan. There may be some advantages to doing this. Often times by paying a car through the plan the debtor can “cram down” the interest rate and/or the amount owed, thereby reducing the car payment dramatically. We will discuss what “cram down” means in a separate chapter.
General unsecured debt also needs to be addressed in a Chapter 13 plan. Debt that is considered general unsecured debt includes credit card debt, medical bills, signature loans, personal loans and any other unsecured debt that is not priority debt or secured debt. The law states that debtors must contribute all of their monthly disposable income towards paying as much back to these creditors as possible. If the debtor has a lot of equity in property that is not exempt, the debtor may be required to pay more back to this group of creditors as well.
Some plans, where debtors have limited income and limited property, debtors may have to pay nothing or little back to general unsecured creditors. However, if debtors have a lot of assets that are not exempt or if debtors have a lot of income, they may have to pay a higher percentage (in some cases even 100%) back to this group of general unsecured creditors. When debtors have to pay everything back to creditors this type of plan is referred as a one hundred percent plan. Debtors usually come out ahead, even in one hundred percent plans, because they end up paying little or no interest on what is usually high interest credit card debt.
A small portion of the plan payment (usually 5-10% of the total payment) is used to pay the Chapter 13 trustee’s office so that it can cover operating expenses. Also, most plans include some attorney fees that are paid through the Chapter 13 trustee’s office. Most attorneys that file Chapter 13 cases charge only a small amount up front and then allow the remainder of their fees to be paid through the course of the plan. By incorporating most of the attorney fees into the plan payment, this allows debtors to get their case filed with a relatively small amount of money up front. Chapter 13 plans can be complex and Salt Lake bankruptcy attorneys can assist throughout the entire process.